Global oil markets have taken another tumble in recent weeks, and Brent crude has now given up almost all of the gains seen earlier this year.
The problem is that too much oil is being produced, but this situation won’t last forever. Eventually, loss-making oil producers will be forced to cut production because they cannot afford to continue operating. When the market sees evidence that this rebalancing is underway, oil prices could start to rise.
I’ve chosen three oil stocks to form a mini-portfolio which I believe could be a profitable way to play any recovery in the price of oil.
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BP
BP (LSE: BP) remains one of the top dividend stocks in the FTSE 100. The oil major’s shares currently offer a dividend payout of 40 cents per share, giving a yield of 6.5%. City analysts are expecting this payout to remain unchanged until at least the end of 2016. In my view BP’ high yield is likely to support the share price at current levels.
BP’s recent settlement for the Gulf of Mexico oil spill is also reassuring. Although the $18.7bn settlement sounds high, payment will be spread over 18 years. In most years, BP will pay just $1.1bn, which should easily be affordable.
With a 2016 forecast P/E of 12.4, BP shares look like a good long-term buy, to me.
Genel Energy
Shares in Genel Energy (LSE: GENL), the Kurdistan oil producer chaired by ex-BP boss Tony Hayward, have fallen heavily recently. However, history suggests that even a modest rebound in the price of oil will have a big effect on Genel’s share price.
In April, Genel shares rose by 37% in one month when oil prices seemed to be recovering. Genel is currently producing more than 100,000 barrels of oil per day in Kurdistan and the firm’s production costs are low. This means that any improvement in the price oil flows straight through to the bottom line.
If the price of oil starts to recover or Genel starts to receive more regular payments for oil exports, then I’d expect Genel shares to rise strongly.
Genel is also an obvious takeover target, with some of the biggest and best oil and gas assets in Kurdistan. In my view, now could be a very good time to buy.
Rockhopper Exploration
One thing that’s missing from my first two selections is exploration upside.
One company that does have significant potential upside from new discoveries is Falkland-focused Rockhopper Exploration (LSE: RKH). Rockhopper has a stake in two exploration wells planned for later this year, Jayne East and Chatham. Both could make a significant difference to Rockhopper’s asset value if successful.
Another factor weighing on Rockhopper’s share price is the risk that its larger partner, Premier Oil, may decide to delay the Sea Lion development until market conditions are more attractive. If Premier confirms the go-ahead for Sea Lion in 2016, sentiment towards Rockhopper shares could improve.
Today’s best buys?
I reckon each of these three stocks looks attractive at current prices, but the problem is there’s no way of knowing when the oil market will bottom out. It could be today, it could be next year.
That’s why I would suggest diversifying your oil holdings with other companies offering equally exciting growth prospects.
