The problem is that too much oil is being produced, but this situation won’t last forever. Eventually, loss-making oil producers will be forced to cut production because they cannot afford to continue operating. When the market sees evidence that this rebalancing is underway, oil prices could start to rise.

I’ve chosen three oil stocks to form a mini-portfolio which I believe could be a profitable way to play any recovery in the price of oil.

BP

BP (LSE: BP) remains one of the top dividend stocks in the FTSE 100. The oil major’s shares currently offer a dividend payout of 40 cents per share, giving a yield of 6.5%. City analysts are expecting this payout to remain unchanged until at least the end of 2016. In my view BP’ high yield is likely to support the share price at current levels.

BP’s recent settlement for the Gulf of Mexico oil spill is also reassuring. Although the $18.7bn settlement sounds high, payment will be spread over 18 years. In most years, BP will pay just $1.1bn, which should easily be affordable.

With a 2016 forecast P/E of 12.4, BP shares look like a good long-term buy, to me.

Genel Energy

Shares in Genel Energy (LSE: GENL), the Kurdistan oil producer chaired by ex-BP boss Tony Hayward, have fallen heavily recently. However, history suggests that even a modest rebound in the price of oil will have a big effect on Genel’s share price.

In April, Genel shares rose by 37% in one month when oil prices seemed to be recovering. Genel is currently producing more than 100,000 barrels of oil per day in Kurdistan and the firm’s production costs are low. This means that any improvement in the price oil flows straight through to the bottom line.

If the price of oil starts to recover or Genel starts to receive more regular payments for oil exports, then I’d expect Genel shares to rise strongly. 

Genel is also an obvious takeover target, with some of the biggest and best oil and gas assets in Kurdistan. In my view, now could be a very good time to buy.

Rockhopper Exploration

One thing that’s missing from my first two selections is exploration upside.

One company that does have significant potential upside from new discoveries is Falkland-focused Rockhopper Exploration (LSE: RKH). Rockhopper has a stake in two exploration wells planned for later this year, Jayne East and Chatham. Both could make a significant difference to Rockhopper’s asset value if successful.

Another factor weighing on Rockhopper’s share price is the risk that its larger partner, Premier Oil, may decide to delay the Sea Lion development until market conditions are more attractive. If Premier confirms the go-ahead for Sea Lion in 2016, sentiment towards Rockhopper shares could improve.

Today’s best buys?

I reckon each of these three stocks looks attractive at current prices, but the problem is there’s no way of knowing when the oil market will bottom out. It could be today, it could be next year.

That’s why I would suggest diversifying your oil holdings with other companies offering equally exciting growth prospects.

The post Could BP plc, Genel Energy PLC And Rockhopper Exploration Plc Be The Perfect Oil Recovery Play? appeared first on The Motley Fool UK.

Although they both have large market capitalisations, neither firm produces much added value to their product offerings. We could go to Lloyds Banking Group for a bank account or a loan, but we might as well go to any banking company. Similarly we could buy petrol or oil from any producer and it would be much the same as BP’s.

Cyclically challenged

These giants might feel like safe investments because of their size, but their longer-term share price charts — say, over 10 years — tell a story of disappointed investors.

Perhaps now, with the shares weak, Lloyds Banking Group and BP look attractive as cyclical bets on the next macro-economic up-leg. Maybe. But there are better cyclical options on the stock market down the rankings, with the smaller market capitalisations.

Rather than buying shares in cyclical monoliths with undifferentiated products, maybe it’s better to look for a firm that adds more value to its final product. That’s why I’m looking at power control components manufacturer XP Power (LSE: XPP).

Making stuff work

The firm makes power control solutions for electronic equipment. A lot of equipment doesn’t work from mains power with its high voltage and alternating current. So, XP Power is part of the industry that makes circuit boards featuring power converter components.

The circuitry changes the characteristics of the power from the mains into a form suitable for the electronic equipment being supplied — perhaps by changing the voltage, or changing the current from alternating to direct, or any combination that is required for the equipment.

