The oil price has rebounded in recent weeks after Brentcrude fell to a 13-year low of around $27 in January. Today, ittrades at around $36, up onethird from its depths, astalk of$20 oil fades,at least for now.
Life in the slow lane
Where oil goes, oil stocks tend tofollow, with many leading lights rebounding by10% to20% over the past month, as investors enjoythe much-needed relief rally. Unfortunately, not every oil company has traced the price of crude upwards.
For example, Tullow Oil (LSE: TLW) has barely budged over the last month. Premier Oil (LSE: PMO) has fared better, but it is still well down year-to-date, having entered 2016 at 46p but now trading at justbelow 40p. So why arent these two stocks joining in the fun?
Only the brave
Tullows recently-published full-year results saw revenues drop 27% to $1.6bn andlosses total $1bn after a series of write-offs and impairment charges. Naturally, the oil price crash was chief culprit.Allis not lost, despite net debt of $4bn, as the explorerstill generated $1bn of operating cash flow and has$1bn of facility headroom and free cash to fund ongoing developments. Ithas alsohedged 64% of expected 2016 production at $75 a barrel, with further material hedges in place for 2017.
Tullow has enjoyedsuccess in drilling new basins, particularly acrossAfrica: it is unlucky that the low oil price has wiped so much off their value. It has the cash to continue developing its estimated $1.3bn of reserves in thehope that they will be worth far more one day. Like every other oil company, it has been slashing costs and capex in a bid to keep the show on the road until oil recaptures its star quality. Brave investors whocan hold theirnerve in the teethof further oil price swings mayconsider Tullowa risk worth taking.
Premiers recovery was knockedby lastweeks full-year results, which showed it suffered a post-tax loss of $1.1, up fivefold from $210m in 2014, largely due to $558.7m impairment charges on its Solan field. It wasnt all bad news, though. Cash flow is healthy at $809.5m, although down on 2014s $924m. It has also cut operating costs by 25% and while production fell due to non-core disposals,Solans first oil flowsshould help to compensate. Premier has also hedged around 30% of 2016 production at$73.4, roughly double todays spot price, and may havepicked upNorth Sea oil and gas assets from EON at a bargain price.
Drill beneath managementspositive spin, however,and there is still plenty toworryabout, especiallynet debt of$2.24bn, up from $2.12bn in 2014, against cash resources of $401.3m. Shareholders could still endure a rescue rights issue, withmanagement warning it may stillbreach debt covenants.
Premier can probablywithstand another year of cheap oil but investors will be sweating on a price revival in 2017. If we get it, Premier will surely join in the fun. However, that remains a big if.
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Harvey Jones has no position in any shares mentioned. The Motley Fool UK has recommended Tullow Oil. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.