Is Solo Oil PLC The Perfect Partner For BP plc In Your Portfolio?


It’s been a tremendous year for investors in Solo Oil (LSE: SOLO). Indeed, the share price of the oil and gas exploration company has risen by a whopping 280% since the turn of the year, with positive news flow being the major cause of the rise.

Meanwhile, BP (LSE: BP) (NYSE: BP.US) has disappointed thus far in 2014, with Russian sanctions and a failure to win an appeal to claw back some of the compensation costs associated with the Deepwater Horizon oil spill being the key reasons for this. Shares in BP have fallen by 10% year-to-date.

However, with a strong asset base and a low share price, the future looks bright for BP as an investment. Could a combination with Solo Oil add even more value to Foolish portfolios? Could BP and Solo Oil turn out to be the perfect partnership?

Scale Differences

Clearly, BP and Solo Oil are hugely different beasts. While BP continues to have a vast asset base that provides it with a huge degree of diversity, Solo Oil is focused on a very small number of sites that could make or break the business.

Indeed, even after shrinking the size of its asset base, BP still has a huge variety of lucrative projects that, in the long run, could boost its profitability. For Solo Oil, positive news flow during the course of this year on projects in which it owns a stake has helped to push shares higher.

For example, the Horse Hill-1 project in the south east of England has encountered oil in recent months, while the Ruvuma gas and condensate project in Tanzania has made two positive discoveries to date. Both of these projects, therefore, seem to hold considerable future potential for Solo Oil.

Company Resources

While Solo Oil has delivered positive news flow in recent months, the next step for the company could involve substantial investment. Indeed, to physically extract gas and oil from the two mentioned prospects is likely to mean significant infrastructure being built and, with Solo Oil having cash of just under £2 million at the end of 2013, this could pose a potential problem to the company. A rights issue or placing could be required to bring the projects on-stream.

BP, on the other hand, continues to benefit from extremely strong cash flow. Furthermore, as its compensation payouts tail off over the medium term, this should increase significantly and allow the company to reinvest more and begin the process of rebuilding its asset base after the oil spill of 2010.

Looking Ahead

So, while Solo Oil has had a great run of late, the next phase in the company’s development could involve more pragmatism and less excitement for shareholders. In other words, news of discoveries may be replaced with news of investment and increased cash demands on the business.

Meanwhile, for BP the future continues to look bright. It trades on a price to earnings (P/E) ratio of just 9.1 and, with a yield of 5.5%, could prove to be a top notch income play. Furthermore, with its strong cash flow and highly lucrative asset base, BP could prove to be a top performer.

While on paper a mixture of ‘little and large’ sounds appealing, Solo Oil’s next phase of development means that the company’s share price could fail to live up to its performance in recent months. However, with BP still offering great value, strong income potential and a superb asset base, it seems to be well worth buying at current price levels.

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Peter Stephens owns shares of BP. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.