There’s no denying that BP (LSE: BP) and Genel Energy (LSE: GENL) are two very different oil companies. Genel is an exploration and production company while BP is an integrated oil major. But because these firms are both so different, they could make a great duo when combined in a portfolio.
You see, BP’s global integrated model means that the corporation can weather market downturns better than pure exploration and production companies like Genel.
However, due to BP’s size the company is unlikely to rack up blistering growth. Slow and steady returns are the name of the game here. On the other hand, an investment in Genel offers much more upside for investors. The company’s shares have fallen 85% during the past 12 months, tracking the price of oil, but it’s well positioned to stage a recovery when the oil price recovers and shareholders should reap the benefits.
Slow and steady
BP is something of a cash cow for investors. The company has built a reputation as being one of the UK’s most trusted dividend stocks, and management has prioritised payment of the dividend. Even though the company’s shares have fallen by around 20% since the beginning of March last year, the current dividend yield of 8% provides some consolation for investors.
Unfortunately, while BP is a great income investment, the company’s growth leaves a lot to be desired. During the past five years, BP’s earnings per share have bounced between -20p and 90p. City analysts are expecting the company to report earnings per share of 12.2p this year and 28.1p for 2017. Of course, this forecast is conditional on the price of oil.
So, all in all, BP is a stable income investment but when it comes to capital growth there are better picks out there for investors. Genel is one such.
Genel, like many other small oil companies, is currently going through a rough patch. Production in 2015 increased to 84,900 barrels of oil per day from the 69,400 barrels being produced each day in 2014, although production is expected to fall to 80,000 barrels a day this year, 70,000 in 2017 and 60,000 in 2018. This forecast is once again conditional on the price of oil. The company’s capital spending has been cut by nearly 90% during the past 12 months, and this reduction in spending is mostly responsible for the lower production figures.
Still, if and when the oil market recovers, Genel is in a prime position to benefit as its flagship Iraqi oilfields have some of the lowest production costs in the industry. What’s more, Genel has a cash-rich balance sheet, giving it plenty of financial flexibility.
Genel on its own may not be a suitable investment for many investors. However, when the company’s combined in a portfolio with BP, the duo becomes an attractive investment proposition. BP’s 8% dividend yield provides a healthy level of recurring income while Genel’s potential upside more than makes up for BP’s lack of capital growth.
Rupert Hargreaves 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.