With the price of oil as low today as it was in the immediate aftermath of the financial crisis, it’s tempting to pile into the sector in the hope that the price will recover, taking oil company shares up with it.
Investing now could be a good idea. A lower oil price reduces some of the downside risk from fluctuating commodity prices. As long as the firms we select are strong financially and capable of weathering any ongoing weakness in the oil price that could develop.
I’m looking at oil major BP (LSE: BP), mid-cap producer and explorer Soco International (LSE: SIA) and small-cap gas producer and exploration company Aminex (LSE: AEX).
Bearing down on costs
With last Wednesday’s first-quarter results, BP revealed an underlying replacement cost profit of $532m, which is up from the previous quarter’s $196m, but well down on the $2.6bn the firm earned in the first quarter of 2015. Given that the average price of a barrel of oil came in at $34 during the period, that’s not a bad result, showing that BP is holding its own.
The firm is bearing down on costs to get itself through the current soft patch in the oil price, saying that lower costs more than offset the impact of significantly weaker oil and gas prices and refining margins. Despite such challenges, the firm reckons its next wave of upstream projects is “well on track,” which offers potential for future upside from operations.
BP thinks that market fundamentals, such as robust demand and weak supply growth, will move global oil markets further up by the end of 2016, suggesting potential for investor returns due to a rising oil price. The company underlines its confidence by standing fast behind its dividend. At today’s share price around 382p, the forward dividend yield sits at about 7% for 2017.
BP’s financial gearing runs at around 24% and the firm reckons it has further flexibility to move costs down if need be. BP looks financially sound to me and as such makes a reasonable candidate to play the upside potential of the price of oil.
Potential on several fronts
In many ways, mid-cap Soco International is even better placed than BP to weather the current storm in the oil market. Soco has a cash pile of around $100m, zero debt and well-established oil production from its assets in Vietnam.
The firm has a decent track record of returning cash to shareholders, which it did shrewdly when oil prices were high rather than squandering the cash on over-priced acquisitions. City analysts believe the firm could yield a dividend as high as 4% during 2016, combining ordinary and special payouts. And the firm is in a good position to invest in any decent but distressed assets that might come along now that the oil price is low.
On top of that, Soco continues its organic development-drilling program, so upside for investors could arrive on several fronts.
Not directly exposed to the oil price
Small-cap Aminex is the odd one out here because it’s about to start production of gas rather than oil. The price of the gas Aminex will sell is subject to a pre-negotiated local price in Tanzania, home of the firm’s soon-to-be producing asset. As such, the fluctuating price of oil doesn’t directly affect the firm, but I think sentiment in the oil and gas sector is so low that it dragged down the firm’s shares with the oilers.
Aminex looks set to benefit from much-needed cash flow as imminent production ramps up. However, the company may need to raise further funds to progress its ongoing drilling operations. Nevertheless, at current levels the firm has plenty of upside potential.
