Will BP plc & Tullow Oil plc Drown In A Sea Of Cheap Oil?

BP plc (LON: BP) And Tullow Oil plc (LON: TLW) been sunk by the global oversupply of oil but will rising demand lift them next year? Harvey Jones explores.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

I would have expected the oil price slump to have squeezed supply significantly by now, but it hasn’t happened yet. Or if it has, any drop-off has been matched by falling demand.

Eight consecutive weekly increases have lifted US inventories to 487m barrels, up from 385m at the turn of the year and at levels not seen at this time of year for over 80 years, according to research from AJ Bell. The news helped push WTI crude to  around $40 a barrel. The world is awash in a sea of cheap oil, the question now is which oil stocks will swim and which will sink.

Major Concern

FTSE 100 oil giant BP (LSE: BP) has sunk another 17% over the past six months but its recent third-quarter results have given it some buoyancy. Its vigorous campaign of cost-cutting and divestments helped offset the damage wreaked by falling oil, allowing BP to post a profit of $1.23bn, way lower than the $2.38bn it posted one year earlier but far better than the market expected.

BP can’t survive by cutting costs forever without damaging the underlying business, and the lower oil falls and the longer it stays there, the greater the threat to its dividend. Chief executive Bob Dudley has reassured investors that the dividend is a “strong priority” but he can’t buck the oil market forever, and it could fall victim to a far stronger priority unless the price rebounds. Dudley has even talked about raising the dividend, but I would rule that out until the price recovers. On a current yield of 6.8% investors are already amply rewarded. Don’t assume that will be sustained.

With oil stocks such as BP and Royal Dutch Shell paying 13% of the £73.7bn in FTSE 100 shareholder distributions forecast for 2016, investors will be clinging onto any optimistic number they can find. Well, here’s one: the International Energy Agency predicts that demand will reach 95.5m barrels a day in the fourth quarter of 2015, up 1.6% year-on-year. The world still needs its oil.

Empty Basin

But does it need Tullow Oil (LSE: TLW)? Its share price is down 52% in the past six months. It hasn’t been helped by this week’s news that its Emesek-1 exploration well in Northern Kenya will be plugged and abandoned after its failure to find commercial hydrocarbons.

At some point the cheap oil cycle will bottom out, and when it does then Tullow should enjoy a relief rally, the only question is when? Investment bank UBS reckons we are pretty much there. It just upgraded Tullow to buy, hailing it a “well-financed company with quality assets and a proven development track-record, offering long-term oil price exposure at the bottom of the cycle”.

Tullow has taken swift action to steady itself, cutting costs by $500m and suspending the dividend, and has cleverly hedged half of next year’s production at $75 a barrel. BP and Tullow still need more expensive oil and can probably cling on well into year before drastic measures are required. Will the tide of cheap oil have ebbed by then?

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Harvey Jones has no position in any shares mentioned. The Motley Fool UK has recommended Tullow Oil. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Illustration of flames over a black background
Investing Articles

2 red-hot UK growth stocks to consider buying in April

These two growth stocks are performing well, but can they continue to deliver for investors through 2024 and beyond?

Read more »

Charticle

Is JD Sports Fashion one of the FTSE 100’s best value stocks? Here’s what the charts say!

The JD Sports Fashion share price remains a wild ride during the first quarter. Could it be one of the…

Read more »

Investing Articles

Could the JD Sports Fashion share price double in the next five years?

The JD Sports Fashion share price has nearly halved in the past five years. Our writer thinks a proven business…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

If interest rate cuts are coming, I think these UK growth stocks could soar!

Falling interest could be great news for UK growth stocks, especially those that have been under the cosh recently. Paul…

Read more »

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »