One of the hardest things to learn in this investment business is to accept when you are wrong.
I remember back in the early days of the oil price crisis, when BP (LSE: BP) chief executive Bob Dudley suggested we were in for a few years of depressed oil prices. He thought that it was a retatively short-term temporary blip, and I went along with him – after all, how can the oil business ever be faced with anything approaching a long-term slowdown?
Those big 7% dividends were surely unassailable, I thought. But now I’m convinced I was wrong.
Longer than I thought
I think the oil-producing nations of the world can keep on going at low oil prices for many years yet, but sooner or later (if the price of a barrel doesn’t pick up), the cash flow taps will slow to a drip and those healthy dividends will surely have to be cut.
Back in the day, if you could get oil out of the ground and to market at a price of anything less than around $100 per barrel, you were almost assured of profits. That’s now ancient history, and with cost-cutting across the industry, many projects with much lower extraction costs are now viable. But that does beg the question of why costs only ever seem to be pared in times of crisis and are presumably accepted at wasteful levels during times of plenty — I’ll leave that as something to ponder.
Though I’ve been confident of BP’s dividend yields of around that 7% mark in the past, I really am starting to lose my confidence. Its restructuring of the past few years has been effective, but it’s increasingly looking like it’s been insufficient to prop up current dividend expectations.
Even more risk
If BP isn’t risky enough for you, what does the current environment say about Tullow Oil (LSE: TLW)?
Tullow is really still afloat only due to a $0.75bn rights issue, and that significantly diluted the ownership of existing shareholders. Debt is the order of the day, and with the company facing $3.8bn in net debt after a $0.3bn loss in the first six months of 2017, does it look like a golden opportunity to cash in on any future oil price gains?
Tullow is actually looking quite decent from a production point of view, with the ramping up of its newly operational TEN Field in Ghana being possibly its most exciting recent opportunity. Five years ago, I think that would have been a great buy signal, but now?
Surely not time to buy debt
With forecast losses suggesting a forward P/E around 14 as late as December 2018 (which is about the FTSE 100 long-term average, but with no dividend expected and risk looking high), I really see the risk facing Tullow shareholders as being incommensurate with the likely reward.
And as a shareholder in Premier Oil myself, another highly indebted oil explorer but with some interesting new discoveries, I really am re-evaluating my whole approach to investing in the oil business.