In mid-January I predicted that with crude oil at $50 a barrel, the worst of the oil price falls were over.
I got that broadly right, with Brent Crude recently nudging $70 a barrel. But now I reckon this is as high as it will go, at least in the short-term.
And a number of factors suggest the oil price recovery could swing into reverse, and this would spell further trouble for oil and gas explorers.
Afren’s Woes
The oil price surge of the last three months has done little for investors in Afren (LSE: AFR) — its stock is down 65% in that time.
Things started going publicly wrong last October, when it was discovered that its executives had accepted hidden payments from a foreign partner.
A last-ditch recapitalisation plan, ongoing solvency fears, expensive debt burden and mountainous debts have all added to investor misery. New chief executive Alan Linn has much more to worry about than the sticky oil price, but a double dip will make his job even harder.
Premier League
Premier Oil (LSE: PMO) has had a better time of it, rising 16% since I made my January prediction.
Its news flow has been rather more promising than Afren’s, after it reported finding oil and gas at its Zebedee well in the Falklands Islands, in which it has a 36% stake.
But trading at a pricey 45 times forward earnings, Premier will also be vulnerable to a oil price dip, especially since its Sea Lion project in the Falklands needs oil at $50 a barrel to be commercially viable.
Tullow To Go
Tullow Oil (LSE: TLW) isn’t taking the oil price rise for granted, pressing ahead with its $500m programme of cost savings, despite the recent rally.
There was good news at the end of April, when a judge ruled that Tullow’s £3.3bn TEN development — which is already 55% complete and expected to come on-line by the middle of next year — could continue.
Tullow has also been tagged as a takeover target, in the wake of the Royal Dutch Shell merger with BG Group, which has kept its share price steadily in recent months.
Oil Could Slip
All three companies have their own challenges, but they would find them easier to overcome if the oil rally continued to break new ground.
Right now, it looks vulnerable. Saudi Arabia, and just about everybody else, is still pumping at record levels. US crude stockpiles are climbing after recent (very minor) dips, with inventories up 1 million barrels a day, according to Barclays. Global growth is slowing, even in the US.
US shale wildcat drillers have taken the opportunity to hedge production at today’s higher price, while technological advances are driving down their costs — two reasons why the Saudi strategy of driving out them out of the market could ultimately fail.
OPEC sees oil staying below $100 for the next decade.
There may be good reasons to invest in Afren, Premier and Tullow, but an oil price resurgence isn’t one of them.
