Royal Dutch Shell
Royal Dutch Shell‘s (LSE:RDSA)(LSE: RDSB) sizeable downstream operations has meant that its earnings have been more resilient in the current low oil price environment. This was reflected in its first-quarter earnings, where downstream earnings rose 70.7% to $2.65 billion, whilst upstream earnings fell 88.2% to just $675 million. Despite the cushion from its downstream operations, adjusted earnings still fell by 56%.
Shell announced that it would cut its capital spending plans by $15 billion over the next three years. But this does not seem to go far enough, as it spent some $37.4 billion for capital spending in 2014. Shell would likely need the price of oil to be above $80 per barrel, in order to generate sufficient operating cash to cover its ongoing capital spending programme and its dividend policy.
The oil major’s cash flow break-even oil price is further increased by its pricey takeover of BG Group. Although it is set to benefit BG’s production assets in lower cost regions, Shell faces huge execution risks with integrating the two companies. If the cost synergies do not materialise or the price of oil remains lower for longer, then Shell would have overpaid for the acquisition.
With net debt steadily rising and oil prices likely to remaining stubbornly low, it seems too early to buy shares in Shell.
Genel Energy
Genel Energy (LSE: GENL), the Kurdistan-focused oil producer, seems to be a better buy. Benefiting from low-cost onshore oil assets, analysts estimate that Genel’s break-even oil price could be as low as $30 per barrel.
The oil producer trades at a discount to its peers because the Kurdistan Region of Iraq is in dispute with the Baghdad government over revenue-sharing and fears of political instability spreading across the region. But, so far, the emergence of ISIS has not had a material impact on Genel’s production or earnings.
Although high-cost producers are more leveraged to the oil price, even low cost producers have plenty to benefit from a recovery of the oil price from current levels. Higher prices would enable Genel to generate more cash flow to accelerate a ramp-up in production. But even if oil prices remain low, Genel is profitable and oil production in 2015 is forecasted to grow another 40%.
Petrofac
Petrofac (LSE: PFC) has continued to secure onshore engineering and construction orders, as demand for its services remain high in the Middle East. Despite recent weakness in the oil price, its backlog of orders rose 12% from the end of 2014, to total $20.5 billion.
With lower oil prices, providers of drilling services and oilfield equipment have struggled to keep customers. The sector has cut prices, in a bid to keep its customers; but this has also led to significant margin compression.
New orders for Petrofac are likely slow in the coming future, as cuts in capital spending could accelerate in the absence of a substantial recovery in the oil price.
Amec Foster Wheeler
Engineering firm Amec Foster Wheeler (LSE: AMFW) is more diversified, as it offers construction and project management services to the clean energy, infrastructure, environment and mining markets, in addition to the oil and gas sector.
Diversification helps the company to offset some of the slack from the upstream oil and gas sector, as investments in downstream oil and gas, infrastructure and renewables continue to be robust. Project delays in power equipment and its North American renewables businesses have had an impact on earnings, but these issues should resolve themselves soon.
Despite the impact of these short-term issues, shares in Amec Foster Wheeler trade with a forward P/E of just 11.2, and benefit from an attractive 5.1% dividend yield.
