A rising oil price doesnt necessarily lift all boats, but it has certainly floatedoil explorersPremier Oil (LSE: PMO) and Tullow Oil (LSE: TLW). Their share prices are up 33% and 24% over the last month alone. Oil at $50 a barrel is almost within touching distance and if it passes that landmark price, investors might really start believing the rally is on.
Golden years
In the longer run, oil has to recover. The demand is still there, renewables cantreplace it yet. Crucially, the plunging oil price has forced producers to slash spending on exploration and development, leading to a sharp fall in global drilling activity, and setting up a future supply shock. Some oil companies will benefit because othershave gone out of business. Those that survive are sitting on a pot of black gold. Judging by recent performance, investors believe Premier Oil and Tullow Oil slot into the latter category.
Over three months, Premiers performance has been blistering. Its up 135% in that time. It was helped by Wednesdays trading and operations update, which showed the company on trackto match or beatupper-end full-year guidance of 65,000 to 70,000 barrels of oil equivalent. The Solan field started production on 12 April with the first well pumpingrates of over 14,000 barrels,while its Catcher project remains on schedule and below budget. Premier alsocompleted the acquisition of E.ONs UK North Sea assets on 28 April.
Rising productionmeets a rising oil price, whats not to like? Chief executive Tony Durranteven boasts significant liquidity with cash and undrawn bank facilities of circa $750m, butthere are still risks as it could breach its financial covenants unless oil powers higher. This has prompted managers tohold talks with lenders to secure a waiver if required, which doesnt seem to worry investors right now but remains something to bear it inmind.
Marks out of TEN
Tullow Oil is up 70% over three months, so investors appear to have bought into this recovery story as well. Its latest update showed the company making progress against the tough backdrop for oil stocks. Oil from itsTEN project isexpected to start flowing in July or August. ItsSouth Lokichar programme in Kenya may holdup to 750m barrels and possiblyeven 1bn.
The company has alsomanaged to extend and increase its borrowing facilities and remains well-funded. Net debt is an estimated $4.5bn with unused debt capacity and free cash ofapproximately $1.3bn, but it sorely needs oil to rise higher still to get its balance sheet back in order.
Tullow will feel more unfairly punished by the falling oil price than most, given that it had borrowed heavily to develop new oil finds just as the price plunged. Maybe its luck has turned, with the price rising just as TEN is set to add 10,000 barrels a day to production. Forecast pre-tax profits of 58.78 this year are predicted to be208.42 in2017, an increase in earnings per share of a whopping 208%.
Premier and Tullow are both at the mercy of what they cantcontrol: the oil price. If itslips, their debts will prove a growing burden. Even if oil rises higher, it may not rise fast enough. My otherconcernis that if youre buying now, rather than threemonths ago, youve missed out on a chunkof the potential upside.
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Harvey Jones has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.
