Its interesting reading and listening to all the commentary around the price of oil. Wheres the price of oil going to settle? Is it due for a rally? Whats influencing the price? It seems these questions are being raised every day in the press.
One thing this Fool knows for sure is that the market for energy worldwide will eventually settle down, and prices for both crude and shale will find their respective equilibriums.
What market events like these can show investors though is those companies that are fundamentally better than others.
Ive lost interest in BP
I have mentioned in previous notes that I struggle with BP (LSE: BP) (NYSE: BP.US)s ongoing court/settlement problems. BP made a huge mistake many years ago and the company and its investors have been paying the price ever since. It doesnt stop there, though.
The latest trauma to hit BP is the falling price of oil. We know that the oil producer has a target of selling $10 billion of assets by the end of this year, but the reasons the company gave for its latest move towards that goal have surprised me a little.
As part of its broad re-structuring move, BP has scaled back its role in two oilfields in the Gulf of Mexico. Its selling half its equity interests in the Gila and Tiber fields. Here are the reasons it gave for its divestment. It needs to support exploration elsewhere, manage its capital and also manage its production. In other words, BP needs to sell these assets.
Im actually tempted to say that without this planned restructure, BPs balance sheet and cost structure look decidedly questionable. What do I mean by that? Well, simply that BP had overstretched and was/is losing money. Even a quick look at the stocks price chart will show the company has been losing value steadily since July last year. A re-structure is necessary. I am, however, a little surprised by just how necessary it seems to be.
Little hope in the short term
One shock is enough, but two major shocks is an entirely different story. The two shocks Im speaking about of course are the Deepwater Horizon oil spill and the steep fall in the price of oil. The company has been left so bruised that theres growing speculation BP is going to be stepping back from its leadership role in the industry. The Financial Times recently reported that BP will not take a lead role as operator in what are some of the most important discoveries in the Gulf of Mexico in recent years.
Is Shell any better?
I suppose the next question then is, is Royal Dutch Shell (LSE: RDSB) (NYSE: RDS-B.US) any better? Its suffering from the same ailments that BP is suffering from after all. Thats true, but Shell has one advantage its a significant refiner of oil as well.
The companys latest results show its adjusted earnings in 2014 were $22.6 billion, up 16% from the previous year. Despite looking good on paper the market was hoping for more, so the stock got a little pummelled on Thursday. Still, theres no sign the company is feeling the heat. Its already put forward a case for continued investment in the firm.
Reasons include that the refining business is offsetting weakness in the oil producing business; that capital spending will likely come down but there will be no slashing and burning in 2015; and that Shell predicts the oil price will recover to over $70 per barrel. Importantly, the oil producer has indicated that its only interested in taking a measured approach to its investments. Some analysts have responded well to that.
Its not an easy time to be an investor in the energy sector, but if the industry turns around any time soon, I think Id prefer to be riding on Shells back.
As I write this Shell is not looking like a great investment from a growth perspective, but, fundamentally, it’s looking quite alright — especially if you’re looking for a dividend play. How do you know that the price of oil isn’t going to turnaround in the next 12 months, though? If it does, Shell is looking like a good investment on all counts.
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