BP (LSE: BP) (NYSE: BP.US) and BG Group (LSE: BG) hit markets with a combined $12.5bn of impairment charges this morning, along with big cuts to planned expenditure for the year ahead.
Low oil prices lay behind the impairments, with BG writing down the value of some of its assets by $8.9bn, and BP reporting a $3.6bn non-cash charge.
BG vs BP
BP shares are up by 2% as I write, but BG has slipped slightly lower, suggesting that the smaller firms results have received a fairly cautious response from big investors.
That matches my view: BPs 2014 profits were broadly in line with expectations, as was its dividend. More importantly, the firms debt levels remained flat last year, and BPs cash balance rose from $22.5bn to $29.8bn, highlighting the oil giants strong free cash flow generation and healthy balance sheet.
BP should be able to ride out a period of low oil prices without immediately cutting its dividend.
In contrast, BG looks like a firm that doesnt yet have all the answers.
Prudently, BG has chosen to freeze its dividend payout at $0.2875, despite consensus forecasts suggesting that the dividend would rise: BGs net debt rose by 13% to $12bn last year, and its free cash flow was -$2.2bn.
Lower oil prices means that the 2015 outlook looks less rosy than expected, and I believe that despite the firms planned cuts to capital expenditure, cash flow will be negative again in 2015, while net debt is likely to rise further.
How will BG square the circle?
BG could face another difficult year in 2015, but things should improve in 2016, when the firms long-running capital expenditure programs in Australia and Brazil should wind down and production ramps up.
Despite this, BG does need to bring its debt levels under control, and this will be a key job for the firms new chief executive, Helge Lund, who is due to start work in March.
Mr Lund has an exceptional reputation from his time in charge of Norwegian oil giant Statoil, and expectations are high but in my view, there is still room for further downgrades in BGs valuation, and I cant convince myself its a good buy at todays price.
BP, in contrast, looks more appealing although personally Id wait to see if the price of oil holds onto its recent gains before investing in either firm.
Better buys elsewhere?
If your portfolio already contains oil stocks, then one area to focus on could be firms that will profit from lower oil prices.
The Motley Fool’s market-beating analysts have identified several firms which should benefit from lower energy costs for their latest special report, “5 Shares To Retire On“.
I can’t reveal the names of the five companies here, but I can say that several should experience significant benefits if oil prices stay low, making them an ideal hedge for the oil stocks in your portfolio.
To receive your free, no-obligation report today, just click here now.
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.
By providing your email address, you consent to receiving further information on our goods and services and those of our business partners. To opt-out of receiving this information click here. All information provided is governed by our Privacy Statement.
Roland Head 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.