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Recovering Oil Gives Afren Plc, Tullow Oil plc And Premier Oil PLC A Boost

Was BP chief executive Bob Dudley wrong when he said he expected to see cheap oil for “certainly a year, I think probably two and maybe three years“?

Well, I don’t think we should get too optimistic, but the price of Brent crude did nudge above $60 for the first time this year on Friday, and it gave a handful of struggling oilies a boost on the day.

Back from the brink?

Shares in Afren have crashed by 95% over the past 12 months, but the uptick in the oil price helped them to a 19% recovery approaching midday, to 8.49p, although they’ve since fallen back to under 8p. There’s also been hope that an offer would made for Afren after the company confirmed it was in talks with SEPLAT Petroleum in January, but the already-extended deadline looks likely to expire with no deal.

There’s a fair chance that Afren is set to go bust, with forecasts suggesting it will struggle to make its debt repayments — and it’s going to need a bigger oil price rise to make much difference. We could be looking at a hope of further strengthening, but on the other hand it might just be a revaluation of the firm’s asset values should it not survive.

Better shape

Tullow Oil (LSE: TLW) is in much better shape than Afren, although falling oil prices have helped push its share price down 49% over the past 12 months to 401p, and the company has just announced the cancellation of its final dividend this year. But at least there’s been a 24p (6.3%) rise on Friday on the back of the firming price of a barrel.

Tullow has launched a cost-cutting programme and has shifted its focus towards its West African operations where its production costs are lower, and that should stand it in good stead to ride out the oil price storm.

Analysts are forecasting modest EPS for this year, but they have a doubling penciled in for 2016. That makes me feel Tullow shares could easily be past their bottom, and any further recovery in oil prices over the coming months could make Tullow look a bargain.

Past the worst?

Premier Oil (LSE: PMO) is our third to benefit today, with a 9.1p (6%) gain to 168p by noon. The shares are down 45% over the past 12 months, but they’ve now recovered 20% since their low point on 14 January.

Premier has no cashflow problems, and though EPS is expected to fall 7% for 2014 (with results due on 26 February) and then by a massive 60% in 2015, that would still put the shares on a forward P/E of 15. And if we really are at the bottom of the oil price cycle and heading for further recovery, Premier Oil shares could be the most attractive of the three here.

The oil price is obviously still speculative, but in the long term Premier looks solid to me.

It can be risky, but carefully-selected oil investments in a balanced portfolio can help lead you to Buffett-style wealth.

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Alan Oscroft has no position in any shares mentioned. The Motley Fool UK has recommended Afren and Tullow Oil. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.