BP plc And Faroe Petroleum plc: The Perfect Oil Partnership?

The price of oil could go up, down or stay where it is. However, it’s nigh on impossible to predict in which direction it will move in the short run since it’s highly dependent upon the prospects for a cut in supply. And with that involving a number of major oil-producing nations such as Saudi Arabia, Russia and Iran, the outcome is extremely uncertain.

In the medium term, the current level of oil seems to be somewhat uneconomic. Certainly, companies such as BP (LSE: BP) are able to stay in business due to them having exceptionally low cost curves and sound finances. But for many oil companies, oil priced at $30 per barrel is simply unsustainable and this is likely to reduce supply in the coming years.

Between now and then, owning a stock such as BP seems to make sense. That’s at least partly because it yields 7.5% and is likely to emerge from the present challenges in a stronger position relative to its peers owing to its ability to keep costs under control and potentially make acquisitions should the opportunities arise. Furthermore, BP trades on a forward price-to-earnings (P/E) ratio of 14.7, which indicates considerable upside given its longer-term outlook.

On that topic, energy demand across the globe is due to rise in the coming decades. While cleaner energy is clearly set to become an even bigger part of the energy mix, oil and gas is still forecast to play a major role in the next 20-30 years. Therefore, BP should remain highly relevant and very profitable in the long run – especially as demand creeps up and supply begins to reduce due to simple economics.

For many investors, buying larger, more financially stable oil plays such as BP will be sufficient to provide them with a degree of risk in return for a relatively high potential reward. However, other investors who are less risk-averse may wish to pair BP up with a smaller, riskier and potentially faster growing stock from the oil and gas sector.

Worth a look?

One company that may appear to fit the bill on that front is Faroe Petroleum (LSE: FPM). It recently reported production for the 2015 financial year that was ahead of previous guidance, with the company averaging 10.5k barrels of oil equivalent per day (boepd), which is 16% higher than the 2014 level of 9.1k boepd.

However, looking ahead to the current year, Faroe Petroelum is expecting production to fall to between 7k and 9k boepd due to the suspension of production at the Njord and Hyme fields in which Faroe has a stake of 7.5%. They will be suspended from May until the end of the year for redevelopment, although Faroe expects no costs to be incurred regarding its other fields that are due to continue to produce throughout the course of 2016.

With Faroe trading on a price-to-book value (P/B) ratio of just 0.6 (using its net asset value figure from the 2015 interim results), it appears to offer good value for money. However, with the prospect of falling production as well as further losses this year, there may be better options elsewhere within the oil and gas sector. That’s especially the case with the industry offering good value for money due to weak investor sentiment.

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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.