The oil price is climbing again, withBrent crude creeping above $48 a barrel. Thats despite the fact that the likes of Saudi Arabia and Kuwait have pledged to carry on pumping, and it suggests to me the recovery still has some way to run. Oil is still too important to the global economy to stay low for long.
The $60 question
The recovery is making BP (LSE: BP)chief executive Bob Dudley look prescient. In the heat ofFebruarys meltdown, while he was announcing the companys worst annual loss for two decades, Dudleypredictedoil prices wouldcorrect to between $50-$60 per barrel by the end of the year. He also said that BP had set upa financial framework to help it survive in a $60 world. That world is now edging closer.
BP is starting to look highly tempting. Although the shareprice has picked up in recent weeks, its still very much in early-stage recovery, and is still down 22% ona year ago. The companyrecentlyreported Q1 operating profits of $532m, comfortably beating market expectations of around$100m, due to cost-cutting and strong operational performance in both its upstream and downstream businesses (although its still losing money upstream).
BP or not BP?
BP now yields a compelling 7.7% but the dividend hangs in the balance, with cover now negative at -0.9. The payoutcosts it around $7.3bn a year, eating upa good chunk of the $20bn cash generated last year. With BP planning $17bn of capital spending this year the dividendwill be partly funded through debt, putting itin danger, although prospectswill improve ifoil continues to climb. BP isa gamble, but forecast earnings per share growth of 119% next year make this a tempting flutter. Long-term investors may wantto get in now rather than wait for the oil price and BPs stock to climb higher.
Gulf in class
Crudes recovery has done little to helpembattled Kurdistan-focused oil explorer Gulf Keystone Petroleum (LSE: GKP). January 20 marked a lowfor both oil stocks, offering healthy gains for brave souls in those crazydays when Standard Chartered forecast that oil could go as low as $10 a barrel. Yet Gulf Keystone has failed to benefit from the wider recovery, quite the reverse. It had fallen to11.75p atthat pointbut has now tumbled to4.5p. By comparison BP is up almost 10% over the same period.
GulfKeystone is a minnow compared to BPand all itsrisk is focused on one ofthe most turbulent regions of the world.It hassuffered payment delays for years as the cash-strapped Kurdistan Regional Government battles for revenues from Iraqs federal government. Worse, it has a string ofdebt obligations coming up, the first being$26.4m atthe end of May, followed by $26.4m in October and a frightening$575m due in 2017. Theres clear and present danger of default and although the oil price is rising, it isnt rising fast enough to make this a sensible stock to buy.
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BP is the type of stock I would pop into my retirement portfolio, Gulf Keystone
Harvey Jones has no position in any shares mentioned. The Motley Fool UK has recommended BP. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.
