Are there any bargains in the oil sector? Maybe, but it seems pointless talking about oil companies without first considering the price of oil, because the future oil price has a big influence on the prospects of firms such as BP (LSE: BP), Tullow Oil (LSE: TLW) and The Parkmead Group (LSE: PMG).
The black stuff
In the middle of August, Brent Crude reached its lowest value since the spring of 2009, at around $45 a barrel. Since then, the price of the black stuff crept up and trades around $53 today.
The price of oil responds to many factors, such as supply, demand, speculation, crises, economic activity, and changes in expectation of all those things. So, its hard to judge where oil prices might be going. However, we can see where the price has been, and that makes $53 look vulnerable.
At the end of 2008, the price was about $37, a level that it rose to earlier in the Spring of 2004. We need to go back to the 1980s to see oil above that level. The price of oil at $40 per barrel or lower remains a possibility during the current bout of price weakness. Furthermore, after hitting that summer low of $45 the chart has yet to show a series of higher lows. If it had, Id feel a lot happier that the downtrend in the price of oil might be over. As it stands, the downtrend still appears to be in place.
The chart and the price action cant tell us what will happen next, but I think it can inform us about why we should remain cautious in the oil sector.
These firms are hurting
BP, Tullow and The Parkmead Group have all seen rising shares recently the uptick in the oil price must have helped that. However, its clear that a low oil-price environment is hurting those firms.
BP reckons it has reached agreements in principle to settle all outstanding federal and state claims, and claims made by more than 400 local government entities, arising from the firms 2010 Deepwater Horizon oil spill. Clearing up that uncertainty must have helped peg the firms share price slide at around 324p, at least for now.
However, Bob Dudley, BPs chief executive, reckons the firms approach to the challenging oil-price environment is to increase efficiency, reduce costs, apply capital discipline and to divest of yet more of the companys assets. That worries me a bit. Selling off the family silver in hard times makes me wonder what shape BP might be in if the good times ever return the firm certainly looks set to become smaller than it was, which could work against longer-term investor returns.
Down the pecking order
Mid-cap oil producer Tullow oils profits collapsed and the share price took back around ten years of investor gains since it began falling at the beginning of 2012. A 45% or so bounce in the share price since the middle of September is some relief or a spectacular gain for those smart, or lucky, enough to invest at the right time, but will the recovery continue?
The chief executive reckons Tullow reset its business with emphasis on managing costs, capital expenditure, and the balance sheet. The directors plan to deleverage the business by considering options for non-core assets and levels of participation in major developments. The story seems similar to BPs the lower oil-price environment is forcing a change in the way the firm goes about its business.
Meanwhile, AIM growth company The Parkmead Group just posted its maiden profit. The firms chairman, Tom Cross, reckons Parkmead is well placed to become a key exploration and production (E&P) player in the North Sea.
Parkmead has more E than P and strikes me as the least correlated of the three firms featured to fluctuating oil prices. Investors returns depend on the firms deal making, whether it strikes oil and gas, and how the company balances fund raising with investor returns. Of the three companies featured here, Im more likely to take my chances with The Parkmead Group.
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Kevin Godbold 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.
