When it comes to the future direction of the oil price, it seems as though all bets are off. In fact, when oil was trading at above $100 per barrel less than a year ago, there was a relatively large number of commentators who felt that it could only move significantly in one direction: up. However, there were very few (if any) who thought that less than a year later oil would drop to below $50 per barrel.
As such, future predictions of oil seem to be of little use for investors. So, while the outlook may be somewhat pessimistic, now could be a good time to increase your exposure to oil. In fact, doing so may allow you to take advantage of higher than normal margins of safety and generous discounts to intrinsic value that are present in case the declining oil price once again becomes a reality.
Further Challenges
Of course, a low oil price is not the only problem facing a number of oil stocks. A lack of diversity continues to plague a number of oil producers and, in this regard, Gulf Keystone (LSE: GKP) and Genel (LSE: GENL) are set to endure a very difficult future. That’s because they are focused on the Kurdistan region of Iraq, which is experiencing a very unstable political outlook. As such, investor sentiment in the two companies has declined massively, with shares in Gulf Keystone falling by 62% in the last year, while Genel is down 50% in the same time period.
Looking ahead, Genel is expected to return to profitability in the current year and, in 2016, is expected to grow its pretax profit by 86% to around £100m. While this is only 54% of its 2013 level, it would represent real progress for Genel and, although there are concerns regarding its cash flow (since payment by authorities has not been on time), its price to earnings growth (PEG) ratio of just 0.2 appears to include a discount for such uncertainties, thereby making Genel a relatively appealing buy.
For Gulf Keystone, however, investor sentiment may remain relatively weak, since it has considerable debts and although it undertook a placing earlier this year, doubts surrounding its cash flow may cause its share price to come under further pressure over the short to medium term.
Relative Stability
While the share prices of Genel and Gulf Keystone have slumped in the last year, oil services company, Wood Group (LSE: WG), has performed relatively well. For example, its shares are down just 5% in the same period, with its bottom line due to fall by just 3% this year and 6% next year. Considering how dramatic the oil price fall has been and how much capital expenditure has been scaled back in recent months, such a moderate decline in earnings would represent a good result.
Furthermore, with Wood Group currently trading on a price to earnings (P/E) ratio of just 13.8 versus 16 for the FTSE 100, it offers realistic rerating potential. As such, now could be a great time to buy a slice of it.
