Oil is a commodity known for its volatility. Over recent weeks, the price has fluctuated immensely on the back of various events, simultaneously impacting the share prices of the top UK oil shares.
History was made on Monday when the price of US oil plummeted below zero to begin trading in negative territory. That means oil suppliers were effectively paying customers to take delivery!
But what does all this mean for the UK oil companies listed in the FTSE 100?
Demand dries up
Plunging oil prices across the board are the result of a number of different factors. Most significantly, the outbreak of Covid-19 has dried up global demand for the commodity.
As lockdown restrictions continue, people are shopping, driving and consuming less of the product, meaning suppliers have nowhere to store excess stock.
Evidently, this is bad news for UK oil shares. That said, I’m confident that once lockdown restrictions ease and the global economy returns to a degree of normality, consumption will return to pre-crisis levels.
If you’re bullish about the prospects of a V-shaped recovery, I’d expect the share prices of UK oil stocks to bounce back swiftly as oil consumption increases and the stock market crash comes to an end.
Cheap UK oil share valuations
UK oil shares have been particularly hard hit in the market crash. Many have wiped billions from their valuations, trading at prices that haven’t been seen for years.
Take BP (LSE: BP) for example, whose share price has plummeted by around 37% since mid-February. It’s a similar story for Royal Dutch Shell (LSE: RDSA), falling around 32%. The lesser-known company Premier Oil has seen its share price drop by an eye-watering 80% and it now trades at price-to-earnings ratio of just 1.55.
As a result of the market crash, there may be value to be had with the UK oil shares, some of which I believe are simply ‘too big to fail’ (especially Shell and BP).
Strong financial position
Don’t get me wrong, the next few months will be tough. With abysmally low oil prices and the uncertainty of the macroeconomic climate, businesses will be bleeding cash.
However, the financial positions of Shell and BP remain strong. The former has taken steps to free up over $8bn of free cash flow through reducing operating costs, capital spending and working requirements. The later has followed suit, implementing a cost-saving programme to supplement the $32bn it already has available in cash.
Both are yet to announce a suspension of dividends, but that could come in the near future. Especially if the burden of a sliding oil price becomes too much.
Regardless, it’s clear both companies have a strong cash position. I think it’ll be more than enough to see these two market leaders through the various crises they are facing.
The future of UK oil companies
With both embarking on the path to net-zero emissions, I think the future of sustainable energy lies with the two industry giants.
Both companies have expanding businesses in solar, biofuels and renewable products. What’s more, both aim to spend billions in order to strengthen their position in the renewables industry.
For this reason, I don’t think either will be going away any time soon. I expect a bright future for UK oil shares, so I’d invest today.
Matthew Dumigan has no position in any of the shares 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.