You have to admire oil investors’ animal spirits: it doesn’t take much to unleash the beast within. Last Friday’s sudden 10% oil price surge, one of its biggest-ever daily rallies, instantly brought out the bulls. It was a pleasant shock to see struggling oil stocks posting double-digit one-day gains.
Troubled waters
AIM-listed oil appraisal and development company Xcite Energy Limited (LON: XEL) was one of the standout stocks, up a roaring 18.68% in a day. Tullow Oil (LON: TLW) also enjoyed some much-needed respite, soaring 14.4%. All it took was a few comments from the chairman of Saudi Armco calling the oil price collapse “irrational”, dovish remarks from Mario Draghi, and a rash of short traders closing their positions and banking their fat profits… and suddenly, oil was back.
The crash has arguably been the standout economic event of the last 18 months. Few expected it, but many are keen to profit by buying into the rebound early. There are plenty of itchy trigger fingers out there and on Friday they started blazing away. Were they wise?
So Xcited
Despite its Friday comeback, Xcite trades at just 12.5p, way below its 52-week high of 44.5p. Management reckons it can exploit its key Bentley oil fields with total lifecycle costs of $35 a barrel. But this hope was looking desperate with oil at $28, scarcely much better at today’s $32. It will clearly take a sustained upward surge in the oil price to make the sums add up to a profitable future.
Xcite boasted a cash balance of $27.9m at the end of September, but has to repay $139m of bonds by 30 June 2016. Commercial discussions with a development partner continue but it can’t be easy with investors rushing out of oil instead of diving in. Friday’s share price surge shows that investors still have some faith in the stock, although it retreated 4.63% on Monday. The oil price will recover at some point but time isn’t on Xcite’s side. Frankly, I’m amazed so many got excited last week given its precarious prospects.Â
Tough road for Tullow
Despite Friday’s short-lived excitement, at today’s 140p Tullow Oil is trading way below its 52-week high of 456p. It needs oil to rise to at least $60 or $70 and it surely has a long road ahead of it before the price hits those kind of levels.
That said, earnings per share are forecast to rise an incredible 851% this year with its TEN asset in Ghana set to start pumping in July or August. This should help to boost pre-tax profits from ÂŁ67.72m to a forecast ÂŁ142.2m. Tullow recently posted 2015 revenue of $1.6bn and pre-tax operating cash flow of $1bn, with management flagging up financial headroom of $1.9bn. It’s certainly a safer long-term bet than Xcite, but still a gamble in today’s topsy-turvy world.
Both stocks are at the mercy of events they can’t control and despite Friday’s excitement, I fear the bulls will vanish just as quickly as they appeared.