The falling price of oil has undoubtedly created buying opportunities.
As I write, Brent crude is down at around $66 per barrel, and while the price may not have bottomed out quite yet, I think that some good buys are emerging among London-listed oil producers.
Three companies Im watching particularly closely are Tullow Oil (LSE: TLW), BP (LSE: BP) (NYSE: BP.US) and Genel Energy (LSE: GENL), each of which I believe could deliver decent gains once the price of oil starts to stabilise.
BP is a well-managed business that generates a lot of free cash flow.
Of course, BP has its problems: the firms 20% stake in cash-strapped Russian giant Rosneft looks more like a liability than an asset at the moment, while the financial consequences of the Macondo disaster continues to hang over its US operations.
Despite this, I reckon BP looks fairly cheap: trading at book value, on a forecast P/E of 10, and with a prospective yield of 6.1%, theres a lot of bad news priced into these shares.
In my view, only some of this bad news is likely to become reality. Although a dividend cut is a risk if oil prices stay low next year, I believe BP could deliver decent gains for investors over the next 2-3 years.
Ive been avoiding buying shares in Tullow Oil for years, as theyve always seemed too expensive, despite the quality of some of the firms big assets.
However, Tullows share price has now fallen by 75% from its 2012 peak, and the firms shares now trade at just 1.1 times Tullows 350p book value. Im starting to get interested, and believe Tullow could soon be a decent buy.
Tullows cash flow is expected to improve over the next couple of years, as new production comes on stream, and this could drive decent returns for shareholders, despite the lower oil price.
Genel, which is run by ex-BP boss Tony Hayward, has been a Kurdistan success story. By buying into known good assets, with strong funding and good partners, it was able to become a profitable oil producer in just one year.
However, the firms shares have fallen by 40% in 2014 to a two-year low, and I reckon now might be a good time to take a look: Genel trades on just 11 time forecast earnings, and also remains a potential takeover target.
A word of warning
The problem with buying shares in a troubled market is that prices can sometimes fall much further than you expect, before they start to recover.
One way of protecting yourself is to focus on companies with strong income credentials.
“How To Create Dividends For Life“ includes a simple five-step checklist that enables you to test the safety of any dividend quickly and easily.
These five golden dividend rulesmay even help you to build a portfolio that could beat the market.
The report is FREE and without obligation. You can find out all the details here.
Get FREE Issues of The Motley Fool Collective
Get straightforward advice on whats really happening with the stock markets, direct to your inbox. Help yourself with our FREE email newsletter designed to help you protect and grow your portfolio wealth.