Is this 50p oil stock now a better buy than BP plc?

Could this small-cap oil stock outperform Footsie giant BP plc (LON:BP)?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

When Premier Oil (LSE: PMO) released its half-year results for 2014 it reported net debt of $1.7bn (£1bn at the prevailing exchange rate), while its shares were trading at 335p, giving it a market cap of £1.8bn. With the price of oil above $100 a barrel and the company generating healthy profits, the debt didn’t appear unduly high.

Then came the great collapse in the oil price. Profits turned to losses. By the end of 2015, oil was heading towards $30 a barrel. Premier’s shares were heading towards 30p and its market cap to not much more than £150m. Meanwhile, net debt had risen to $2.2bn (£1.5bn at the prevailing exchange rate).

Within the space of 18 months, debt had become a huge problem, being 10 times the company’s market cap. Having reached agreement with its lending group during 2015 to modify its financial covenants, it had to seek further amendments in 2016. Finally, after protracted negotiations with its lenders, it agreed a refinancing deal.

New era

Today, Premier is on a more stable footing. And with the cost-cutting initiatives of the last two years, new production coming on tap and a partial recovery of the oil price (currently $49 a barrel), investors can look forward to a new era.

City analysts are forecasting a small profit this year, followed by a significant advance in 2018, with a consensus for earnings per share (EPS) of $0.30 (23p at current exchange rates). At a share price of 50p, the price-to-earnings (P/E) ratio is just 2.2. This suggests there is considerable upside potential for Premier’s shares and they look eminently buyable to me at their current level.

Footsie giant

BP (LSE: BP) endured a less perilous journey through the oil crisis than Premier, its shares falling 37% peak-to-trough, compared with the decline of over 90% suffered by Premier’s shareholders. Furthermore, at a current 445p, the FTSE 100 giant’s shares are only 14% below their pre-crisis level, while Premier’s are still some 85% down.

Despite BP’s relatively strong share performance, the valuation continues to look reasonably attractive to my eye. The City consensus for this year is EPS of $0.34 (26.2p at current exchange rates), followed by $0.41 (31.5p) next year on the back of earnings growth of over 20%. This gives P/Es of 17 and 14.1 respectively. Furthermore, the price-to-earnings growth (PEG) ratio is an eye-catching 0.7. This is firmly on the value side of the fair-value PEG marker of one and suggests there’s scope for BP’s shares to climb higher.

BP also offers an attraction that Premier currently doesn’t. Namely, a dividend — and a mighty juicy one at that. The City expects the company to maintain the payout at last year’s $0.40 level (30.8p at current exchange rates), which gives a prospective yield of 6.9%.

Oil price

Of course, the fortunes of both BP and Premier are intimately linked to the price of oil. A major reversal in its recovery wouldn’t be welcome and could certainly put BP’s dividend at risk. However, most oil analysts aren’t forecasting this in the near future, albeit neither are they forecasting a rapid rise. We may not see $100 a barrel again for many years, but Premier and BP don’t need oil at such an elevated level to deliver for their shareholders.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

G A Chester has no position in any shares mentioned. The Motley Fool UK has recommended BP. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »

Investing Articles

Are HSBC shares a FTSE bargain? Here’s what the charts say!

There are plenty of dirt-cheap FTSE 100 banking stocks for investors to choose from today. Our writer Royston Wild believes…

Read more »

Three signposts pointing in different directions, with 'Buy' 'Sell' and 'Hold' on
Investing Articles

Just released: Share Advisor’s latest ‘Hold’ recommendation [PREMIUM PICKS]

In our Share Advisor newsletter service, we provide buy, sell, and hold guidance for our universe of recommendations.

Read more »

Investing Articles

Investing £5 a day could help me build a second income of £329 a month!

This Fool explains how £5 a day, or one less takeaway coffee, could help her build a monthly second income…

Read more »