Despite oil prices falling by around 50% since last summer, shares in BP (LSE: BP) (NYSE: BP.US) have fallen by just 14% since June 2014.
Rising downstream (refinery) profits have helped cushion the impact of lower oil prices, and BP’s low debt levels, $29bn cash balance and multi-decade timescales mean that a short-term dip in the price of oil isn’t a big problem.
However, BP shares currently trade on 18 times 2015 forecast earnings, and I suspect there could be further downside ahead. At current prices, I don’t believe BP is a very appealing buy, or a particularly good way to profit from the eventual oil price recovery.
In my view, the companies best positioned to profit when oil prices recover are cash rich, mid-cap oil producers — and in this article I’ll highlight three possible choices.
Genel Energy
Shares in Genel Energy (LSE: GENL) have fallen by 42% since last June, despite the firm reporting that production rose by 58% to 69,000 barrels of oil equivalent per day (boepd) in 2014.
As well as the falling price oil, Genel is suffering because the Kurdistan authorities have not been paying Genel and its peers for the oil they’re exporting.
However, Genel has $490m of cash on hand, and it’s worth remembering that until July last year, the firm’s shares were trading at 1,000p — around 75% higher than current prices.
SOCO International
SOCO International (LSE: SIA) has a net cash balance of $185m and “low $20s” per barrel breakeven cost for oil production, according to the firm.
However, falling oil prices and a cautious approach to growth have left the firm’s shares 32% lower than they were last summer, with the risk of further downside, given SOCO’s 2015 forecast P/E of 21.
A 4.0% yield means the risk might be worth taking, as I believe that when oil prices do recover, SOCO’s share price could rebound sharply as the firm’s profits recover.
Dragon Oil
Dragon Oil (LSE: DGO) trades on a 2015 forecast P/E of just 9.8, despite the collapse in the price of oil.
Dragon has net cash of $1,975m, no debt and a 5.7% prospective yield. The firm’s Turkmenistan oil fields are prolific and very low cost, and the firm’s finances look absolutely bombproof.
I believe a price of 600p+ is realistic when the oil price recovers, but the catch is that Dragon’s majority shareholder is the Emirates National Oil Company, making a takeover bid very unlikely.