XP Power’s products are an important cog in the electrical equipment industry. The firm gets involved in making power solutions for equipment areas such as factory automation projects, automated testing, industrial control, test and measurement, instrumentation,  hazardous environments, semiconductor production, audio visual broadcasting, mobile & wireless communications, computing & data processing, and a range of medical applications.

XP Power serves a range of industries internationally, but the firm operates in a competitive market. The directors reckon the global power converter market is highly fragmented and made up of hundreds of thousands of customers. XP Power competes with around fifty manufacturers of power solutions capable of operating on a worldwide basis.

Doing something right

Despite the competition, today’s interim results show that XP Power has carved out a profitable niche for itself in the industry. The order book rose almost 11% on the year-ago figure, revenue increased more than 7% and the operating margin came in around flat at just under 24%.

The chairman reckons orders, revenues and profit before tax for the first six months of 2015 all set new records, while the firm grew its engineering and sales resources to help drive future growth.  He thinks the company’s strong order book should drive further revenue growth for the rest of 2015, because designs won last year will enter their production phase.

A typical customer for XP Power is an original equipment manufacturer (OEM) characterised as having expertise in their particular area, whether it be medical devices, communications or industrial automation, but unlikely to have in-house power supply expertise. XP Power, therefore, provides the necessary expertise and assists its customers to design suitable power supplies from an extensive range of products that meet the customer’s cost and technical requirements.

Such personal and bespoke service strikes me as the key to XP Power’s niche position in the market. My guess is that OEMs might be reluctant to turn their backs on a business relationship nurtured over years to save a few pounds here and there. Sometimes, the outcome of such flighty buying behaviour can be disastrous if a replacement provider fails to satisfy — a small potential saving can end up becoming a large additional cost. With XP Power’s product so critical to a project, customer loyalty could manifest as increased profitability and cash-flow reliability for XP Power.

Added value

At a share price of 1,602p, the firm’s forward dividend yield runs at 4.4% for 2016 and the price-to-earnings ratio at just over 14. City analysts following the firm expect an 8% uplift in earnings per share that year.

There’s no doubt that XP Power’s business is cyclical, too. However, the value the firm adds to its product offering could drive the company to outperform total returns from undifferentiated cyclicals such as Lloyds Banking Group and BP.

The post Why XP Power Limited Might Outperform Lloyds Banking Group plc and BP plc appeared first on The Motley Fool UK.

A key reason for that is the valuations currently on offer within the sector. After a year in which the price of oil more than halved, it is not surprising that major share price falls have been recorded. For example, BP saw its share price slump from 520p in July 2014 to as low as 385p in December of the same year. That’s a fall of 26% in just five months and, likewise, Wood Group recorded a decline of over 20% in its valuation during the same time period.

As a result, both stocks now trade on very appealing valuations. Certainly, their share prices have stabilised somewhat since then, but BP still has a forward price to earnings (P/E) ratio of only 13.3 (using 2016’s forecast numbers). Similarly, Wood Group has a forward P/E ratio of just 12.5, which indicates that its shares could be due for a significant upward rerating over the medium to long term.

Clearly, the performance of both companies has been affected by the falling oil price, but their earnings numbers are perhaps better than many investors may be anticipating. For example, BP is forecast to grow its bottom line by 98% this year and by a further 20% next year, while Wood Group’s bottom line is expected to post a fall in earnings of just 6% this year and a further 5% next year.

Certainly, in BP’s case its net profit is still set to be over a third lower than it was in 2014 but, given the challenging trading conditions, its improving performance and Wood Group’s relatively stable numbers could lead investors to decide that the two stocks are worthy of an upward rerating.

In fact, if BP and Wood Group were to see their P/E ratios increase by 20%, it would still leave them trading on relatively appealing valuations. In BP’s case, it would mean a P/E ratio of 16, while Wood Group would have a P/E ratio of 15, and would equate to share price gains of more than 20% in both cases. And, with BP having a price to earnings growth (PEG) ratio of just 0.6 and Wood Group’s price to book (P/B) ratio being a rather modest 1.3, a 20% gain in their share prices appears to be very realistic.

