The price of oil has fallen by more than 50% over the last six months, but not all oil companies are suffering equally.
Heres how the share prices of five major UK-listed exploration and production companies have fallen since July 2014:
Company |
6 month share price movt |
Premier Oil (LSE: PMO) |
-58% |
Ithaca Energy (LSE: IAE) |
-57% |
Tullow Oil (LSE: TLW) |
-53% |
Dragon Oil (LSE: DGO) |
-18% |
Cairn Energy (LSE: CNE) |
-13% |
Premier, Tullow and Ithaca have seen their share prices fall broadly in line with the price of crude oil, but Dragon Oil and Cairn Energy have coped relatively well, significantly outperforming the price of oil.
Why?
One reason Dragon and Cairn have done so well is that they have massive net cash balances, which account for around half of each companys market capitalisation:
Company |
Net cash |
Market cap |
Dragon Oil |
1,248m |
2,380m |
Cairn Energy |
575m |
925m |
Unlike oil, cash hasnt fallen in value over the last six months.
However, its a different story at the other three firms, all of which have significant debt that will need servicing, despite reduced cash flow from oil sales:
Company |
Net debt |
Market cap |
Premier Oil |
1,400m |
692m |
Tullow Oil |
2,118m |
3,520m |
Ithaca Energy |
505m |
206m |
Its not just about cash
These figures highlight how debt can become a painful burden when the market turns against a company but cash isnt the only reason why Dragon and Cairn are outperforming the market.
Tullow, Premier and Ithaca are all in the middle of major capital expenditure programmes, which were planned when $100 oil seemed normal. These must now be completed, but payback from new production revenues could take much longer than expected, unless oil prices rebound strongly.
Cairn is also in the middle of developing the Kraken and Catcher fields in the North Sea, and has a multi-well drilling programme planned for 2015, but the difference is that all of this is being funded from net cash.
This means that even if the eventual cash flow is less than expected, it will drop straight through to profits, rather than being used to repay debt. Its a similar story at Dragon, where all capex is funded from cash, and existing production is very low cost.
Two big buying opportunities
All of this leaves these firms trading on a wide range of forecast valuations:
Company |
2015 forecast P/E |
Cairn Energy |
n/a (expected to make a loss) |
Tullow Oil |
20.9 |
Dragon Oil |
6.5 |
Premier Oil |
6.0 |
Ithaca Energy |
3.1 |
In my view, there are two big buying opportunities in todays market: Dragon Oil and Ithaca Energy.
Dragon boasts a cash-backed 6.0% prospective yield and profitable low-cost production. However, upside could be limited, as the shares havent fallen very far, and the firms majority shareholder will prevent a takeover bid.
In contrast, I think Ithaca could potentially double in value towards the end of 2015, when production comes on stream from the firms Stella project. This is expected to increase Ithacas production from 12,000 barrels of oil equivalent per day (boepd) to 28,000 boepd.
However, despite the temptation to pile into oil shares that look cheap, you need to remember that things could yet get much worse for oil firms.
This is why it is important to have a diversified portfolio — and if you’re not sure of the best way to do this without sacrificing big returns, I’d urge you to read “7 Simple Steps To Seeking Serious Wealth“.
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Roland Headowns shares in Dragon Oil. 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.