In this article I’ll ask if BP (LSE: BP), Barclays (LSE: BARC) and Premier Oil (LSE: PMO) could be among the big winners in 2016.
BP
BP’s recent third-quarter results made reassuring reading for shareholders, in my opinion.
Third-quarter underlying replacement cost profit, an oil industry standard measure, came in above expectations at $1.8bn for the quarter, while cash costs were $3bn lower than for the same period of 2014.
BP is planning to have balanced cash flows at an average oil price of $60 per barrel by 2017 The group is now focused on managing its portfolio to generate free cash flow and protect the dividend.
Although the price of oil is still below $50 at the moment, production in the US and other high cost areas is now falling steadily. I believe that the market will start to rebalance next year, which should support modest price increases.
BP currently offers a prospective dividend yield of around 6.8%. Such a high yield is often seen as a warning sign, but I think it could be a good buying opportunity unless oil market conditions continue to worsen.
Barclays
Barclays’ new chief executive Jes Staley doesn’t start work at the bank until December, but has already spent £6.5m of his own cash on Barclays shares.
Although Mr Staley is probably a fairly wealthy man, this seems a substantial purchase. It’s also a refreshing change to see a top executive buying shares with his own cash, rather than just accumulating them through stock options.
Mr Staley’s purchase was made after the firm’s third-quarter results were published. These showed more of the same slow but steady progress we’ve seen over the last two years, in my view.
Pre-tax profit rose 7% to £3,975m, while net tangible assets per share increased to 289p. Barclays shares now trade at a 20% discount to their tangible net asset value. As a value investor, this is a buy signal for me. I’m also attracted by Barclays’ 2015 forecast P/E of 10.3, which is expected to fall to 8.7 in 2016.
Now could be a good time to buy Barclays, in my opinion.
Premier Oil
Shares in Premier Oil have fallen by 70% over the last year. The group has been a victim of unlucky timing, with investment in its Solan and Catcher fields in the North Sea peaking just as the price of oil crashed.
It’s not all bad news, though. Premier is in no immediate danger of running out of cash or breaching its banking covenants. The group does not have to repay any debt until the end of 2017 and still has $1.3bn of cash and undrawn borrowings.
Oil production from Solan is expected to start in the final quarter of this year. From this point, cash flow should start to improve and new borrowing should be reduced.
Premier has cut costs heavily and expects operating costs of just $16 per barrel across its operations this year.
However, the firm does still have net debt of $2bn which will eventually need to be repaid. Arranging hedging contracts for 2016/17 may also be more difficult, as markets are adjusting to the idea that oil prices will be lower for longer.
In my view, it may be a little too soon to invest in Premier Oil.