Certainly, the oil price may endure a number of challenging months and may test its recent lows. As such, BP and Wood Group are likely to remain relatively volatile but, with relatively strong financial performance set to be delivered, they both appear to present a favourable risk/reward opportunity, having the capability of rising by 20% or more over the medium term.

The post Why BP plc And John Wood Group PLC Are Set To Post 20%+ Gains appeared first on The Motley Fool UK.

Plump payouts widely expected

For many years, BP — like industry rival Royal Dutch Shell — has been sought after by investors hunting for reliable dividend growth year after year. The business has lifted the annual payment at a compound annual growth rate of 17.1% during the past five years alone, the previously dependable nature of oil demand and plentiful cash reserves helping it to deliver terrific shareholder rewards.

And despite the onset of crude price weakness more recently — the Brent barometer was recently dealing at $57.50 per barrel, down from a peak of $115 last summer — the City expects the oil giant to fork out dividends of 40 US cents in both 2015 and 2016, projections that throw up a brilliant yield of 6%.

Prices poised for fresh dip?

Still, an expected end to BP’s long-running, progressive dividend policy indicates the financial pressure the oil sector is experiencing in the face of deteriorating crude prices. Indeed, Brent is now dealing at levels not seen since April, and recent fundamental evidence suggests another calamitous fall could be in the offing.

Easing fears over US shale production since January have helped oil prices recover ground in 2015. But recent Baker Hughes numbers have shown the number of rigs begin to increase again, with a second successive weekly rise suggesting hardware reductions may have bottomed. All the while, North American output continues to climb as production from more lucrative fields lights up. With brokers also taking the red pen to their demand forecasts through to 2016, the revenues outlook for BP and its peers could take another almighty battering.

Sales shore up battered finances

However, many will point to BP’s ongoing commitment to shoring up the balance sheet as a way of assuaging fears over the size of future dividends — as well as initiating vast cost-cutting across the firm, the fossil fuel leviathan is bent on “continuing to progress our planned divestment programme [and] resetting our level of capital spending“.

The business remains on course to sell off $10bn worth of assets by the close of this year alone, the firm already having rid itself of $38bn worth as of late 2013. And BP’s total organic investment is expected to ring in at $20bn in 2015, down from $22.9bn last year. At a time of huge uncertainty over the future of the oil price, a sustained period of capital reservation would seem an intelligent course of action for many.

Reduced spend pounds growth prospects

But for others such a strategy could be seen as fraught with its own risks. In other industries, BP’s programme of investing its capital allocation into its most profitable, core assets would be considered an intelligent use of resources. But given the unpredictable and delay-ridden nature of oil drilling, should BP experience any exploration or production hiccups at any of its projects, the smaller size of its asset portfolio is likely to magnify these issues.

Indeed, BP was forced to shelve exploration work in the Beaufort Sea in the Arctic late last month as the company decreed it did not have enough time to carry out testing work before leases expire in 2020. Combined with the firm’s decision to scale back organic investment, it makes one wonder exactly where the next blockbuster earnings drivers will emerge from.

The post Why You Should — And Shouldn’t — Invest In BP plc appeared first on The Motley Fool UK.

However, over the past 12 months, Shell and BP have underperformed the FTSE 100 by 27% and 15% respectively excluding dividends. 

So, here are three reasons why investors should continue to buy Shell and BP despite their lacklustre performance. 

Valuation

BP and Shell have a reputation for being two of the UK’s most trustworthy income stocks. Shell has paid and raised its dividend every year since the Second World War. Similarly, BP was one of the most widely held income stocks by portfolio managers until it cut its dividend following the 2010 Gulf of Mexico disaster. 

BP is now working hard to restore its dividend reputation and is set to yield 6% this year. The payout will only just be covered by earnings per share this year. Next year the payout cover is set to increase to 1.3x. 

Shell’s dividend yield has recently surged to 6.5%, and the payout is covered one-and-a-half times by earnings per share. 

Key advantage 

Integrated oil companies like Shell and BP have one huge advantage over their smaller, pure E&P peers. You see, as well as producing oil, Shell and BP both refine and process oil, a business that benefits from a low oil price. 

