Friday, 13 June 2014

Crude gets an Iraq Spike: Value Oil Companies Lead The Market

Crude Oil Spikes Up on Iraq Tensions

That the Isis rebels are advancing on Baghdad has sent shudders through the crude oil market, with Brent Crude oil prices breaking above their 9-month trading range to hit over $113/barrel today (Figure 1).

1. Brent Crude Oil futures head back to the 2013 highs
Source: Bloomberg

Iraq is projected to be 11% of OPEC output this year

With OPEC representing over 40% of global crude oil production, and Iraq forecast to produce 11% of OPEC's crude output this year, any long-lasting disruption to Iraqi oil production could keep crude oil prices higher than expected, in spite of the burgeoning production of oil and gas from US shale deposits. 

2. Iraq is projected to produce 11% of OPEC's Oil Output This Year
Source: OPEC

UK, European, US Oil Companies Outperforming

At a time when global stock markets could finally be stalling in the short-term after breaking new all-time highs, the oil & gas sectors on both sides of the Atlantic have maintained strong upwards momentum thanks in part to this geopolitical boost, comfroatbly outstripping the wider benchmark stock indices. 

3. European and US Oil Stock Gains in the Double-Digits This Year
Source: Bloomberg

So Which Oil Stocks Look Particularly Attractive Right Now?

In the US, my attention has been drawn to oil-related stocks that have under-performed up to now, but which are starting to rebound sharply. Noble Corporation (US code: NE) is one such company, an offshore drilling contractor which is very cheap at 9.5x forward P/E, 0.9x price/book and offers a tempting 4.3% dividend yield (more than twice that offered by the S&P 500 index). 

4. Noble Corporation An Attractive US Value-Momentum Play
Source: Bloomberg

But what could you look at in Europe (and the UK)? 

I must declare that I work for BCS, which is a Russian financial services company that offers with Asset Management and also Broking. So if you have the stomach for an emerging market oil play, you could of course look to Russia, which after all is an economy and stock market that tends to be highly correlated to the oil price over time. 

High Risk, High Reward?

The Russian oil stock that comes out high on Stockopedia's QVM (Quality-Value-Momentum) combined stockrank is Rosneft (LON Int: ROSN) (Figure 4), with a combined StockRank of 97, a Value rank of 98 and Quality rank of 95. The dividend yield of 4.3% also pays an investor to be patient.

4. Rosneft Near the Top of the Stockopedia QVM StockRank

Oil Services Still My Favourite: AMEC, Wood Group

Otherwise, I am still a big fan of Oil Service companies given the Shale Oil & Gas investment theme. The key to remember is this: that shale oil and gas producers need to continue to drill a huge number of new wells not only to keep up production growth, but even to maintain existing levels of production! With shale oil, well depletion rates are far higher than with conventional oil wells, hence there is correspondingly more business for oil service companies helping them to get the oil out of the ground, process it and then transport it!

I continue to favour both AMEC (LON: AMEC) and Wood Group (LON: WG) as they both come at or near the top of the combined QVM StockRank within the Oil & Gas sector, AMEC with a near-maximum combined StockRank of 99, and Wood Group with a high 85 StockRank (Figures 5, 6). 

5. AMEC Top of the StockRanks!

6. Wood Group: Good Value, Momentum to be Had

Have fun "drilling down" on these oil stock ideas!


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