Is BP plc or Gulf Keystone Petroleum Ltd the best way to play the oil price rebound?

The oil price is climbing again, with Brent crude creeping above $48 a barrel. That’s despite the fact that the likes of Saudi Arabia and Kuwait have pledged to carry on pumping, and it suggests to me the recovery still has some way to run. Oil is still too important to the global economy to stay low for long.

The $60 question

The recovery is making BP (LSE: BP) chief executive Bob Dudley look prescient. In the heat of February’s meltdown, while he was announcing the company’s worst annual loss for two decades, Dudley predicted oil prices would correct to between $50-$60 per barrel by the end of the year. He also said that BP had set up a financial framework to help it survive in a $60 world. That world is now edging closer.

BP is starting to look highly tempting. Although the share price has picked up in recent weeks, it’s still very much in early-stage recovery, and is still down 22% on a year ago. The company recently reported Q1 operating profits of $532m, comfortably beating market expectations of around $100m, due to cost-cutting and strong operational performance in both its upstream and downstream businesses (although it’s still losing money upstream).

BP or not BP?

BP now yields a compelling 7.7% but the dividend hangs in the balance, with cover now negative at -0.9. The payout costs it around $7.3bn a year, eating up a good chunk of the $20bn cash generated last year. With BP planning $17bn of capital spending this year the dividend will be partly funded through debt, putting it in danger, although prospects will improve if oil continues to climb. BP is a gamble, but forecast earnings per share growth of 119% next year make this a tempting flutter. Long-term investors may want to get in now rather than wait for the oil price – and BP’s stock – to climb higher.

Gulf in class

Crude’s recovery has done little to help embattled Kurdistan-focused oil explorer Gulf Keystone Petroleum (LSE: GKP). January 20 marked a low for both oil stocks, offering healthy gains for brave souls in those crazy days when Standard Chartered forecast that oil could go as low as $10 a barrel. Yet Gulf Keystone has failed to benefit from the wider recovery, quite the reverse. It had fallen to 11.75p at that point but has now tumbled to 4.5p. By comparison BP is up almost 10% over the same period.

Gulf Keystone is a minnow compared to BP and all its risk is focused on one of the most turbulent regions of the world. It has suffered payment delays for years as the cash-strapped Kurdistan Regional Government battles for revenues from Iraq’s federal government. Worse, it has a string of debt obligations coming up, the first being $26.4m at the end of May, followed by $26.4m in October and a frightening $575m due in 2017. There’s clear and present danger of default and although the oil price is rising, it isn’t rising fast enough to make this a sensible stock to buy.

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BP is the type of stock I would pop into my retirement portfolio, Gulf Keystone

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