At today’s price of $67, Brent Crude oil has now risen by nearly 50% from the low of $46 per barrel seen in January.
How has this rapid recovery changed the outlook for oil stocks such as Gulf Keystone Petroleum (LSE: GKP), Premier Oil (LSE: PMO) and John Wood Group (LSE: WG), whose performance over the same period has been quite varied?
Premier Oil
Premier Oil issued a trading update today, sending the firm’s shares up by 4% ahead of today’s AGM.
Premier’s production has averaged 60,200 barrels of oil per day (bopd) so far this year, ahead of full-year guidance of 55,000 bopd. The firm said that both the Solan and Catcher projects in the North Sea remain on schedule, with first oil expected later this year, and in 2016, respectively.
Good progress is also being made in the Falkland Islands, but the question for investors is whether Premier will be able to deliver real returns to shareholders if oil prices remain in the $65-$75 range for several years, which seems increasingly likely.
Premier reported undrawn debt facilities of $1.3bn today, which seems ample — but it’s worth noting that at the end of 2014, just over four months ago, that figure was $1.9bn.
Premier appears to have burned through $600m of cash so far this year: with net debt of $2.1bn and a 2016 forecast P/E of 21, I think Premier stock already looks fully priced.
Gulf Keystone Petroleum
Gulf Keystone shareholders have not benefited from the rebound in oil prices in the way that some of the firm’s peers have done.
Shares in Kurdistan rival Genel Energy have climbed by 26% since the start of April, but Gulf’s share price has fallen by 5% over the same period.
The problem, of course, is Gulf’s debt, which stood at $538m at the end of 2014. The firm needs to pay $52.8m to bond holders in 2015 alone.
Higher oil prices should be improving Gulf’s cash flow: the firm’s Shaikan oil sells at a heavy discount to Brent but should be generating positive operating cash flow based on last year’s reported operating costs of $11.80 per barrel.
However, even if the payment situation continues to improve, I believe Gulf will need significant new investment, or an outside buyer, in order to restructure its debt and fund the next stage of the Shaikan development.
So far, the firm hasn’t found this money, making the shares a risky buy, in my view.
Wood Group
Oil services stalwart Wood Group also issued a trading update today, ahead of its AGM.
The tone was cautious, but positive, and Wood Group’s shares edged higher: management expects to deliver full-year cost cutting of $30m and earnings in-line with current expectations, while “double digit” dividend growth is expected “from 2015 onwards”.
Although market conditions remain difficult, Wood Group was keen to emphasise the benefits of the company’s business model in todays’ update. The firm requires few assets and reclaims most costs from its customers.
The advantages of this are clear: Wood Group shares have already risen by 20% this year, far ahead of most oil firms. Trading on a 2015 forecast P/E of 12.7 and with a prospective yield of 2.9%, I believe Wood Group remains a buy.