3 Attractive Oil Stocks Following Price Drop

These three companies have suffered at the hands of the recent oil price decline, making them more interesting to value investors

Holly Cook 29 October, 2014 | 8:00AM
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Holly Cook: The price of oil has dropped substantially in October, hitting some oil companies really hard – as much as 20% or even 30%. There is a couple of reasons why the oil price is down so much. One of them is fear of oversupply after Libya returned to exporting in the summer months of the year. Another is that there is tight oil production coming out of the States, which is squeezing demand. So, we’re actually seeing the price of oil is down now around 24% versus its peak earlier in this year of about $107, according to the WTI measure. 

Morningstar still sees the marginal cost of oil round about $90 for WTI and about $100 for Brent. Now we see this supply/demand issue as a short-term one. We’re looking at sort of 18 to 24 months that this is going to play out. And so the impact it has had on the oil companies, that 20%-30% drop that I mentioned, we think that’s actually substantially overdone and it has made some particular stocks look really rather attractive. 

For investors looking at this area, integrated oils are one of the areas that offer more protection in such a sort of sliding market scenario. They’ve got stronger balance sheets; they’ve got more downstream assets. So we would highlight three stocks that you might want to look at. 

The first one is BP, traded on the London Stock Exchange. It’s currently trading at a steep discount to our fair value estimate, which is currently £5.90. And that’s earned the stock a 4-star rating at the moment. 

Another one that we would look at would be ExxonMobil. That’s currently traded on the New York Stock Exchange again a steep discount to its fair value estimate, which is $109 from our analysts. And that has also given it a 4-star rating, given that it’s trading round about $93 at the moment. 

And the third stock that we’d look at is BG Group. Another LSE stock and that’s almost in 5-star territory, because it’s currently trading at just over £10 a share and our analyst values it at £14. So that is substantial discount there again. 

Overall, even if oil prices were to remain weak all the way through to 2016, say, let’s say we were looking at an oil price for WTI of $75 and $80 for Brent, our analysts see they’re taking around 5% to 8% off our fair value estimates. So even taking that into account, these stocks are looking attractive, given this short-term impact.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Holly Cook

Holly Cook  is Manager, Morningstar EMEA Websites