The oil price is falling again, after new figures showrising US stockpiles and evidence of increasing Iraqi oil exports. Brentcrude is down to $45 a barrel, and inevitably oil stocks are falling with it.
Consensus suggests this trend will continue into the New Year, but it wouldnt take much to reverse it. Saudi Arabia could bow to pressure from fellow OPEC members and tightensupply. Islamic State could launch a successful track against a key oil or gas installation. Falling oil investment could translate into falling production faster than people think.
Oil could rebound suddenly, and when it does, oil stocks will inevitably rebound with it which could make now a good opportunityfor brave contrarians. Here are two very different stocksto consider.
BP, BP, Yeah!
BP (LSE: BP) cant blame all its troubles on cheap oil, many have been self-inflicted, but it plays a large part in the 20% share price slide of the past six months. Its recent third-quarter results were fairly warmly received although the fact that BP was basing its forward planning on an optimistic figure of $60 oil worried many. They will be even more worried today, with oil $15 below that assumption.
Chief executive Bob Dudley has been slashing billions off BPs costs in a bid to make the sums add up but there is only so much hecan do before that screamingly high yield of6.71% begs to be shotdown. Most analysts seem to think it will survive 2016 but if oil falls further then Dudley may have little choice but to pull the trigger. Events are now out of BPs hands. Those who said the vertically integrated oil majors had built-in protection against oil price swings didnt see them swinging this low.
In some ways, BP is a simple investment. If you think oil will recover, buy it. If you dont, stay away. What actually happens nextis anybodys guess.
Explorer Tullow Oil (LSE: TLW) is even more exposed to the oil price thanBP and is down 55% in the last six months.That is despite a 17% one-day leap in its share price on Mondayafter Copenhagen-based A.P. Moeller-Maersk A/S agreed to buy half of Africa Oil Corps shares in licenses in Kenya and Ethiopia, where Tullow also operates. The share price topped out at 259p but the excitement quickly ebbed andby Friday had slumped24% to todays 197p.
That was partly due to the reality check of Wednesdays production update, whichslightly lowered oil production guidance to around 66,000 to 67,000 bpd.Tullow expects full-year operating cashflow before working capital and tax to be around $1bn, but hasnet debt of $4.2bn. Successful hedgingshould keep it afloat,with36,011 bpd hedged at $75.45 a barrel for next year, a further 22,500 bpd hedged at $73.44 a barrel in 2017and 9,000 bpd hedged at $62.67 a barrel for 2018. But it needs pricier oil tosoothe the troubled waters of its balance sheet and start shrinking that debt.
Tullowsdynamics are the same for BP, only more so. Investors have more to lose if oil falls, more to win if it rises. How brave do you feel?
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Harvey Jones 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.