With the price of Brent Crude oil hovering around $30 per barrel as I type, I suspect that there will be plenty of readers feeling the pain at the pace and severity of the decline in the oil price that seems to have taken everyone by surprise.
As is always the case, youll read plenty of predictions from brokers through to journalists. Currently, the oil bears are getting their call correct.
Not all bad
However, the falling oil price, while painful for some businesses and some economies as a whole, can be seen as a positive for several other business sectors.
In my view, this can be seen as a positive for businesses such as easyJet, which counts jet fuel as a significant cost in its operating model. This would follow through for companies such as Royal Mailthat also incur significant fuel costs as they deliver to homes and businesses across the land.
And once this theme spreads into the wider economy, it should mean that consumers have more money in their pockets. I say this on the basis that for most of us, a significant cost in all of our lives is heating our home and running our car. Indeed both of these rank in the top five places of my own monthly expenditure.
This should bode well for consumer-focused businesses such as NEXT, Whitbread, Cineworld and Restaurant Group. All of themshould be able to more-than-accommodate the coming National living wage given that operating costs will reduce. This, combined with consumers havingmore disposable income,should reflect positively in results going forward.
Survival of the fittest
That said, as Ive already said, theres plenty of pain currently being felt in several sectors thatserve the oil and gas explorers. A recent example isa 40%-plus decline in the share price of Plexus Holdings on Monday following an ill-received trading update, this was followed by a further sell-off yesterday. The pessimist in me expects that theres going to be much more of this to come as explorers either cut unprofitable production or cancel new drilling operations, or indeed both, while they wait for the oil price to recover.
The optimist in me however points towards fully vertically integrated operators like Royal Dutch Shell (LSE: RDSB) and BP (LSE: BP). These are operators at the top of the food chain, able to cut production at less profitable upstream operations while increasing efficiencies in the downstream side of the business in order to weather the current storm.
Of course, its true that in times like these the share price suffers. A quick glance at the chart below depicts Shell and BPsunder-performance over the last 12months, even against a poorly performing FTSE 100.
However, its at times like these that investors should be looking to pick up shares at depressed prices, lets not forget that these companies have been here before and survived. Indeed, I would argue that theyve prospered.
And while you wait, you can pick up a 7% to 9% dividend yield, which I believe is safe for now.
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Dave Sullivan owns shares in Next and Restaurant Group. The Motley Fool UK has recommended Royal Dutch Shell B. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.