For example, BP’s underlying pre-tax replacement cost profit from downstream (refining and processing) activities in the first quarter of 2015 more than doubled to $2.2bn  At the same time, pre-tax profits from oil and gas production, or upstream, collapsed to $0.6 billion from $4.4 billion a year earlier.

Shell’s first quarter refining and marketing profits jumped 68% to $2.6bn. Downstream profits fell 52% to $3.2bn. Shell and France’s Total are the world’s largest oil traders, handling enough fuel every day to meet the needs of Japan, India, Germany, France, Italy, Spain, and the Netherlands. 

Clearly, higher profits from refining and marketing arms won’t completely offset declining upstream income, but they do go some way to cushioning the effect of low oil prices. Further, at a time when many other producers are struggling to make ends meet, upstream operations give Shell and BP a robust and predictable income stream with which to finance deals and pay dividends. 

Clean balance sheet 

The third reason Shell and BP are great investments is the fiscal prudence they exhibit. Specifically, both Shell and BP have rock solid balance sheets with low levels of gearing and healthy cash balances. What’s more, the two companies are currently in the process of pruning their asset portfolios, to free up cash from underperforming assets. 

At the end of the first quarter Shell’s net gearing, calculated by dividing its net liabilities by stockholders’ equity, stood at 14%. The deal to buy BG Group will push this figure higher, but Shell is planning to sell off $30bn worth of assets over the next few years to fund the transaction. At the end of the first quarter, BP had over $30bn of cash on its balance sheet and a net gearing ratio of 23%.

A high percentage of BP’s cash is reserved for the company’s legal liabilities stemming from the Gulf of Mexico disaster. Although, as the lion’s share ($18bn) of these liabilities set to be spread out over the next 18 years, BP’s cash isn’t going to disappear overnight. 

The post 3 Reasons To Buy BP plc And Royal Dutch Shell Plc appeared first on The Motley Fool UK.

The Beginners’ Portfolio is a virtual portfolio, run as if based on real money with all costs, spreads and dividends accounted for. Transactions made for the portfolio are for educational purposes only and do not constitute advice to buy or sell.

I looked at some of the sun that has shone on the Beginners’ Portfolio a couple of weeks ago, checking out how well Barclays, Persimmon and Apple have done for us in the past 12 months. But into any portfolio a little rain will fall, so today I’m looking at a few poorer performers and pondering what went wrong:

No mining turnaround

I’ve been convinced for some time that a turnaround in the cyclical mining sector has been coming. But it hasn’t happened yet, and Rio Tinto (LSE: RIO)(NYSE: RIO.US) shares are down 22% in the past 12 months, to 2,563p. We have had 135p per share in dividends, which would give us a 4.3% yield on the 3,133p price at which Rio was added to the portfolio. And overall, we’d be down 13% overall on Rio since purchase if we sold today. The company seems to think its shares are cheap and has been buying them back, but it hasn’t halted the slide.

What’s perhaps ironic is that production volumes remain high, but global commodities prices remain low as uncertainties surrounding China continue — the price of iron ore has blipped up a little in the past couple of months, but it’s still selling for only around a third the price it fetched back in February 2011. With the Chinese stock market also in a slump (and still overpriced in my view), we could have more pain ahead before Rio turns round.

Oil slump

The oil price slump has hit BP (LSE: BP)(NYSE: BP.US), coming right after the Gulf of Mexico disaster, and BP’s shares have fallen 15% in a year to today’s 429p. Our overall loss on the share price is modest at 5.7%, but once we include dividends we’re up 10% — not great over the timescale, but actually not too bad. A mistake I made was underestimating the costs of the oil spill, and I reckoned the bad news was over far too soon.

BP has said it expects the era of cheap oil to continue for at least two to three years, and with a renewed fall back to $52 levels it could well be right. But how does it look as an investment? Well, with dividend yields of around 6% forecast, I reckon it’s not unattractive — the cash wouldn’t be well covered by earnings over the next couple of years, but BP has the means to keep it going in the meantime.

