Oil just can’t press on above the $50 a barrel benchmark, upping the pressure on producers. How are these two stocks likely to respond?
Crude picture
Oil giant BP (LSE: BP) has staged a comeback lately, its share price up 22% in the past three months. The price has been driven upwards by the recovering oil price and weaker dollar, as expectations of a US rate increase faded. BP has also been given a boost by its expanding shale exploration programme in China, with the China National Petroleum Corporation.
BP certainly needs a higher oil price to make its maths add up. The company’s crude break-even price is around $55 a barrel and despite the recovery it’s still some way short, costing $46.83 at time of writing, which puts continuing pressure on its upstream business. It still managed to post Q1 profits of $720m, helped by lower group cash costs and fewer exploration writeoffs, although this was down on $1.3bn a year ago.
Upstream boy
Unfortunately, this level of profit isn’t enough to cover its dividend payout let alone exploration expenses, putting more pressure on the business. Management is talking up a new wave of upstream major project start-ups delivering growth to 2020 and beyond, without completely allaying my concerns. The truth is it needs the oil price to hit $60 or $70, and preferably a lot higher.
Investors are pinning their faith on Vladimir Putin agreeing a production freeze with Saudi Arabia, although the Saudis may baulk at his suggestion that Iran is exempt. A freeze would certainly help BP, but if there’s no deal the share price could be crushed in the general disappointment. BP’s recent dividend was unchanged and the company has expressed confidence about its sustainability. But I’m beginning to think BP should bite the bullet and slash its dividend in half. That would still leave it yielding more than 3%, which is a pretty decent income in these low-interest times.
Low energy
Asia and Africa-focused gas and oil explorer Ophir Energy (LSE: OPHR) has had a turbulent year, its share price hammered after global oil services giant Schlumberger pulled out of its planned upstream participation in the Fortuna floating liquid natural gas (FLNG) project off East Guinea in late April. There has been little news since then, which is disappointing, as Ophir needs to find new partners for the project. Finding investment in today’s oil world isn’t easy, even for a project with a tempting break-even price of just $40 a barrel.
Management set itself a target of moving ahead with the project by the end of this year but the uncertainty makes it difficult to invest today. Ophir isn’t in any immediate difficulties, it held net cash of $355m at the end of 2015, although its burn rate is high, as it stood at $1.17bn a year earlier.
The stock has its adherents. Barclays named Ophir a “top-pick” in June and recently reiterated its overweight status with a target price of 125p, giving it a potential 60% upside against today’s 78p. The long-term outlook for LNG is positive and there are buyers out there, with the share price up almost 18% over the last month. If you’re betting on a sharp crude rebound Ophir could be a tempting way to play it. But it’s a gamble.
