Brent crude slumped from around $110 a barrel two years ago to below $30 in January a whopping 75% decline. However, weve seen a pretty strong recovery in recent months, with Brent now flirting with $50.
Manycompanies will benefit from this, but for the biggest gains should we be looking to a FTSE 100 giant such as BP (LSE: BP), a mid-cap oil company such as Tullow (LSE: TLW), or perhaps a small-cap equipment specialist such as Hunting (LSE: HTG)?
Blue-chip prospect
During oils 75% decline, BPs shares fell a relatively modest 28%. Conversely, while oil has risen 70% from its January low, BPs shares have rallied a less spectacular 17%.
BPs heavyweight blue-chip status, scope for reining-in investment and cutting operating costs, profitable refining operations mitigating upstream losses, and headroom to increase borrowings have all contributed to itsshares being less volatile than the oil price.
It currently offers a dividend yield of 7.4%, with finance director Brian Gilvary saying last month that the dividend is the first priority within our financial frame,and that levers can be further pulled to support the dividend should oil prices remain low.
BPs high yield, and a price-to-earnings (P/E) ratio of under 14 based on next years forecast earnings, suggest itcould deliver a superior investment return than some other blue chips in highly-rated, low-yielding sectors. But is BP the best oil bet?
Up with events?
Shares of FTSE 250 firm Tullow have been far more volatile than BPs, and much closer to the decline and rise of the oil price. Tullows shares fell 71% as oil declined 75% but have soared 111% as oil has recovered from its January low.
The company is riskier than BP for a number of reasons, including its operations being focused on Africa and the importance of the success of its TEN Project from which first oil is expected in July/August. Tullow also carries a lot of debt around $4.5bn at the last reckoning butdoes have free cash and unuseddebt headroom of $1.3bn.
Ittrades on a 2017 forecast P/E of 20, compared with BPs 14, so the market appears to have factored-in the improving oil price by pushing up the mid-cap firms with that huge risesince the January low. The valuation seems up with events for the time being, although the long-term outlook could still be bright.
Big winner potential
Oil equipment firm Hunting was demoted from the FTSE 250 to the FTSE SmallCap index as its shares sank 70% as oil declined 75%. While Huntings downward move was of a similar magnitude to Tullows and the oil price, it hasnt shared in the big recovery since January. Itsshares are just 12% up from the low.
The reason for the relatively poor performance was a trading update last Thursday. Itreported a further deterioration in market conditions, poor near-term trading visibility, and said its in negotiations with its lenders to amend some bank covenants.
However, the balance sheet remains strong and the covenants relate to EBITDAratios. I dont see this as being a huge problem with Huntings supportive lending group, comprising five banks. Clearly, though, theres heightened uncertainty and risk, which would only increase if it turned out to be over-optimistic for management to anticipate the trading environment to stabilise in the latter part of 2016.
However, for investors prepared forthe risk, Hunting couldbe the biggest winner in my view, if things pan out favourably.
Of course, not everyone’s risk appetite extends to this type of recovery situation. If Hunting looks a risk too far, you may wish to read about the company identified as A Top Growth Share From The Motley Fool.
The company in question is a long way from the troubled oil sector, and has simply confounded value investors for years by consistently exceeding the growth priced into the shares. What’s more, our analysts fully expect it to continue doing so for very good reasons.
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G A Chester 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.
