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Cap on crude price won't sink oil shares

The unofficial current cap on the oil price will not prevent sold-off oil stocks climbing from current levels, a range of analysts and investors have said.

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by Nicholas Paler on Sep 15, 2010 at 11:08

Cap on crude price won't sink oil shares

The current cap on the oil price will not prevent sold-off oil stocks climbing from current levels, a range of analysts and investors have said.

Brent crude has been stuck in a trading range between $65-$85 a barrel since May, as fears of a double-dip, coupled with climbing US stockpiles, weigh on the commodity in the face of stronger than expected growth in developing economies.

The unofficial cap on the price – supported by the Opec cartel of oil producing nations, which has given a tacit agreement to keep prices lower in order to prevent sparking a downturn in the US – will not weigh down equities in the longer term, however.

UK’s majors both cheap at current levels?

Both BP, which has had a tumultuous year in the wake of the catastrophe in the Gulf of Mexico, and Royal Dutch Shell remain well below highs seen in the past five years and are poised to appreciate, analysts have said.

Shell is the more straight forward case. The company’s share price has recovered from recent lows of £16.35 per share after a summer of disappointing economic data, particularly in the developed world, and now sits back above £18. But it remains well below the peak of £23 seen in 2008.

Tim Guinness (pictured), who has a 3.4% weighting in Shell in the £72 million ($111 million) Guinness Global Energy fund, said the stock looked attractive to investors at its current price.

Guinness, whose fund returned almost 15% over the past year, said: ‘Shell is currently at a discount and the share price has not recovered sufficiently.’

Jonathan Waghorn, manager of Investec Asset Management’s Global Energy fund which returned 14% in the last year to end of July, said Shell looked cheap on current valuations.

‘Shell has suffered along with energy markets and looks very attractive. It is trading at under five times cash flow, under seven times earnings, and has a full funded dividend of 6.5%, so we think it is a cheap stock,’ he said.

Waghorn has just under 5% of the fund in Shell but hinted the portfolio could increase its exposure on any sign of weakness.

‘We can see some downside to the crude price and that could make these stocks cheaper,’ he said. ‘If Shell comes off that would make the shares even more attractive.’

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12 comments so far. Why not have your say?

Sink oil prices? Don't be daft... the oil companies cannot and will not ever lose! They might sink the world one day though...

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Tullow Oil is one to watch, if oil prices rise. A big player in Africa and also a take over target.

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I don't see that being a " big player in Africa " is a bull point as the political risks are very great . I would prefer to invest in more stable countries . As for a takeover , most successful oil exploration co's are in that category .

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Whatever you invest in in Africa, the main factor is not geology or oil being present or infrastructure to exploit it. The key factor is the political background. Just look at what has happened to First Quantum Minerals in Congo who have had most of their assets taken by the government.

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Comments on Tullow Oil and Junior Oils recently, brings to mind the 'Bulletin Board' commentary during the I T bubble. Look where that led us.

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Oil companies only get roughly 10-15% of oil revenue from African dictatorships. It would be a crazy dictator who would risk the 85% they get. Any dictator judged as particularly unreliable will get a worse deal from oil companies. That's from memory from a half-read library book possibly a few years out of date. My own guess is that there would be more risk in a Latin American country with a marxist government or the possibility of one.

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Obvious comment here... most dictators ARE crazy!

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'most dictators ARE crazy!'

Would not dispute. Can't swear it's true but there's a story about an African president who invited Miss Peru over, she was shown to a private room where the prez pressed a button, and sliding doors revealed a bed. She fled. But when it comes to business they know not to kill the golden goose, unless they put ideology ahead of corruption. That may have been true of Gadaffi who apparently wanted to give oil revenues to the people, but this was abandoned as it was recognised that it would disappear before getting there. I've never heard of a sub-Saharan equivalent of Gadaffi. Americans are alleged to mistake African left-wingers for African left-wingers, when in fact if they get power they are simply corrupt.

Americans have also mistaken official structures for actual ones, and in the past Elf has run rings round them in countries where Elf was thouroughly mixed up in the real politics. However I would guess that even American oil companies might have wised up by now.

Sometimes the mix-up between left-wing and right-wing interests has been absurd, things like Cuban troops defending American companies in allegedly left-wing countries to protect revenue supposedly to be used to finance supposedly left-wing military action. However I should repeat that my main source is a book I didn't finish reading which is now back in the library, plus some odd bits mostly from the BBC World Service, and I can't back up my statements with sources.

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I agree that Africa is a high risk region to invest in. It is full of corruption.

Having been to Angola to work off-shore, I have seen the situation first hand, the poverty, corruption( just try and even get through the airport without being asked for bribes and backhanders).

Saying all this, the smart money is moving into this continent. As you will know when you a particular investment idea becomes highly advertised as the next big thing, the smart money by this time has made their money and moved on .

Lonrho is another company that I am invested in. This company knows exactly how to deal with these African governments as they have had years of experience there.

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Yes, Lonhro knew all about corruption. Too late to ask Tiny (in the early 1970s, the "unacceptable face of British capitalism" because of its attempt to avoid tax) though. Yes, no company better than Lonhro. . .

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Having bragged on other topics about shares which have gone up I'd better own up to gambling on African Medical Investments and losing 60% due to governance and corruption issues.

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Dennis .

Sep 19, 2010 at 18:29

I see that the Sunday Times business section has lots in it about First Quantum Minerals having their mines in Congo seized by the government and sold off. Who would invest in this place?

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