Have you seen what’s happening to the oil price? Just as it looked set to enjoy another burst of price growth recovery, it has started to slip again. Brent crude is back to $47 a barrel and growth forecasts have been downgraded as well, with analysts suggesting it will trade at just $53 in a year’s time. Although don’t take that prediction too seriously, nobody can guess where oil will go next.
Oil in troubled waters
The oil price slowdown is bad news for stock markets, as it suggests that some of the steam is going out of the global economy. Further slippage could point to a turbulent summer, although right now just about everything points to a turbulent summer.
Oil investors enjoyed some relief during the recent rally, when the oil price nearly doubled from the low of $27 a barrel in mid-January, as some stricken stocks almost tripled in value. Explorer Soco International (LSE: SIA), for example, leapt from a low of 121p to a high of 177p in early March, a rise of 41% in a matter of weeks. Oil major BP (LSE: BP) made more stately progress but still jumped nearly 17% between its January low and April high. There are clearly rewards for those who invest at the right time, but is now a good time?
Crude outlook
Oil is down 10% from its recent highs, due to a combination of the stronger dollar, shaky US growth, Brexit uncertainty and reduced disruption in Nigeria and Canada, which has boosted supply. OPEC’s increasing ineffectiveness has also contributed as member states ramp up production in a free-for-all, while $50 oil has tempted US frackers back into the market (although they may retreat again as oil slides). Investors have responded in different ways to BP and Soco, with the major’s share price continuing to creep upwards to 370p and the minor’s giving up its recent gains to trade at just 132p.
As markets wake up to the fact that the US is in no position to hike interest rates, stocks like BP, which currently yields a mighty 7.22%, are a massive draw for investors. The problem is that a falling oil price raises question marks about the sustainability of its dividend.
Feel the yield
In 2011, BP’s earnings per share (EPS) stood at 135.9 cents, roughly four times its dividend payout of 29 cents. This year, EPS are forecast to be 12.93p, barely half its 27.24p dividend payout. A forecast 113% rise in EPS in 2017 will bring earnings and dividends roughly into line, and we must assume that management will fight tooth and nail to keep the income flowing, but there are serious risks, and these will only intensify if oil slides.
While BP management is looking to defend its yield, Soco is aiming for progression from today’s lowly 1.51%. Soco holds out future promise with profits forecast to rise from £3.37m this year to £42.21m in 2017, and the dividend rising from 2.93p to 4.27p. Its yield is forecast to hit 3.4% next year.
Astonishingly, Soco only needs an oil price in the low $20s to achieve cash flow break-even, due to its low operating costs. While further increases in the oil price will help, it isn’t essential to investor well-being, as it may prove to be at BP.
