As the oil market has crashed over the past few weeks, shares in oil producers have plunged. Indeed, BP (LSE: BP) shares have declined around 31% since the beginning of 2020. Meanwhile, shares in smaller peer Premier Oil (LSE: PMO) are off 75%!
The question is, should investors be diving into these stocks at current levels or is it worth waiting out the storm?
BP shares look appealing
It’s easy to say that after recent declines, BP shares look attractive. The stock is now dealing at one of its lowest levels in the past five years.
On top of this, the dividend yield has spiked to 9.6%.
However, if you’re looking for capital gains, Premier Oil might be the better buy. After recent declines, the stock is dealing at a price-to-book (P/B) ratio of just 0.2.
The company’s last reported book value was 136p per share. That hints that the stock could rise 400% from current levels when confidence returns.
Premier has acted quickly to reduce costs and shore up its balance sheet in the face of falling oil prices.
Management is planning to reduce capital spending by $100m a year. On top of this, the company has hedged 30% of its full-year 2020 oil and gas entitlement production at an average oil equivalent price of $60 a barrel. That should provide some protection against falling prices.
On the balance sheet front, Premier has unrestricted cash of $135m and undrawn debt facilities of $330m. All of the above suggest that it can withstand a period of sub-$30 a barrel oil prices.
But it’s unclear if the company can survive for an extended period of, say, 12 months or more.
With this being the case, while Premier might appear to offer more significant capital gains potential, BP shares might be the better buy.
Strong balance sheet
The BP share price is unlikely to generate the sort of capital gains Premier might do in the best-case scenario, but it’s also unlikely to wipe out shareholders in the worst-case scenario.
Like Premier, BP has acted quickly to slash its spending and protect its balance sheet.
Unlike Premier, the company also has plenty of diversification in the form of its refining and trading operations. These operations should provide some cushion against the oil price downturn, and give the group a token income to fund its dividend.
Therefore, while Premier might look like the better investment to own in this oil price crash based on valuation alone, BP shares could be the better choice.
BP shares are unlikely to make you rich overnight, but investing is a marathon, not a sprint. BP has the balance sheet capacity and operational diversification to help the business pull through this storm. Premier can weather the storm for the next few months. After that, it’s not clear, at this stage, if the business can survive.
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Rupert Hargreaves owns no share mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.