Pharma woes

The picture at GlaxoSmithKline (LSE: GSK) is similar — we’re down on the shares after a 12-month fall of 12% to 1,386p, but with dividends we manage a 7.7% gain. The thing with Glaxo is I don’t think anything has fundamentally gone wrong. The firm is still in its turnaround phase as it recovers from the patent cliff that hit the sector (protection on some key drugs expired), and we’re not expecting a return to growth before next year. But a P/E of around 16 at the bottom of the earnings cycle doesn’t look expensive to me, and although the dividend is likely to be cut a little, analysts are still predicting a yield of around 6% — which, again, the company should be able to sustain.

The portfolio overall? Up 43% since first purchase in May 2012, including dividends and all costs and spreads — with the FTSE 100 up 27% excluding costs, spreads and dividends.

The post Beginners’ Portfolio: A Bad Year For Rio Tinto plc, BP plc And GlaxoSmithKline plc appeared first on The Motley Fool UK.

I guess it’s all about supply and demand. But it’s also about more than that. It is also about trends — trends that begin and trends that end.

Can we make sense of this complex picture?

So it would easy to predict the oil price? I’m not so sure. Leafing through OPEC’s World Outlook 2014, I’ve found on page 32 that it predicted that in 2015 the average oil price would be $105.7/barrel. But, in mid-2015 the oil price is around $53/barrel. So OPEC, which should know more about hydrocarbons than anyone else, seemingly can’t even look one year into the future.

But this statistic makes all the difference to whether companies like BP (LSE: BP) and Royal Dutch Shell (LSE: RDSB) are buys. So let’s see if we can make sense of this complex picture.

Let’s start with supply. The record high oil prices of the past decade (peaking at $147 a barrel) has caused supply to rise. This means that, alongside the core producers such as Saudi Arabia and Iran, a host of other suppliers have been extracting petroleum.

The high oil price means that countries like Russia and Brazil have been ramping up supply, as even expensive oil found below the ocean floor and in the Arctic is now economically viable.

It has also driven companies to try ever harder and look ever further afield to extract these hydrocarbons. That’s why there has been a shale oil boom in the States, and why the hugely expensive oil sands of Canada have finally produced oil profitably.

This means that the supply of oil has been trending upwards remorsely over the past decade. After all, if oil is worth so much, you want to produce as much as you possibly can.

Not too high, not too low

What will happen when supply increases so rapidly? Well, you would expect the oil price to fall, as consumers bargain down the price of petroleum. And this has broadly been what’s happened. The oil price has tumbled over the past year.

But what about demand? This is where things get complicated. Because the population of the world is still growing, and still getting wealthier. So energy demand is also rising. The crucial question is: how is this demand split between oil, gas, coal, nuclear and renewables?

My honest answer is: I don’t know. But I can see a series of key trends. There are more cars on the road than there has ever been. Almost all of these are petrol- or diesel-powered.

So I think, in the medium term, increasing demand will act as a counter-balance to increasing supply. That’s why I think the picture for oil prices over the next few years is one where they will be not too high, nor too low.

But longer term, fuel efficiency is also improving, and hybrids and electric vehicles have now entered the mainstream. Solar power soon will be the cheapest form of energy. This means that electric vehicles could soon be a lot more popular.

So my view is that BP and Shell do have a future; but they will need to refocus their ambitions and reduce their capital spend. In a way, this counter-balanced view will mean that oil prices, and thus profitability, will be less volatile and more stable. But I still don’t see the oil majors as a place I would like to invest in.

You see, everyone knows that the oil age will eventually draw to a close — but no one knows just how quickly this will happen…

The post Why BP plc And Royal Dutch Shell plc’s Fortunes Are More Complex Than You Think appeared first on The Motley Fool UK.

However, even if this takes many years to come to fruition, there is still opportunity within the oil sector. Two stocks spring to mind for very different reasons. The first is BP (LSE: BP) (NYSE: BP.US), which has clearly endured a very challenging handful of years. In fact, few FTSE 100 companies have faced anything like the problems that BP has in recent years, with the Deepwater Horizon oil spill, Russian sanctions and lower oil price hurting its financial performance.

Despite this, BP remains a high quality company with a very strong and impressive asset base. In fact, BP is expected to post superb growth numbers over the next couple of years which, with or without a rising oil price, could push its share price considerably higher.

