The oil price has rebounded in recent weeks after Brent crude fell to a 13-year low of around $27 in January. Today, it trades at around $36, up one third from its depths, as talk of $20 oil fades, at least for now.
Life in the slow lane
Where oil goes, oil stocks tend to follow, with many leading lights rebounding by 10% to 20% over the past month, as investors enjoy the much-needed relief rally. Unfortunately, not every oil company has traced the price of crude upwards.
For example, Tullow Oil (LSE: TLW) has barely budged over the last month. Premier Oil (LSE: PMO) has fared better, but it is still well down year-to-date, having entered 2016 at 46p but now trading at just below 40p. So why aren’t these two stocks joining in the fun?
Only the brave
Tullow’s recently-published full-year results saw revenues drop 27% to $1.6bn and losses total $1bn after a series of write-offs and impairment charges. Naturally, the oil price crash was chief culprit. All is not lost, despite net debt of $4bn, as the explorer still generated $1bn of operating cash flow and has $1bn of facility headroom and free cash to fund ongoing developments. It has also hedged 64% of expected 2016 production at $75 a barrel, with further “material” hedges in place for 2017.
Tullow has enjoyed success in drilling new basins, particularly across Africa: it is unlucky that the low oil price has wiped so much off their value. It has the cash to continue developing its estimated $1.3bn of reserves in the hope that they will be worth far more one day. Like every other oil company, it has been slashing costs and capex in a bid to keep the show on the road until oil recaptures its star quality. Brave investors who can hold their nerve in the teeth of further oil price swings may consider Tullow a risk worth taking.
Premier investment?
Premier’s recovery was knocked by last week’s full-year results, which showed it suffered a post-tax loss of $1.1, up fivefold from $210m in 2014, largely due to $558.7m impairment charges on its Solan field. It wasn’t all bad news, though. Cash flow is healthy at $809.5m, although down on 2014’s $924m. It has also cut operating costs by 25% and while production fell due to non-core disposals, Solan’s first oil flows should help to compensate. Premier has also hedged around 30% of 2016 production at $73.4, roughly double today’s spot price, and may have picked up North Sea oil and gas assets from EON at a bargain price.
Drill beneath management’s positive spin, however, and there is still plenty to worry about, especially net debt of $2.24bn, up from $2.12bn in 2014, against cash resources of $401.3m. Shareholders could still endure a rescue rights issue, with management warning it may still breach debt covenants.
Premier can probably withstand another year of cheap oil but investors will be sweating on a price revival in 2017. If we get it, Premier will surely join in the fun. However, that remains a big “if”.
