Suffice to say, 2014 has been a very challenging year for investors in oil stocks. After all, the price of oil has almost halved during the course of the year and now stands at just $56 per barrel. However, there could be further price falls to come, with Saudi Arabia apparently willing to let it fall to as low as $40 per barrel as it seeks to outmanoeuvre Russia and the US shale industry. As such, things could get worse before they get better for investors in oil stocks.
However, for investors considering buying oil stocks such as BP (LSE: BP) (NYSE: BP.US), Premier Oil (LSE: PMO) and Gulf Keystone (LSE: GKP), now could be the perfect time to do so. That’s because their share prices appear to price in an exceptionally bleak scenario where the price of oil will fall much further and stay there for a considerable period of time. So, if there is a positive surprise in that regard, it could lead to increases in the share prices of the three companies through improved sentiment.
BP
For example, BP trades on a price to earnings (P/E) ratio of just 9.4. This means that there is considerable scope for an upward rerating during the course of 2015, especially since the FTSE 100 has a much higher P/E ratio of 14.6. In addition, BP has a superb yield of 6.2% that is covered 1.7 times by profit and this could help to push the company’s share price higher during the course of the next year, as income-seeking investors bid up the price of BP’s shares.
And, while the uncertainty surrounding Russia’s economy could hurt the value of BP’s stake in Russian operator, Rosneft, it remains highly diversified and vastly cheap. As a result, BP’s share price appears to have a sufficient margin of safety included given the challenges it currently faces.
Premier Oil
Similarly, Premier Oil trades on a P/E ratio of just 6.6 using next year’s lower forecast earnings. This seems to be extremely cheap for a relatively high quality company such as Premier Oil and means that there could be significant scope for an upgrade to its valuation next year – especially if the oil price does not continue its savage fall of the last few months. In addition, Premier Oil has a dividend that is extremely well covered by profit at 5.6 times and this means that there is considerable scope for higher shareholder payouts moving forward.
Gulf Keystone Petroleum
Of course, Gulf Keystone Petroleum’s share price has been hurt by continued uncertainty in Iraq, as well as a lower oil price. As such, its shares are down 62% since the turn of the year despite there being relatively positive news flow in recent months.
This has included the Kurdistan Regional Government (KRG) recently making its first payment to producers in the region, with Gulf Keystone receiving $15 million, and more payments are expected throughout the course of 2015. In addition, Gulf Keystone recently released an upbeat operational update and is anticipating production to reach 60,000 bopd over the medium term.
While both of these examples could prove to be catalysts for share price growth next year, the situation in Iraq appears likely to remain volatile in the months ahead. As a result, and while Gulf Keystone does have significant long term potential, its shares may continue to disappoint during the course of 2015 due to the potential for further unrest in Iraq and its negative effect on sentiment.