A barrel of Brent crude has hit the dizzying heights of just over $44, a rise of more than 60% on mid-January’s $27. That’s a long way from the $10 predicted by Standard Chartered at what now looks like the bottom of the oil cycle. Goldman Sachs, RBS and Morgan Stanley also made ultra-bearish forecasts at the start of the year, but investors are feeling more bullish today.
What goes down….
Where the oil price goes, oil stocks follow. On 19 January, Premier Oil (LSE: PMO) hit a low of 19p. Today, it trades at 54p, up 184%. It’s the same story with explorer Tullow Oil (LSE: TLW). By 20 January it had slumped to 118p. Today, you pay 225p, a rise of 90%. It rose almost 12% on Wednesday alone. At the Fool we’re always urging readers to buy good companies on bad news, and moments like these show why.
Let’s not get too excited, both Premier and Tullow are still down almost 90% over the past five years, but the rally offers welcome respite. The big worry is that both remain at the mercy of the oil price, something wholly beyond their control. So where will it go next?
Could go higher
Oil has partly been driven higher by speculation that OPEC and non-OPEC members will freeze output in Doha on Sunday, but markets could be disappointed, with Saudi oil minister Ali al-Naimi pouring scorn on the idea. Also, stockpiles remain high, as the US Energy Information Administration reports that its crude inventories have increased by 6.6m barrels, despite tightening supply. On the other hand, oil production has dropped below 9m barrels per day for the first time in over a year and I could see oil creeping higher still. The cycle is moving upwards again.
Premier Oil dug in for cheap oil by disposing of non-core assets, slashing operating costs and cutting capex, while adding to its reserves. Some 30% of 2016 oil production is hedged at $73.40 a barrel, which helps. It also benefitted from Chancellor George Osborne’s decision to scrap the Petroleum Revenue Tax. Cash flow held firm at $809.5m last year and although year-end debts of $2.24bn dwarf its $401.3m cash reserves, that doesn’t seem to worry investors who’ve poured into the stock in recent weeks, and been rewarded for their courage.
Carry on climbing
Tullow has hedged 52% of 2016 production at $75 a barrel before tax, while boasting costs of $10 and $15 per barrel at its Jubilee and the West Africa fields, so any rise in the spot oil price is a real bonus. Year-end net debt may have been $4bn but free cash of $1.9bn should soothe investors. Also, production will rise in the second half of 2016 as its Project TEN in Ghana starts pumping.
Where the oil price goes next is anybody’s guess, at least in the short term, so don’t assume Premier and Tullow will continue gushing in the weeks ahead. They need oil to continue rising, as it surely must in the longer term, but they still number among the more secure stocks in this volatile sector.
