Miners and oil companies have been prominent culprits in sending the FTSE 100 sinking. The shares of many firms in these industries are now trading more than 50% below their previous highs. Put another way, they offer 100%+ upside when they regain their former levels. Even if it were to take 10 years, you’d get an annual return in excess of 7%, not including dividends.
Oversupply, and low oil and metals prices, won’t last forever. And, obviously, buying when prices have slumped, rather than when they’re riding high, will be hugely beneficial to your long-term returns. The main danger for investors during a slump is that not all companies will survive — the collapse of Afren this year is one example — so choosing your investments carefully is essential.
Today, I’m looking at the prospects for miner BHP Billiton (LSE: BLT), oil company Tullow (LSE: TLW) and oil equipment firm Hunting (LSE: HTG).
BHP Billiton
BHP Billiton’s shares reached an all-time high of over £26 in 2011, and were above £20 little more than a year ago. In recent days, they’ve been trading at near to £10.
Billiton is a super-megacap, and its business is diversified across petroleum, copper, iron ore, coal and potash. The company’s sheer size and level of diversification give it strong survivability credentials. Like other giant low-cost producers, Billiton is actually increasing volumes, while higher-cost producers go to the wall or are obliged to shut down uneconomic operations.
Earnings ratings, such as the near-term P/E, mean little in the current environment. The cash dividend, though, is worth noting, not least because of its reinvestment power, particularly if the share price remains depressed — or goes lower — for a sustained period. Reinvesting dividends will give you an even bigger return when the recovery does come.
The forward yield is 7.8%, and the Board has recently said it remains committed to a progressive dividend policy. Of course, that’s not guaranteed, but even if the company were to halve the dividend, you’d till have a chunky sum for reinvestment. As such, Billiton looks to me to be a good buy at current levels.
Tullow Oil
Tullow Oil’s shares were above £8 last year when the oil price began its precipitous slide. The shares yesterday hit a new low of under £1.70. In truth, Tullow’s decline began long before the oil-price slump. The shares have fallen relentlessly from a record high of over £15 in 2012, and the company was demoted from the FTSE 100 earlier this year.
Tullow’s important TEN Project in Ghana is currently on schedule and on budget for first oil in mid-2016. With no debt maturities ahead of the project coming on stream, the long-term prospects for the company look good — if everything pans out. However, with a market cap of £1.5bn, net debt of $3.6bn, and assets concentrated in higher-risk Africa, Tullow is a markedly less safe bet than Billiton, although the potential upside is also markedly higher. An investment in Tullow would need to be watched carefully, with the risk of having to get out at a loss, if prospects were to turn sour.
Hunting
The shares of oil equipment firm Hunting fell to under £4 in late January this year, having been at £9 less than six months earlier. The shares of this mid-cap company can rise and fall dramatically on relatively modest shifts in the oil price, rig-counts news and sentiment. For example, on the back of the fragile and ultimately temporary bounce in the oil price in the first half of the year, Hunting’s shares shot up from under £4 to £6.50.
The shares have been back under £4 this week, at which price the market cap is just below £600m. Net debt of $167m is eminently manageable at the moment, with gearing (net debt/shareholders funds) being at just 12%. The key directors have been with the company for decades, and have seen all manner of situations, so are well-equipped to steer the business through the current turbulent seas.
While the price of oil and industry activity obviously have a huge effect on Hunting, this picks-and-shovels business doesn’t have the risks that some similar-sized oil companies have, such as a concentration of assets in a higher-risk region or reliance on a single big project. As such, and with consolidation in the oil equipment and services industry also rife, Hunting looks to me to have a good risk-reward balance at current levels.