Oil price expectations change by the minute. Fresh figures show a surge in US inventiveness, and down goes the price. Speculation suggests that Saudi Arabia will cut production, and it rebounds. Right now, oil is down, with Brent crude trading at $43 a barrel, but long-term oil bulls sense an opportunity.
The oil world is watching this weeks crucial Opec meeting, when Saudi Arabias high supply strategy will come under intense pressure from disgruntled members. Plummeting prices have blown holes in the national budgets ofAlgeria, Angola, Libya, Nigeria, Ecuador, Iraq, Venezuela and even Saudi itself, which has beenforced to launch its own version of austerity.
If the aim was to crush the US shale industry and the threat fromrenewables therehas so far been more pain and gain. Reports suggest the Saudis maypropose an production cut of 1 million barrels of oil a day in2016, if certain (quite tricky) conditions are met. If correct, now mightbe a great time to make a play for oil industry strugglers Ophir Energy (LSE: OPHR), Tullow Oil (LSE: TLW) and Weir Group (LSE: WEIR).
All three stocks have, inevitably, had a tough year. Ophir has actually been the best of the three, its share price is down just 30% in 12 months, as recent bid speculationreversed earlierlosses. Oil services specialist Weir is down 40% and Tullow is down 52%.
All oil sector firms suffer when the price collapses,but each suffers in its own way. Ophir suffered a first half pre-tax loss of $123.3m but remains in a reasonably strong financial position, with a net cash position of $392m. It wont last forever, with total cash available falling from $1.17bn to$708m year-on-year, but time seemsto be on its side, especially with pre-tax losses forecast to drop from around 94 million in 2015 to just 8 million next year. I dont like buying on bid speculation, but others will be tempted.
Tullow has some protection whatever happens to the oil price over the next few months, with half of 2016 production hedged at $75 a barrel. Its commodity hedge programme is worth a net $450m nice work. Earnings per share are forecast to rocket by 540% next year, as new production comes on stream. By 2017, itsWest African oil assets will be producing around 100,000 bpd. Its price/earnings ratio is actually in negative territory at -1.8, which make itlookstempting even if the oil price recoveryis deferred.
Life was a gas for Glasgow-based industrial pump-maker Weir Group when the shale revolution was in full swing but Saudi retaliation has taken its toll.HSBC reckons the pain will continue, as it downgraded the stockto reduce from hold and slashed the price target to 1,000p from 1,300p. Deteriorating oil and gas markets are the main problem but Weir also has personalproblems, including strong decline in its aftermarket order book.
Investors who want to play the oil price recovery need to choose their target carefully, as any rebound will be uneven. Of these three, Tullow looksthe brightestprospect today.
If you reckon the oil sector is just too unpredictable right now, there are more straightforward bets out there.
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Harvey Jones has no position in any shares mentioned. The Motley Fool UK has recommended Tullow Oil and Weir. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.