BP vs Premier Oil: which oil stock would I buy now?

Oil stocks were some of the worst performers among UK shares in 2020. This is due to the collapse of oil prices caused by the lack of demand. Worries also abound over the future of the oil industry, and BP (LSE: BP) believes that oil demand has already peaked. This has led to its ambitious renewable energy programme, announced last year.

However, this is not the view held by everybody, and BP’s US counterpart, ExxonMobil, expects demand to climb until at least 2040. This is due to rising incomes and population. Is it therefore a good time to buy oil stocks, and if so, which one would I buy?

Premier Oil will soon ‘disappear’

Subject to shareholder approval, Premier Oil (LSE: PMO) is shortly going to be renamed Harbour Energy after a reverse takeover by private equity-backed Chrysaor. This means that Chrysaor will soon become a publicly traded company without the need to go through an IPO.

As part of this deal, Premier’s stakeholders will own up to 23% of the enlarged group and current shareholders will hold only around 5.5%. It will also create the largest independent oil and gas company on the London Stock Exchange.

Due to the tough environment for oil stocks at the moment, particularly smaller ones like Premier Oil, I believe this is a shrewd move. This is because it allows the company to pay off its large debt pile. The debt of over £2bn has held back the company for years, and previous plans to pay it off included issuing more shares and buying BP assets to generate more cash. I believe these had a number of problems and taking the tiny stake in Harbour Energy seems a preferable option.

But while this makes Premier Oil a more tempting buy, I’m still not going for it. It may be a shrewd move for the firm, but the fact that Premier’s stake of the merger is extremely small means that it’s not worth a considerable amount for shareholders. With oil stocks currently under pressure, I also struggle to see the reformed company flourishing. I’m leaving it on the shelf for now.

The oil stock I prefer

Even after the Deepwater Horizon oil spill in 2010, the BP share price was still higher than it is now. This highlights the pain inflicted on the firm throughout the pandemic. However, as a leading energy company worldwide, I still remain bullish on BP shares.

Indeed, the company has already made “a commitment to return at least 60% of surplus cash to shareholders through share buybacks, once BP’s balance sheet has been de-leveraged”. This accompanies a dividend currently yielding around 6%. The BP share price therefore looks far too cheap to me right now.

Of course, the company will face significant headwinds over the next few years. For example, BP’s debt is still too high and lockdowns around the world should continue to depress oil prices. But I believe that Bernard Looney is a competent leader and the renewable energy transition shows progress. Questions still remain over whether this will make BP more profitable, but I’m willing to take the risk.