The price of crude oil has collapsed over the past few months, falling to a low of around $97 per barrel last week, after reaching a high of $115 per barrel during June. Unfortunately, investors have also turned their back on oil producers such as Shell (LSE: RDSB), BP (LSE: BP), Tullow Oil (LSE: TLW) and Genel Energy (LSE: GENL) as they bet that the falling price of oil will dent profits.
However, recent declines have given investors a great opportunity to buy in at an attractive price, as OPEC considers production cuts and the global economic recovery gets under way.
Oversupply
Many analysts believe that the sliding oil price can be traced to market oversupply, as output from Libya comes back online and U.S. production continues to increase. As a result, OPEC contemplating a production cut of 500,000 barrels of oil per day, or bopd to match supply and demand. Such a move by the oil cartel is likely to send oil prices back above the key $100 per barrel mark.
For a pure exploration and production company like Tullow Oil, a rising oil price is great news and recent declines give investors the chance to buy in at an attractive price. Actually, after a tough year for the Africa focused oil explorer, Tullow’s shares are now trading at a five-year low despite the company’s bright prospects.
Indeed, Tullow is now focused on rationalizing its portfolio, selling non-core assets to focus on high-impact exploration. The company’s most recent divestment was the sale of its Dutch subsidiary to AU Energy, for £50m.
Still, Tullow’s oil production is expected to fall slightly this year, from the 84,200 bopd reported last year, which generated $1.9bn in cash for the company. However, Tullow added that its TEN project in Ghana is on target for production my mid-2016. The TEN project is expected to almost double the group’s production.
Increasing production
Like Tullow, Genel is a pure exploration and production play, what’s more, the company, led by Tony Hayward, the former chief executive of BP, is analysts’ favourite takeover target.
Genel’s oil production hit 63,000 bopd during the first half, up 50% year on year, and the firm is currently in the middle of a high impact exploration program offshore Morocco. The firm’s current cash balance is $973m, including $500m of recently-issued debt. And recent declines have depressed the company’s valuation to a levels that’s attractive for most investors. City analysts are currently expecting Genel’s EPS to rise 8% this year, followed by growth of 76% during 2015. Based on current figures Genel is trading at a 2015 forward P/E of 11.7.
Russian issues
Unfortunately, BP has been hit by a tidal wave of bad news recently. Firstly, Russia’s warmongering in Eastern Europe has raised concerns about the company’s Rosneft investment, which provides a significant contribution to BP’s bottom line. Secondly, BP has recently been found guilty of gross negligence with regard to its actions in the Gulf of Mexico.
The gross negligence ruling could mean billions in additional fines for BP. Nevertheless, the company remains committed to its dividend payout, currently equal to a yield of 4.8%, and has further asset disposals planned, which should cover any additional fines.
Freeing up cash
Of all the oil companies, Shell has been least affected by the falling price of oil and it’s easy to see why. Oil exploration and production is a key part of Shell’s business but the company also has many other interests, including refining. With income flowing in from many different sources, the company is not totally reliant on a high oil price to remain profitable.
Further, the company is currently in the process of divesting $15bn worth of non-core assets to improve return on investment. This $15bn cash boost will help the company drive growth as City analysts believe that the company’s operating cash flow already covers capital spending and the dividend.
