Baron Rothschild, an 18th century British nobleman and member of the Rothschild banking family, is credited with saying, “The time to buy is when there’s blood in the streets“.
He should know. Rothschild made a fortune buying in the panic that followed the Battle of Waterloo against Napoleon. But that’s not the whole story. The original quote is believed to be, “Buy when there’s blood in the streets, even if the blood is your own“.
In more recent times, one of — if not the — greatest investors the world has ever seen, Warren Buffett, famously said:
“Be fearful when others are greedy and greedy when others are fearful”
So turning to the chart, I think that it’s fair to say that there is a fair amount of fear about when considering investments in oil and gas producer Tullow Oil (LSE: TLW) as well as oil services & equipment companies Amec Foster Wheeler (LSE: AMFW) and Hunting (LSE: HTG) – but has this created an opportunity for the brave amongst us? Let’s take a look…
Survival of the fittest
With the price of Brent Crude trading around the $44 per barrel mark, there are plenty of producers that are simply not making any money. When one adds rather large debt piles into the equation, it becomes easier to see why the market has marked so many oil and gas stocks down by so much – the recent fall from grace of Afren is a stark reminder of an easy way that investors can lose all of their money in a stock.
While I wouldn’t be insensitive enough to wish the financial pain from a total loss on anyone, I do believe that those companies with the financial strength to withstand these depressed prices will be in a far stronger position with less competition as the market will eventually do what it is supposed to and sort the wheat from the chaff.
Are we there yet?
Those investors with long memories will be aware that we have not seen the share prices of the companies under review today this low since 2006. However, this on its own does not necessarily mean that now is the best time to invest.
In the case of Tullow, I believe that management are making all the right noises; there is currently a cost-saving programme set to save around $500m over the next three years, and capex is set to reduce by $0.7bn to $1.2bn in 2016. Additionally, the group continues to manage its hedging arrangements well.
The key here for me will be ensuring that the upcoming projects (specifically the TEN project) continues on time and on budget, so as to ensure that it is producing sufficient oil to start to deleverage the balance sheet before the huge debt pile starts to come due.
In its recent update to investors, AMEC Foster Wheeler announced that, although its business was diversified, markets were challenging. Like sector peers, the cost-cutting programme was accelerated and the dividend policy amended, which seems to have taken some by surprise. The Board expected to recommend a final dividend for 2015 of 14.2p, half of the equivalent declared in 2014, making 29p the full-year dividend for 2015.
Additionally, the Board signalled that ordinary dividends in 2016 will be approximately half that declared in 2014, giving an expected pay-out of 21p, though that is still good for a yield of 4.6% at today’s prices.
Finally, in the case of Hunting, management gave a rather gloomy update at the start of November:
“Given these weak market conditions and on the assumption that current levels of profitability prevail for the remainder of the year, our 2015 full year results are likely to reflect a year on year profit from continuing operations decline in the region of 90%. Should trading conditions materially change, then further trading updates will be released prior to the announcement of our full year results on Thursday 3 March 2016”.
This final paragraph of the announcement leaves the door open for a profit warning if the oil price remain depressed for longer than investors or management expect — after all, why would upstream operators go to the trouble and expense of producing if they were not making any money from it?
Drilling down to the bottom line
Call me a pessimist if you like, but I think things will get worse before they get better. For me, there is not nearly enough blood on the streets or enough fear in the market for me to start feeling greedy. However, I think that those companies that survive this market storm will be very well placed to make money going forward, given the fact that there will be reduced competition out there.
