Should you dump these 2 oil stocks before crude falls below $50 again?

The OPEC production freeze was great news for a host of struggling oil stocks, giving some respite from a torrid 2016. My worry is the good news won’t last much beyond next week.

Troubled waters

Explorer Premier Oil (LSE: PMO) is up 25% over the last week, while Tullow Oil (LSE: TLW) is up around 20%. However, that doesn’t even begin to repair the damage inflicted by the oil price slump, with both stocks still trading 80% and 64% lower than just three years ago. Any further climbs are largely dependent on what now happens to the price of crude.

There are worrying signs the oil rally already running out of gas. Brent crude is down 1.87% today to just under $54 a barrel. WTI is now only a whisker over $50. Some of this is due to profit taking, the inevitable retreat that follows a sudden rush forwards. The danger is the dip could become a trend.

Russian roulette

Crude futures have slipped lower and Premier and Tullow have slipped with them, falling 4.89% and 6.44% respectively on Tuesday, and 1.19% and 1.8% on Wednesday. Again, this is part profit taking, part fear the OPEC deal won’t hold.

Oil prices are falling even though US crude inventories have declined for the third consecutive week as investors await this Saturday’s meeting between OPEC and 14 non-OPEC oil producers in Vienna to finalise details of coordinated cuts. OPEC secretary general Mohammed Barkindo expects non-OPEC cuts to the tune of 600,000 barrels per day, of which half are likely to come from Russia. This could give oil another short-term lift.

Hedging funds

One danger is that OPEC members could cheat on their cuts, as they regularly have in the past. Also, Libya and Nigeria are exempt, and keen to ramp up production. Non-OPEC members could also backslide, given time. Finally, US shale drillers are lining up to plug any supply shortfall, and are taking advantage of the recent oil price surge to lock in profitable hedges at $56 a barrel.

Premier is currently negotiating a refinancing package with its banks and private bondholders, which should put the company on a sounder footing if it goes through. It should also reduce concerns over its $2.63bn debt pile, which towers over its market cap of just £319m.

Oil slicks

Premier looks set to meet full-year guidance of 68,000 to 73,000 barrels of oil equivalent per day, and its Catcher field is on schedule for first oil next year. It can generate free cash flow with oil above $45 a barrel, but things could get increasingly uncomfortable if crude starts slipping back towards that level.

Tullow has even more money worries as it’s likely to end the year with net debt of $4.9bn, against its current market cap of $2.79bn. Goldman Sachs has just downgraded it to ‘sell’ as it’s now trading above the fundamentals of its long-term $60 oil price assumption. My assumption is lower and right now I would consider taking any profits, or reduced losses, from these companies and putting my money somewhere less slippery.

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Harvey Jones 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.