I believe the levels of uncertainty surrounding the oil sector make investment in the likes of Tullow Oil (LSE: TLW) far too risky right now.
The celebratory mood that followed OPEC’s first supply cut for almost a decade in November may have helped propel crude prices back above $50. And for the time being OPEC continues to talk up the positive impact of the deal, the group reporting at the weekend that the conformity rate hit 94% in February, up 8% from the prior month.
The group is due to update the market next month on whether or not the output freeze will persist beyond the summer. A failure to keep the taps turned down would see the world still drowning in unwanted material.
But even should OPEC agree to keep production constrained, there is no guarantee that other non-cartel members like Russia will agree to keep up their end of the bargain after June. Indeed, the downward direction of crude more recently shows that OPEC is no longer the be-all-and-end-all when it comes to determining crude values.
A resurgent US shale sector has seen oil values move back into reverse in recent weeks, latest Baker Hughes numbers showing another 21 oil rigs added to the country’s total last week, the biggest seven-day build for two months.
Fragile finances
The consequent threat of oil prices going back on the defensive puts Tullow Oil for one under immense pressure.
The oil giant has been battling to mend its stretched balance sheet for what seems an age, and earlier this month it was forced into a £607m share issue to pay down its suffocating debt pile. Net debt rang in at $4.8bn as of December, surging 20% from just over $4bn 12 months prior.
Tullow Oil has been toiling since crude values collapsed from their peaks of $115 per barrel in the summer of 2014, as well as an alarming rise in capex costs to get its mega projects in Africa firing.
While it is hoped that the company’s titanic TEN project off the coast of Ghana will drive revenues to the stars, the possibility of oil values continuing to struggle amid the market’s broader supply/demand issues could see Tullow Oil remain under extreme pressure.
Troubled Tesco
Like Tullow Oil, a perilous top-line profile also makes groceries giant Tesco (LSE: TSCO) too risky at the present time, in my opinion.
The supermarket facing a constant battle to stop its customers flocking to cheaper outlets Aldi and Lidl is one thing. Indeed, latest Kantar Worldpanel numbers showed Tesco’s market share slipped again in the 12 weeks to February 26, to 27.9% from 28.4% a year earlier.
And the difficulties Tesco is encountering to protect margins is likely to keep rising as suppliers raise costs to offset sterling’s persistent weakness.
Just last week Tesco became embroiled in a spat with Heineken over what it pays to stock the lager maker’s products like Sol and Tiger. And this follows a well-publicised dispute with Unilever late last year.
Predictions of a sustained profits turnaround at Tesco remain on extremely thin ice, in my opinion, and I reckon risk-averse share pickers should browse elsewhere.