As supply disruptions begin to bite and demand growth picks up, the oil market is rebalancing and this has sent the price of oil surging over the past two weeks.
Indeed, over the past month, the price of Brent crude has jumped by more than $6 per barrel from $43/bbl in mid-April to around $49.30/bbl at the time of writing, a gain of around 15%.
This spike in oil prices has sent investors rushing to buy oil stocks in an attempt to cash in the on the rally before it’s too late. BP (LSE: BP) and Genel Energy (LSE: GENL) could be two of the best companies to play this trend.
Bet on BP
On one hand, you have BP, one of the largest oil companies in the world with a diversified asset base and long-term business model. The company has been designed to weather all stages of the oil market cycle, from booms to busts, and right now this model is proving itself as BP continues to generate cash even while the price of oil languishes.
However, BP isn’t the most exciting oil company in the world. But there’s a reason why the company’s stock is a favourite of pension funds as it can be relied upon to produce steady returns even in the most turbulent economic environment.
It’s unlikely that BP will make you rich overnight, but the company will provide stable long-term returns. On the other hand, if you’re looking for a company that has tremendous upside potential then Genel Energy could be the one for you.
Huge potential
With a relatively cash-rich balance sheet, Genel isn’t facing the same leverage pressures as many of the company’s peers. In fact, while Genel’s peers such as Tullow and Premier warn that they could be in breach of covenants on their banking facilities, Genel has been buying back its own debt.
Several months ago management made the decision to repurchase $55m of Genel’s bonds at only 63% of face value, a decision that has dramatically improved the state of the balance sheet.
That being said, Genel’s future is still at the mercy of the Kurdistan Regional Government and the political system in Iraq, a factor that many investors may find to be too overbearing. Still, 2016 could be the first year that the company receives a full 12 months of oil payments from the KRG if oil prices recover to more attractive levels.
A diversified portfolio
Neither BP nor Genel are star investment picks in their own right, which is why if you’re looking for two investments to play the recovery in oil prices, a mixed portfolio of both Genel and BP could be the best option.
By using this approach, you’ll be able to pocket BP’s hefty dividend yield of 7.4% while waiting for an oil-price recovery. And when the recovery finally picks up steam, Genel’s shares have the potential to rocket, more than making up for their lack of income.
