Trying to guess where the price of oil will be in a year, six months or even a week from now has turned out to be almost impossible for the past twelve months. Indeed, every analyst and industry insider that has tried has been proven wrong, often within days of their prediction.
However, since the end of October the price of Brent crude has staged a small rally. As a result, the shares of oil producers such as Gulf Keystone Petroleum (LSE: GKP), Genel Energy (LSE: GENL), Tullow Oil (LSE: TLW) and Premier Oil (LSE: PMO) have pushed higher.
Nonetheless, even after these impressive gains I believe that investors should stay away from these four companies for the time being.
Wait and see
All four oil producers are impressive companies in their own right. Gulf Keystone owns part of the Shaikan oil field in the Kurdistan Region of Iraq, which is arguably one of the lowest-cost oil fields in the world. Genel is producing oil from two major low-cost oil fields in Kurdistan and has a portfolio of gas assets offshore Africa. Also, the company is run by an experienced management team, is cash rich and is profitable.
Tullow is expecting to bring its Tweneboa, Enyenra and Ntomme (TEN) development — touted as Tullow’s second flagship project after the Jubilee field — online during the second quarter of next year, nearly doubling the company’s output. And Premier has built a highly desirable portfolio of production assets around the world and improved productivity via an efficiency drive.
One major factor
There’s one issue that’s holding all of these companies back, and that’s the volatile oil price.
Take Premier for example. Oil needs to hit at least $60 a barrel to revive Premier, and as we’ve seen over the past few days, Premier’s share price tends to overact when there’s any sign that the price of oil might be heading up. Unfortunately, Premier’s shares also overreact if the price of oil shows any sign of dropping further.
And while Tullow was a market darling when oil was trading at $100/bbl, in a $50/bbl world the company’s mountain of debt is extremely concerning. Tullow’s carries net debt of three times next year’s forecast earnings before interest, tax, depreciation and amortisation.
If the price of oil returns to $100/bbl, Tullow’s gearing metrics will improve dramatically, but just like Premier, Tullow is at the mercy of the market for the time being.
Well-positioned
The oil market hasn’t been kind to Gulf Keystone. Indeed, the company is now in a better shape than ever before. The KRG is paying off its debt to the group, and daily average commercial production from the Shaikan field has risen to more than 40,000 barrels of oil gross. However, low oil prices are preventing Gulf Keystone from realising its full potential.
Genel has the brightest outlook of these four producers. The company’s net debt is falling, and Genel was quick to slash capital spending when the price of oil started its slide last year. Net debt at 30 September totalled $211m, $5m lower than the figure of $216m reported at the end of June. Genel is expected to report a pre-tax profit of £32.4m this year.
