With Brent crude vaulting over $46 yesterday, the oil rally looks to be in rude health. This will be very welcome news for BP (LSE: BP) after posting a $583m loss for the first quarter of the year. While a large part of this was due to $917m in charges related to the Gulf of Mexico spill, the average price of oil at $34/bbl for the quarter led to upstream losses of $1.2bn and resulted in net debt rising to $30bn.
However, things weren’t all bad news for BP as it ran a small $532m profit on an underlying replacement cost basis. Management also believes it will be breakeven with crude prices in the mid $50/bbl range, which isn’t too far off. If this happens quickly enough for earnings to once again cover the 7.4% yielding dividend, BP can stop piling on debt.
The company has proved adept at reacting quickly to the low price environment, and with gearing still low at 23.6% it has room to continue paying out dividends for the time being. Combined with a bevy of low-cost-of-production assets, stellar downstream operations and a relatively tame valuation of 14.5 times 2017 forecast earnings, BP isn’t the worst choice for investors looking for exposure to the oil & gas industry at a low point.
Bucking the trend
Provider of offshore support vessels Gulf Marine Services (LSE: GMS) bucked the industry trend and reported a 12% increase in revenue for 2015. This isn’t only because the company added several vessels to the fleet, but also because it was able to rent them out 98% of the year. This high usage rate came because 14 of its 16 vessels were in the Middle East, where national oil companies have continued to pump oil at record rates.
This trend looks set to continue in 2016 as the company’s order backlog stood at a respectable $443m. The bad news for GMS is that building its six new large vessels is expected to bring net debt at year-end 2016 up to a staggering $425m. With 2015 EBITDA of only $138m and expected to fall 15%-20% in 2016, this level of debt is worrying. But, if the company can keep up its impressive usage rate it should be able to work this pile of debt down to manageable levels with no further ship builds in progress.
Tough decisions ahead?
The experience of oil services provider John Wood Group (LSE: WG) was more typical of the industry in 2015 as revenue fell off a cliff to the tune of 23.2%. The company was able to manage only a 14.5% fall in EBITDA by slashing its workforce by 20%. With these relatively easy cost-cutting measures already taken, it will have to make more difficult decisions if the crude rally fizzles out.
Despite this, Wood Group is in a good spot. Net debt of only $290m in 2015 on revenue of $5.8bn is relatively insignificant. And the company has put its healthy balance sheet to good use by snapping up smaller services providers at bargain prices. After $233m in acquisitions last year, 2016 should follow a similar story. A healthy balance sheet, 3.7% dividend yield and rather sedate 13.5 P/E ratio, Wood Group could be a relatively low-risk choice in the oil & gas sector as crude prices rebound.
