TheOPEC productionfreeze was great news for a host of struggling oil stocks, giving some respite froma torrid 2016. My worry is the good news wont last much beyond next week.
Troubled waters
Explorer Premier Oil (LSE: PMO) is up 25% over the last week, while Tullow Oil (LSE: TLW) is up around 20%. However, that doesnt evenbeginto repair the damage inflicted by the oil price slump, with both stocks still trading 80% and 64% lower than just three years ago. Any further climbs arelargely dependent on what now happens to the price of crude.
There are worrying signs the oil rally already running out of gas. Brentcrude is down 1.87% today to just under $54 a barrel. WTI is nowonly a whisker over$50. Some of this is due to profit taking, theinevitable retreat that follows a sudden rush forwards. The danger is the dip could become a trend.
Russian roulette
Crude futures have slipped lowerand Premierand Tullow have slipped with them, falling 4.89% and 6.44% respectively on Tuesday, and 1.19% and 1.8% on Wednesday. Again, this is part profit taking, part fear the OPEC deal wont hold.
Oil prices are falling even though US crude inventories have declined for the third consecutive week as investors await this Saturdaysmeeting between OPEC and 14 non-OPEC oil producers in Vienna to finalise details of coordinated cuts. OPEC secretary general Mohammed Barkindo expects non-OPEC cuts to the tune of 600,000 barrels per day, of which half are likely to come from Russia. Thiscould give oil another short-term lift.
Hedging funds
One danger is that OPEC members could cheaton their cuts, as they regularly have in the past. Also, Libya and Nigeria are exempt, and keento ramp up production.Non-OPECmembers could also backslide, given time. Finally, US shale drillers are lining up to plug any supply shortfall, and are taking advantage of the recent oil price surgeto lock in profitable hedges at $56 a barrel.
Premier is currently negotiating a refinancing packagewith its banks and private bondholders, which should put the company on a sounderfooting if it goes through. It should also reduce concernsover its $2.63bn debt pile, which towers over itsmarket cap of just 319m.
Oil slicks
Premierlooks setto meet full-year guidance of 68,000 to 73,000 barrels of oil equivalent per day, and itsCatcher field is on schedule for first oil next year.It can generate free cash flow withoil above $45 a barrel, butthings couldget increasingly uncomfortable if crude starts slipping back towards that level.
Tullow has even more money worries as its likely to end the year with net debt of $4.9bn, against its current market cap of $2.79bn.Goldman Sachs has just downgraded itto sell asits now trading above the fundamentals of itslong-term $60 oil price assumption. My assumption is lower and right now I would considertaking any profits, or reduced losses, from these companies and putting my money somewhere less slippery.
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Harvey Jones has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.
