The oil price is falling again, after new figures show rising US stockpiles and evidence of increasing Iraqi oil exports. Brent crude is down to $45 a barrel, and inevitably oil stocks are falling with it.
Consensus suggests this trend will continue into the New Year, but it wouldn’t take much to reverse it. Saudi Arabia could bow to pressure from fellow OPEC members and tighten supply. Islamic State could launch a successful track against a key oil or gas installation. Falling oil investment could translate into falling production faster than people think.
Oil could rebound suddenly, and when it does, oil stocks will inevitably rebound with it… which could make now a good opportunity for brave contrarians. Here are two very different stocks to consider.
BP, BP, Yeah!
BP (LSE: BP) can’t blame all its troubles on cheap oil, many have been self-inflicted, but it plays a large part in the 20% share price slide of the past six months. Its recent third-quarter results were fairly warmly received although the fact that BP was basing its forward planning on an optimistic figure of $60 oil worried many. They will be even more worried today, with oil $15 below that assumption.
Chief executive Bob Dudley has been slashing billions off BP’s costs in a bid to make the sums add up but there is only so much he can do before that screamingly high yield of 6.71% begs to be shot down. Most analysts seem to think it will survive 2016 but if oil falls further then Dudley may have little choice but to pull the trigger. Events are now out of BP’s hands. Those who said the vertically integrated oil majors had built-in protection against oil price swings didn’t see them swinging this low.
In some ways, BP is a simple investment. If you think oil will recover, buy it. If you don’t, stay away. What actually happens next is anybody’s guess.
Burning Tullow
Explorer Tullow Oil (LSE: TLW) is even more exposed to the oil price than BP and is down 55% in the last six months. That is despite a 17% one-day leap in its share price on Monday after Copenhagen-based A.P. Moeller-Maersk A/S agreed to buy half of Africa Oil Corp’s shares in licenses in Kenya and Ethiopia, where Tullow also operates. The share price topped out at 259p but the excitement quickly ebbed and by Friday had slumped 24% to today’s 197p.
That was partly due to the reality check of Wednesday’s production update, which slightly lowered oil production guidance to around 66,000 to 67,000 bpd. Tullow expects full-year operating cashflow before working capital and tax to be around $1bn, but has net debt of $4.2bn. Successful hedging should keep it afloat, with 36,011 bpd hedged at $75.45 a barrel for next year, a further 22,500 bpd hedged at $73.44 a barrel in 2017 and 9,000 bpd hedged at $62.67 a barrel for 2018. But it needs pricier oil to soothe the troubled waters of its balance sheet and start shrinking that debt.
Tullow’s dynamics are the same for BP, only more so. Investors have more to lose if oil falls, more to win if it rises. How brave do you feel?
