The oil industry has endured a challenging number of years, but there could be light at the end of the tunnel. OPEC’s deal to cut production means that the imbalance between supply and demand that has been the root cause of low oil prices may cease to exist over the medium term. In fact, due to increasing demand for oil and a lack of exploration spend, it would be unsurprising for an oil deficit to push the price of black gold higher. As such, now could be a good time to invest in these two oil stocks.
A changing business
Shell (LSE: RDSB) is in the process of a major transformation, which should see it emerge as a leaner and more profitable entity. It has made multiple asset disposals and cut expenditure in a range of areas, including exploration. Furthermore, it has acquired the assets of BG Group, which provides it with a significant exposure to the gas sector. Since countries across the globe are seeking to improve their environmental credentials, gas could be a growth area as it’s a relatively clean fossil fuel.
Looking ahead, Shell should benefit from synergies from the BG acquisition. It also has a strong balance sheet and excellent cash flow, which could be leveraged to engage in further M&A activity. And with its shares currently yielding 6.8% and profits likely to rise as the higher oil price boosts Shell’s top line, the outlook for the business is upbeat.
Certainly, there’s no guarantee that the oil price will rise. In such a situation, Shell is well prepared due to its modest level of debt and its high degree of diversification. As such, it has a lower risk profile than many sector peers, while also having the opportunity to deliver high rewards in the long run.
A growing business
The Tullow Oil (LSE: TLW) pivot from exploration to production looks set to significantly improve the company’s financial performance. Key to this is project TEN, which has raised the company’s production level in the current year. This is expected to contribute to a positive net cash flow performance in the final quarter of 2016, which could help to alleviate investor concerns regarding Tullow’ debt levels.
Alongside a rise in production from higher margin West African projects, cost reductions have also been delivered. This has helped to make Tullow leaner and more nimble in what remains an uncertain climate for oil producers. Looking ahead, it’s now capable of matching capex to the oil price environment and has a number of low cost African development options that can be used should the oil price become more favourable.
Of course, Tullow needs to deleverage over the medium term and this means that dividends could be in short supply. However, its appeal lies in the capital gain potential on offer. As a result, now could prove to be an excellent time to buy it.