For example, BP is forecast to double its earnings in the current year before posting a further increase of 21% next year. This would be a truly astounding rate of growth and, while it may not be replicated in future years and there is a chance that current guidance will be downgraded, BP has a very wide margin of safety via a price to earnings growth (PEG) ratio of just 0.6. This indicates that its share price performance should be strong over the medium to long term and, alongside a dividend yield of 6%, BP’s total return could be well ahead of the wider index.

Also offering a wide margin of safety is Falkland Oil and Gas (LSE: FOGL). Unlike BP, it is a loss-making entity and, due to it being a much smaller business, its operations are naturally less diverse. However, it trades on a price to book (P/B) ratio of just 0.6 and, looking ahead, this appears to sufficiently price in the risky outlook that may lie ahead for the business.

And, while Falkland’s share price performance has been rather impressive thus far in 2015, with it being up 35% year-to-date, more capital gains could be on the cards. Its 2015 drilling programme is fully funded and appears to be making excellent progress, with the recent discovery at Isobel Deep in the North Falkland Basin showing that positive news flow is very realistic over the medium term.

So, while BP and Falkland are two very different businesses in terms of their size, scale and diversity, they both have wide margins of safety which mean that, while their futures may not be plain sailing, they are likely to be very profitable for their respective investors.

The post Are BP plc & Falkland Oil And Gas Limited The Perfect Oil Partnership? appeared first on The Motley Fool UK.

The post Is It Finally Safe To Buy BP plc? appeared first on The Motley Fool UK.

That perfect combination of an expanding income and a rising share price is investing heaven to me. Yet, to find such gems we often need to look down the table of market capitalisations on the share listing pages, to firms smaller than well-known dividend payers such as AstraZeneca (LSE: AZN) and BP (LSE: BP).

I think I’ve found one!

Over four years from 2011 to 2014, FTSE Small Cap company St Ives (LSE: SIV) increased its dividend payout by around 104%, which beats BP’s 88% increase and knocks spots off AstraZeneca’s 9.8% uplift over the period.

Around 50 years ago, St Ives started out as a traditional printing firm but evolved into a marketing business engaged in today’s digital world. The company reckons it diversified by acquiring high-growth outfits led by management teams focused on client service and expansion. In St Ives now, we see a firm offering digital and mobile creativity, intelligent data analysis, research, production, and other services in the marketing and print industry.

It’s hard to argue with progress. Since 2011, earnings are up around 32% and, at today’s 179p or so, the shares are up about 75%. An investor holding St Ives shares from January 2011 through to the end of 2014 will have seen a total return from capital growth and dividends of around 118%, which compares to 76% from AstraZeneca and just under 2% from BP.

More to come?

City analysts following St Ives have around 7% earnings-per-share growth pencilled in for 2016. Yet the current valuation seems undemanding with a forward price-to-earnings (PER) ratio running at just under nine and a dividend yield of around 4.4%. Earnings should cover that payout around 2.6 times when it arrives next year, providing a comfortable cushion of support for investor income from the shares.

There’s no doubt that St Ives’ business has a big element of cyclicality to it. As such, we can’t expect racy valuation multiples at this point in the general macro-economic curve. Investors will be worried about an earnings slow-down at least, or a profit-collapse at worst, when the next economic downturn arrives. So the valuation will likely contract even as profits rise, but how long will the cycle last? Anyone’s guess will do. As long as we keep the nature of the beast in mind, St Ives remains investable on that front — the firm is cyclical, yes, but it’s growing too, and cash generation appears to remain strong.

What now?

St Ives’ shares dropped back a bit recently, which makes them worth researching. The firm’s acquisitive past has left it with a net debt load of around £43 million at the last count, which is around three times the level of last year’s operating profit. As long as the company keeps growing, and as long as the banks keep playing along, that seems fine; however, any macro-economic plunge could make such borrowings problematic.

The post St Ives plc’s Fast-Growing Dividend Trounces AstraZeneca plc’s And BP plc’s appeared first on The Motley Fool UK.