Is a Trump presidency my chance to earn a second income by investing in FTSE 100 oil stocks?
Shares of BP (LSE:BP) and Shell (LSE:SHEL) come with some attractive dividend yields. That naturally means they catch the attention of investors looking for a second income.
Both stocks are on the up as it looks almost certain that Donald Trump will (again) be the next President of the US. But I think investors should be very careful here.
Oil outlook
In general, Trump favours hydrocarbon energy over renewables. This immediately raises questions about the Inflation Reduction Act, which was subsidising the energy transition.
This could well have the effect of boosting demand for oil â especially in the US. And both BP (29%) and Shell (22%) generate significant revenues across the Atlantic.
Despite this, the benefits to both FTSE 100 companies could be limited. Any rise in demand seems likely to be met by an increase in supply, which is why the price of Brent crude is falling.
The companies that stand to benefit the most â in my view â are US producers. And I think this could be a real problem for both BP and Shell.Â
Taxes
Reducing the rate of corporate tax to 15% has been a big part of Trumpâs campaign. This would amount to significant savings for the likes of Exxon Mobil, Chevron, and ConocoPhillips.
In Britain, things are going the other way â last weekâs Budget featured an increase in windfall taxes on UK producers. This makes me very wary about BP and Shell.
Dealing with higher taxes when competitors are getting a break puts the FTSE 100 firms at a cost disadvantage. And that leaves them more exposed to the impact of lower oil prices.
A lot goes into oil prices beyond the US. But I expect lower taxes to lead to increased output and I think this is likely to be a challenge for UK producers over the next few years.
Passive income
Despite this, shares in BP and Shell could be attractive from an investment perspective. In general, they trade at a significant discount to their US counterparts.
Shell, for example, currently trades at a price-to-book (P/B) multiple of 1.24, compared to 2.52 for ConocoPhillips. And the gap is the widest it has been at any time in the last decade.
Shell vs. ConocoPhillips price-to-book ratio 2014-24
Created at TradingView
Equally, the dividend yield on BP shares is almost 6%, while ExxonMobil stock comes with a much lower 3.3% yield. That reflects a substantial difference in the marketâs expectations.
This is something to consider carefully. Although the FTSE 100 oil majors are facing challenges their US counterparts are not, investors get a lot more for their money from the UK stocks.
Should I buy FTSE 100 oil stocks?
On the face of it, Trumpâs disposition to support US oil production isnât a reason to start buying shares in BP and Shell. But the situation is a lot more complicated than this.
A focus on hydrocarbons over renewables might boost the long-term demand for oil. And that is something the UK producers could stand to benefit from.
The big question is whether or not the valuation discount the FTSE 100 companies trade at is worth the additional challenges. Iâm taking a wait-and-see approach.
The post Is a Trump presidency my chance to earn a second income by investing in FTSE 100 oil stocks? appeared first on The Motley Fool UK.
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More reading
- 2 UK shares that could rise if Trump wins the Presidential election
- Hereâs the growth forecast for BP shares for 2025!
- BP share price decline is presenting a gift for value investors
- Warning! 2 FTSE 100 shares I think could collapse in 2025
- Shell share price climbs on better-than-expected earnings, announced $3.5bn buyback
Stephen Wright has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
