I’ve been saying for some time that oil would stabilise back above $75 per barrel. And with the price ticking towards $80, I might finally have been proved right. I’m no great soothsayer, mind, as I’ve been saying this for years and it’s almost certainly something that would eventually come true.
But I’ve also held the conviction that prices above $75 were what it would take to start oil company shares moving upwards again, and that’s what seems to be happening. Shares in BP (LSE: BP) have gained 23% since the end of March, while the FTSE 100 is up 12%. And the gains have been across the board, with Royal Dutch Shell up 15% — and Premier Oil shares have shot up 70%!
At around 560p today, will it be long before BP shares break the 600p barrier? I don’t think so.
For one thing, BP has steadfastly stuck to paying its dividends during the oil price crisis, with chief executive Bob Dudley insisting that the business would recover, even though we were surely in for a few years of cheap oil.
BP’s consistent dividend provided a yield of 5.7% last year, though the same in cash terms yielded as much as 7.7% back in 2015. If you’d been prescient enough to see that oil prices would surely recover and that BP would continue to be a nicely profitable company, just think what a difference to your pension pot it could have made if you’d locked in a yield like that for the long term — and congratulations if you did just that.
Even though the share price has perked up lately, BP’s forecast dividend still stands at around 5%, and that’s still a good deal better than average. For the yield to come down to what I’d think of as sustainable long-term level of round 4%, we’d be looking at a share price of 750p.
First-quarter results show that BP’s earnings are recovering nicely and as soon as we get back to dividend rises, I can see the share price soaring.
Picks and shovels
This brings me to an old “picks and shovels” favourite in the oil business, one that provides services to the oil explorers working at the sharp end.
I’m talking about Gulf Marine Services (LSE: GMS), whose share price has also ticked up of late. We’re looking at a 31% rise since a low point in early April, though there’s still some way to go before the 33% drop of the past 12 months can be clawed back.
Gulf Marine shares have struggled more than I anticipated as the period of cheap oil has lengthened, and a profit warning in August last year sent the price tumbling. But are we looking at good value now?
Analysts are forecasting a massive recovery in earnings. Admittedly it’s from a low base, as EPS collapsed to almost nothing in 2017. But if these predictions prove accurate, we’d be looking at a forward P/E multiple for 2019 of only seven — and maybe even the first signs of a returning dividend.
The big concern for me is debt, which stood at $398m at 30 April. That’s almost twice the company’s market capitalisation, and the big challenge in the next couple of years will be to get that down substantially. But if Gulf can remain afloat and achieve its expectations, we could be on to a decent recovery candidate.
