Trying to guess where the price of oil will be in a year, six months or even a week from now has turned out to be almost impossible for the past twelve months. Indeed, every analyst and industry insider that has tried has been proven wrong, often within days of their prediction.
However, since the end of October the price of Brent crude has staged a small rally. As a result, the shares of oil producers such asGulf Keystone Petroleum (LSE: GKP),Genel Energy (LSE: GENL),Tullow Oil (LSE: TLW) andPremier Oil (LSE: PMO) have pushed higher.
Nonetheless, even after these impressive gains I believe that investors should stay away from these four companiesfor the time being.
Wait and see
Allfour oil producers are impressive companies in their own right. Gulf Keystone owns part of theShaikan oil field in theKurdistan Region of Iraq, which is arguably one of the lowest-cost oil fields in the world. Genel is producing oil from two major low-cost oil fields in Kurdistan and has a portfolio of gas assets offshore Africa. Also, the company is run by an experienced management team, is cash rich and is profitable.
Tullow is expecting to bring its Tweneboa, Enyenra and Ntomme (TEN) development touted as Tullows second flagship project after the Jubilee field online during the second quarter of next year, nearly doubling the companys output. And Premier has built a highly desirable portfolio of production assets around the world and improved productivity via an efficiency drive.
One major factor
Theres one issue thats holding all of these companies back, and thats the volatile oil price.
Take Premier for example. Oil needs to hit at least $60 a barrel to revive Premier, and as weve seen over the past few days, Premiers share price tends to overact when theres any sign that the price of oil might be heading up. Unfortunately, Premiers shares also overreact if the price of oil shows any sign of dropping further.
And while Tullow was a market darling when oil was trading at $100/bbl, in a $50/bbl world the companys mountainof debt is extremely concerning. Tullowscarries net debt of three times next years forecast earnings before interest, tax, depreciation and amortisation.
If the price of oil returns to $100/bbl, Tullows gearing metrics will improve dramatically, but just like Premier, Tullow is at the mercy of the market for the time being.
The oil market hasnt been kind to Gulf Keystone. Indeed, the company is now in a better shape than ever before. The KRG is paying off its debt to the group, and daily average commercial production from the Shaikan field has risen to more than 40,000 barrels of oil gross. However, low oil prices are preventing Gulf Keystone from realising its full potential.
Genel has the brightest outlook of these four producers.The companys net debt is falling, and Genel was quick to slash capital spending when the price of oil started its slide last year.Net debt at 30 September totalled $211m, $5m lower than the figure of $216m reported at the end of June.Genel is expected to report a pre-tax profit of 32.4m this year.
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