BP (LSE: BP) could be one of the best bargains in the FTSE 100 right now. The company’s shares are trading close to a five-year low and are only 15% away from hitting a 10-year low, despite the fact that the company is in better shape than it has been for many years.
Of course, BP’s shares have followed the price of oil lower and the market doesn’t seem to care about the company’s underlying fundamentals. Still, BP is adjusting rapidly to the ‘new oil order’ the company is now having to grapple with.
BP has announced sweeping spending cuts, job losses and cuts to capital spending, all of which have convinced analysts that it’s well placed to ride out oil price volatility. One analyst believes that this year, the breakeven price of Big Oil – the level at which Big Oil makes a cash profit – has fallen 20% year-on-year to $80 per barrel. A further decline in costs to $60 per barrel is expected by 2017.
Low cost, high debt
Unlike BP, Tullow Oil (LSE: TLW) Premier Oil (LSE: PMO) and Enquest (LSE: ENQ) all need the price of oil to be significantly higher than it is today to be able to remain solvent.
But aren’t their operating costs lower than BP’s? Tullow’s underlying cash operating cost per barrel of oil produced, including depreciation, depletion and amortisation cost, was $38 during the first six months of the year. Premier’s first-half underlying cash operating cost, including amortisation, was $30/bbl. And Enquest recently reported an operating cost of $31 to $32/bbl.
At first glance, these operating costs may seem attractive to investors. Indeed, an operating cost of $31 for a North Sea operator like Enquest is extremely impressive. The North Sea has a reputation for some of the highest lifting costs in the world with the average barrel costing $60 to extract. However, Enquest, Premier and Tullow all have mountains of debt to deal with, and unless the price of oil returns to $100/bbl it’s going to be difficult for them to pay off creditors.
For example, Tullow reported net debts of $3.6bn at the end of June, against net assets of $3.8bn. City analysts forecast net debts to rise to $4bn by the end of December against pre-tax profits of only £68m for full-year 2015 and £142m for full-year 2016.
Meanwhile at the end of June, Enquest reported net debt of $1.3bn. City analysts expect the company to report a loss for the next two years.
And finally, Premier Oil has net debt of $2.3bn but is also expected to report a pre-tax loss this year. City analysts expect Premier to report a pre-tax profit of £35m for the year ending 31 December 2016.
Wise to avoid
No matter how low Enquest, Premier and Tullow’s production costs are, their debts will hold the companies back for the foreseeable future. Even though the three companies aren’t at risk of becoming insolvent any time soon, if you’re going to play a recovery in oil prices, BP with its robust balance sheet and diversified operations is the best way to go.
