The outlook for the oil sector is very downbeat at the present time. Industry experts are generally of the view that we have now entered a ‘new normal’ of low oil prices, which means that profitability for sector incumbents and their investors may be disappointing over the short to medium term.
Of course, it is not all that long ago since there were predictions of $200+ per barrel. Since then, though, a slowing Chinese economy as well as increased production of oil have combined to more than halve the price of black gold and send predictions for its future price level southwards.
The reality, though, is that the price of oil is a known unknown. For investors who can take a long term view and cope with a relatively high degree of volatility, the margins of safety on offer at a number of oil producers, explorers and supper services companies indicate that now is an opportune moment to buy.
Clear upside
For example, BP (LSE: BP) trades on a price to book value (P/B) ratio of just 0.96 which, for a company with such an appealing asset base, indicates that there is clear upside potential. Furthermore, the company is taking a prudent approach to the future direction of the oil price, with it stating in its recent third quarter results that it is planning on operating within an environment of $60 oil. This means that BP is focused on improving productivity, reducing costs and generating efficiencies over the medium term, which is likely to have a positive impact on its bottom line.
In addition, BP remains committed to paying a relatively generous level of dividends, with the company stating in its third quarter results that it intends to maintain its current level of payout over the medium term. This means that BP should yield around 6.8%, which makes it one of the most appealing, albeit risky, income plays in the FTSE 100.
Very sustainable
Similarly, with Amec Foster Wheeler’s (LSE: AMFW) share price having fallen by 16% since the turn of the year, it now offers a yield of just over 6%. Unlike BP, though, Amec Foster Wheeler’s dividend is well-covered by profit at 1.7 times, which indicates that they it’s very sustainable, even if profitability comes under pressure in future years.
Looking ahead, though, the company is forecast to return to positive earnings growth next year, which has the potential to improve investor sentiment and push its share price higher. With Amec Foster Wheeler trading on a price to earnings (P/E) ratio of just 9.7, there is considerable rerating potential and this makes it a very appealing buy at the present time.
One to watch
Meanwhile, Ophir Energy (LSE: OPHR) today issued an update on its exploration well at the Soy Siam prospect in Thailand. The well was drilled to a depth of 1,627m, but all the reservoirs which were encountered were dry and no hydrocarbon shows were encountered. Therefore, the well has been plugged and abandoned, with the rig now set to move on to drill the Parichat South West prospect.
Although disappointing, Ophir’s share price has fallen only marginally today but, with the company set to move into loss-making territory in the current year, investor sentiment could decline and cause the company’s share price to come under a degree of pressure. This, plus the loss of a major investor earlier in the year, means that Ophir may be a stock to watch rather than buy at the present time.
