If you are a UK investor and you want to get into oil, look no further than our two majors, BP and Shell, says MoneyWeek's James Ferguson: historically they have tended to move in tandem, so if you are in for the longer term, it really doesn't matter which one you go for. The question is not which is better, but are they both still a buy? And the answer to that is a firm yes.
Higher oil prices look like they're here to stay, yet while BP and Shell have made back most of the ground they lost when their share prices fell in 2002, there is little evidence they have yet adjusted for today's oil price of $53. In fact, Shell hasn't traded on such a low p/e since the late 1980s, when double-digit interest rates forced all equities into the cheap zone. Up until 2001, Shell's earnings yield was always higher than the yield on gilts. Ten-year gilt yields are now 4.5%, suggesting Shell should be on a p/e of over 20 times (1/4.5 = 22 times) instead of its current 11.12 times. There is an equally compelling case to be made for BP. Since last autumn, consensus analyst medium-term profit forecasts for the firm are up around 43%. Yet technically speaking, BP has been in a downtrend now since the all-time high way back in 2000. This is despite the fact that analysts are 20% more bullish on BP's profit outlook now than they were even at their most optimistic at the peak of the last cycle.
Outside the majors, investors should be more cautious - note that many of the more speculative stocks that call themselves exploration and production companies are often no more than cash shells. Worth considering, however, might be Gulf Keystone Petrol (AIM, GKP), says the Investors Chronicle - the firms exploration programme in Algeria is going well and "the shares look good value." Otherwise, consider Sterling Energy. "The shares trade on a multiple of four times 2006 cash flow," says Red Hot Penny Shares, "which is attractive."
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In the US, you are probably better off avoiding the larger companies, says Bill Sarubbi: they have been lagging the wider sector since 2000. Each of the following four firms are involved in a fast-growing segment of the energy patch and are classified as either mid or small cap. Atwood Oceanics, Inc. (ATW) is engaged in the international offshore drilling of exploration and developmental oil and gas wells in offshore areas and related support, management and consulting services. During its 36-year history, the majority of the company's drilling units have operated outside of United States waters. It has conducted drilling operations in most of the major offshore exploration areas of the world. The stock has moved a long way since I first began recommending it in 2003, as we can see in the chart. But I expect it to continue to do very well. On a fundamental level, the firm should benefit because sea drilling is profitable with oil over $35 a barrel, a level unlikely to be seen again soon. But at the same time the technical position looks good. The shares have only recently ascended from a huge multi-year base and this is the type of technical launching platform that leads to longer-term outperformance.
Transocean Inc. (RIG) provides offshore contract drilling services for oil and gas wells, related equipment and work crews, to drill oil and gas wells. The firm operates with a particular focus on deepwater and harsh environment drilling services and should, like Atwood, do well out of the fact that sea drilling is now profitable.
The other two shares I would recommend are Cooper Cameron Corporation (CAM), an international manufacturer of oil and gas pressure control equipment and Ensco International Incorporated (ESV), an international offshore contract drilling company.
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