The price of oil seems to be maintaining its upwards push, at least for now the price of a barrel of Brent Crude has recovered from under $30 in mid-January to over $39 today and were waiting for it to push through $40. But whats the best way to profit from an oil recovery stay with a safer FTSE 100 giant, risk your cash on a smaller explorer, or what? How about spreading the risk with three different types of companies?
Big oil
Athree-way oil strategy for me would have to include BP (LSE: BP) or Royal Dutch Shell. I dont think theres much to choose between them, but Im going for BP for itsclearer commitment to maintaining its dividend as far as possible. For the current year, forecasts suggest a yield of 7.4%. Though that would be less than half covered by predicted earnings, estimates for 2017 would see the same dividend just covered, and would put the 362p shares on a P/E of a modest 13.
BP has been cutting costs, selling assets, and shelving unprofitable projects, and is in a far leaner position than it was before the oil price crisis struck. The shares should respond well to any sustained oil recovery.
Many will point out that we still have a glut of oil and current efforts to slow production might come to nought and theyd be right. But long term, oil prices so low that producing countries will go bust are simply not sustainable. Long term, BP should be a nice earner, with relatively low risk and the Citys analysts have it as a strong buy.
Smaller explorer
Cranking up the risk, but also the potential reward,Rockhopper Exploration (LSE: RKH) is a possibility. Rockhoppers shares are down 65% to just 30p in the past 12 months, but thats nothing unusual in the sector.
Rockhopper is sitting on impressive assets around the Falklands (in addition to its Mediterranean interests) after its merger with Falklands Oil & Gas. The latest update on the Sea Lion field has raised estimates of recoverable resources from 160mmbbls to 200 mmbbls, with peak production expected to hit 85,000 bbls per day with the life of the field extended from 15 to 20 years.
Also, unlike some others thatcould face problems servicing their large debts in the coming year, Rockhopper looks to be well funded at the halfway stage last year, the company reported cash resources of $160m.
A support gem
The last of my trio is Gulf Marine Services (LSE: GMS), which has been attracting my eye of late. Its the largest provider of self-propelled, self-elevating accommodation jackup barges in the world, and builds and maintains the vessels in Abu Dhabi to serve the Gulf region.
With the cancellation of a lot of new projects and severe spending cutbacks, demand for new barges has fallen. Thats led to a forecast dropof 30% in EPS for the year to December 2015. Results are due on 22 March. But Gulf is still making nice profits from maintenance work, and the City has a 22% rebound in EPS forecast for this year followed by 17% in 2017.
And get this the shares would drop to a P/E of just 3.2 by 2017 on todays 73p share price if these prognostications should prove accurate.
Could such a three-way investment really double your money in a few years? If oil picks up to around $60-$70 a barrel, I could see it happening.
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Alan Oscroft has no position in any shares mentioned. The Motley Fool UK has recommended Royal Dutch Shell. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.
