It can be an expensive mistake to write-off fundamentally good companies that are simply suffering at the hands of either a cyclical downturn, or as we have seen with the depressed oil price, a case of oversupply in the market.
A tale of two charts
As we can see from the first chart, the three shares under review here today, Hunting (LSE: HTG), Amec Foster Wheeler (LSE: AMFW) and Weir (LSE: WEIR), have trounced the FTSE 100 over the last three months as oil has staged a recovery along with some other commodities.
Indeed, anyone who was brave enough to buy in the market panic would now be sitting on a handsome return. However, like me, I suspect not many investors did take the plunge due to the fear of conditions worsening.
And it’s not too difficult to understand why investors would be reluctant to invest in the sector when you cast an eye over the 12-month chart below.
As you can see, all three companies have been hit hard by the impact that the low oil price has had on the upstream explorers and producers who are understandably reluctant to deploy their cash while the price of the commodity is so low.
A difficult year ahead?
It’s sometimes difficult for investors to actually appreciate the impact that a prolonged event such as the low oil price can have on a business. What brought it home to me was the AGM trading update from Hunting on Wednesday.
Investors were told that, as highlighted in the group’s preliminary results outlook in March, trading during the first quarter of 2016 across the majority of the businesses had been weak, with revenue being approximately 50% lower when compared to Q1 2015.
They were also told that while the price of WTI crude oil has stabilised since the year-end at around $40 per barrel, the US rig count has declined to below 450 active units. This was down from over 1,800 units at the start of 2015, reflecting the difficult market environment being experienced by all energy sector companies.
Despite the gloomy outlook, the shares actually rose on the day, I suspect due to general relief that trading hadn’t worsened.
Have we reached a low point?
I’ve written before on the folly of trying to predict the direction of prices, and in particular the prices of commodities exposed to movements in the US dollar, concerns over Chinese growth and many other moving parts, supply included.
However, it seems that the market is looking towards a meeting of some of the major oil producers over the weekend in Doha. It’s hoped that there will be an agreement struck which will mean a freeze on production at current levels.
While this, in my view can be seen as a positive sign, demand is going to have to catch up with the supply in order to see a return to more normal pricing in the future. This in my view leaves the door open for additional volatility going forward, which in turn could knock the recovery in the share prices that we’ve witnessed so far.
