The price of oil is experiencing a turbulent time, creating a knock-on effect on oil stocks. After hitting historic lows last week, WTI, the main US oil price benchmark, fell into negative territory, close to -$40. It has since rebounded to now be positive, but the jury is out on how stable it will remain.
With the coronavirus pandemic pausing international travel, demand for oil has fallen. Meanwhile, production continues and storage facilities are full. This combination of unfortunate events has created a perfect storm for the destruction of oil stocks.
Many analysts believe there will be no storage left for any newly pumped oil within a matter of weeks. So where does this leave the companies involved in the oil and gas sector? Not in great shape.
Several oil companies have already filed for bankruptcy in the US. Houston-based contractor Diamond Offshore Drilling did so yesterday.
Is oil investing risky or wise?
There’s no doubt that oil investing carries risk, but the level of risk depends on the stock you’re looking to buy. I’d avoid oil stocks with high debt, just as I’d avoid any stock with high debt.
The price of oil depends on supply and demand. As we currently face a ridiculous amount of oversupply and a drop of over 30% in demand, the oil price is low.
Once the world comes out of lockdown, demand should soar again. By which time reduced drilling will be in play. When demand outweighs supply, this should, in theory, push the oil price up again.
However, it won’t be pleasant getting to that point and some companies will likely perish. It’s also debatable how quickly previous demand levels will return because coronavirus may stick around for much longer than any of us would like.
Are there any oil stocks worth watching?
Premier Oil (LSE:PMO) is a widely traded share with which oil investors have a love-hate relationship. It has faced its fair share of troubles in recent years and has been battling an eye-watering debt pile for some time. By the end of 2019, it looked to be on track to overcome its debt with several projects to look forward to.
The current climate paints a different picture and how long it can sustain low oil prices and reduced demand I’m not sure. I think it’s a stock worth watching, but I’d be wary of investing in the PMO share price just now.
Noting a further depressing slant on the company; Hedge Fund, Asia Research and Capital Management is reported to have profited by around £135m from shorting the Premier Oil share price in recent weeks.
Premier has a £220m market cap, its price-to-earnings ratio is 1.4 and earnings per share are 16p.
Tullow Oil is another oil stock with massive debt and endless speculation. Last week French oil major Total agreed to buy out Tullow’s Ugandan oil field stake, which will help with debt reduction in the short term.
The key for both Premier and Tullow will be how long they can maintain short-term liquidity and reduce expenditure. If they can survive the oil price slump, then their share prices will probably recover. But that’s a big ‘if’. Personally, if I was looking to invest in oil stocks, I’d stick with FTSE 100 big guns Royal Dutch Shell or BP.
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Kirsteen 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.