Sub-$50 oil is starting to hurt even the big oil companies now, with Royal Dutch Shell and BP having to impose cost-cutting measures. BP has even slashed 300 jobs in the North Sea and decided to shelve some plans, as the low oil price makes the relatively expensive development unprofitable.
Commentators have even suggested that BP expects oil to remain at today’s low prices for the next two or three years, as Saudi Arabia is keeping the production taps open in a bid to kill off the more expensive oil shale industry. That could have crippling effects on smaller oilies with high costs.
Cairn Energy (LSE: CNE) has other activities to offset it, but it’s still big in the North Sea. The firm’s latest update on 13 January did say that “Cairn is fully funded to deliver its exploration and appraisal programme, along with the Kraken and Catcher developments which are on track for first oil in 2017“, and it has plenty of cash and credit — but it made no mention of oil prices.
Cairn seems safe for now, at least. The share price has leveled off of late, but it’s still down 38% over 12 months to 171p.
Xcite Energy (LSE: XEL) is another company focused on the North Sea, currently developing known resources. At Q3 time in November the firm confirmed it had raised $140m through bond and equity issues, so its cash situation looks reasonable for now. But analysts are forecasting increasing losses per share until at least 2016, and if oil hasn’t started to recover by then we could be looking at a scary situation.
Xcite’s shares are down 68% in the past year, to 33.25p.
Turning to Rockhopper (LSE: RKH), exploring in waters north of the Falkland Islands, we find another that could be seriously damaged by long-term cheap oil.
Costs in the South Atlantic are also high, and discoveries around the Falklands have been considerably poorer than originally hoped back in the days when the region was looked on as a great new hope. Still, Rockhopper is moving further afield too, and in its first-half update told us that it is adopting a “phased, lower cost development solution” for its Sea Lion field and is revising and derisking some of its commercial arrangements.
But again we’re looking at losses until at least 2016, and the share price is down 61% over 12 months to 59.8p.
If you’re thinking of investing in a smaller oil explorer right now, I’d say you need to be sure it’s one with the financial clout to keep going for at least three more years and into an era of recovering oil prices.
Alternatively, you could avoid oilies and turn to a very simple approach to investing that could help you to long-term financial security
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Alan Oscroft has no position in any shares mentioned. 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.