Theres still a big sense of pride in the oil sector these days in spite of extreme market conditions for all oilplayers. Shareholders of BP (LSE: BP), Tullow Oil(LSE: TLW) andPremier Oil(LSE: PMO) are among those who are not having much fun, but should they stay putor should they abandon ship?
BP Is A Solid Buy
The shares of BP are down 7% since the turn of the year, which is a remarkable achievement in the light of current macroeconomic headwinds!
Consider that BPs current assets for 2014 cash and cash-like items amount to 80% of its $108bn market cap.Moreover, its stock trades just in line with the book value of its equity.
Based on the fair value of its total assets, I estimates that BPs current valuation offers upside of between 26% and 57%, which could be realised by mid-2016.
The dividend looks safe its forward yield is about 6% based on the assumption that BP will hit $24bn of operating cash flow on $18bn of capital expenditure this year, and testifies to a stock that is grossly undervalued. This operating cash flow/capex scenario is consistent with its first-half 2015 results.
Of course, oversupply remains a problem, but its net leverage is manageable, and BP has decided to settle for the2010 Deepwater Horizon oil spill the biggest threat to the investment case in recent years.Even with lowly oil prices below $50 per barrel, which is a worst-case scenario into 2016, BP is unlikely to be a disappointing trade.
I do not share the same feelings about Tullow Oil & Premier Oil, however.
It Doesnt Look Good
The shares of Tallow Oil are down about 50% this year, while those of Premier Oil have lost almost 30% of value. Their fundamentals are not reassuring, to say at least.
Tullow Oil said Wednesday it plans to further deleverage the business and that gas production at its Jubilee field in Ghana has resumed ahead of schedule, Dow Jones reported today in the wake of Tullow Oils operational update.
The company is bullish over guidance, but youd be paying 50x forward earnings for that I am not interested at all, particularly in the light of its huge debt load.
Management has lost the backing of some key investors, and until new developments emerge, Id be inclined to give it a pass, although analyst at Royal Bank of Canada wrote today that Tullow Oil is the most credible takeover target in the oil industry, based on a few variables including the tangible value of its reserves.
By contrast, Premier Oil isnt that attractive, according to the broker, whose research shows that Premier Oils share price discounts oil prices above $80 per barrel.
Macroeconomic pressures for example, China cutting the yuan rate against the dollar today for the second day in a row dont bode well for smaller oil players. Bbut if you are willing to embrace risk, at 119p a share you may be tempted to snap up Premier Oil stock.
After all, its stock hovers around its five-year lows, and is much cheaper than that of Tullow Oil based on adjusted operating cash flow metrics and on the book value of its equity. But then, keep in mind that Premier Oil even more expensive than Tullow Oil based on its forward earnings multiples, and is similarly stretched.
In fairness, I need growth, a solid balance sheet and promising prospects for yield to invest in any stock — and this is whyI’d rather buy a small-cap stock with defensive characteristics, whose track record is phenomenal!
This value candidate, whose interim results are due at the end of this month,could doublerevenues and core income by 2017, and for that you are payinga lowly 16x forward P/E multiple!
Our team of analystshas identified this value play in a brand new report, whichcomes without further obligations andis free only for a limited amount of time.
Alessandro Pasetti 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.