Sooner or later, it’s more than likely that the price of oil will recover. Market forces will push supply out of the market, and over the long-term, demand will creep higher, dragging prices back to more normal levels.
However, it could be some time before this recovery takes place. So, if you’re planning to bet on a recovery, you need to be careful where you place your bets.
BP (LSE: BP) and Genel Energy (LSE: GENL) are two companies that are well placed to ride out low oil prices and rebound when prices recover. Indeed, each company has its own strengths.
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For example, BP’s downstream operations (refining and marketing) have seen profits rise five-fold due to falling oil prices, helping the wider group remain profitable as oil prices collapse. Meanwhile, Genel’s low production costs and robust cash balance are the two key qualities needed for the company to ride out turbulence in the oil market.
First-half results
Genel Energy issued its results for the first six months of the year today, and the company’s numbers showed why it’s one of best companies in the exploration and production sector.
For the six months to 30 June, Genel reported revenues of $199m, profit before interest, tax, depreciation, amortisation and exploration expense came in at $158m and pre-tax profit for the half was $31m. Production averaged 88,800 barrels of oil equivalent per day.
What’s more, at the end of June Genel reported a cash balance of $474m, and management is taking drastic action to position the company as best it can to weather a period of low oil prices. Specifically, capital expenditure has been slashed by 70% year-on-year and two outstanding bonds have been merged to lower interest costs. The company is guiding for full-year 2015 production of 90,000 to 100,000 bopd. Revenue of $300m to $400m on a Brent oil price of $50/bbl. And capital spending of $150m to $200m.
Based on these forecasts, City analysts expect Genel to report a pre-tax profit of $53m for full-year 2015, more than 50% lower than the figure reported for 2014 excluding one-off costs.
Nevertheless, based on analysts’ forecasts, which predict that the price of oil will rebound during 2016, the City believes Genel’s earnings will jump 46% in 2016. Additionally, City figures suggest Genel will report earnings per share of 31.5p for 2016. On this basis, the company is trading at a 2016 P/E of 11.5.
Uncertainty removed
Now that BP has finally reached a settlement with US authorities regarding the company’s involvement in the Gulf of Mexico disaster, much of the uncertainty surrounding the company has been removed.
Further, the company’s downstream operations are help the company weather the weak oil price. After stripping out non-cash charges, BP generated $6.3bn in cash from operations during the second quarter, down only 20% year-on-year. The company is looking to cut costs further going forward so cash generation should improve.
These cost-cutting efforts suggest that BP is positioning itself to recovery rapidly when the price of oil starts to rebound. Still, it might be some time before oil mounts a recovery. BP’s investors could have a long wait ahead.
