The oil price crash has seen the price of Brent Crude oil fall more than 60% this year. In the US, oil prices even went negative for a short time. I think this could be a good time to hunt for cheap oil stocks to buy.
Although the coronavirus pandemic has put a big dent in oil demand, I expect demand to improve during the second half of 2020. I’ve identified three UK oil stocks which I think should perform well in this scenario.
A long-term winner?
If you’re looking for oil stocks to buy, you can’t ignore the FTSE 100‘s biggest company, Royal Dutch Shell (LSE: RDSB).
Shell hit the headlines last week by cutting its dividend for the first time in 75 years. This will reduce the stock’s dividend yield to around 3.8%. Although this is a disappointment for income investors, I think it’s a far-sighted decision that will prove to be correct.
At more normal oil prices, Shell is a formidable cash machine. Its oil business has low operating costs for fields that are already in production. The group also has a very large gas business and a sizeable ‘downstream’ division – that’s industry jargon for refineries which convert oil into petrol, diesel, and chemicals.
I see Shell as a potential winner as the coronavirus pandemic recedes. I’m also encouraged by the company’s plans to cut emissions over the coming years. I remain a buyer.
One North Sea oil stock I’d buy
North Sea firm Serica Energy (LSE: SQZ) has been around for 15 years. But in 2017 the firm acquired a number of oil and gas fields from BP. This deal transformed the company into a mid-tier producer with 2019 production of more than 30,000 barrels of oil equivalent (boe) per day.
More than 80% of Serica’s production is gas, which is piped to the UK for electricity generation. Operating costs are low, too, at just $12.60 per boe.
Serica’s low costs support strong cash generation, and net cash rose from £43m to £102m in 2019. The group plans to pay its first ever dividend in July, giving the stock a forecast yield of more than 3%.
Serica could still face challenges from coronavirus. In the future it could face significant decommissioning expenses. But the shares look reasonably priced to me. I’d be happy to buy at current levels.
I think this oil stock could double
The final company on my list produces oil for an operating cost of just $3 per barrel. Genel Energy (LSE: GENL) was one of the first companies to strike oil in the Kurdistan region of Iraq. It remains a leading producer in this region.
There are some potential problems for investors. Genel’s oil is sold to the Kurdistan government and payment is sometimes delayed. The political environment isn’t always stable. However, this business has a track record of operating successfully and maintaining a good relationship with the authorities. I can live with the political risks.
Genel’s net cash stood at more than $90m at the end of last year, supporting a generous dividend. Looking ahead, analysts currently expect the firm’s strong cash generation to support a 9% dividend yield in 2020.
This oil stock isn’t without risk, but if oil prices rise stabilise above $40, I think shareholders could see big gains. I’d be happy to take a small position in Genel.
