The crude slide continues with Thursday’s fall and stockpiles surprise with a build-up on higher imports and production. Brent Crude – the key North Sea price and global benchmark – for February delivery is down 2.1% to $47.67 a barrel on the ICE Futures Europe exchange.
Four Horsemen of Oil Apocalypse
The oil apocalypse can be attributed to four root causes. The first and foremost is burgeoning supply. Compounding this is the lack of substantial demand rise. Third is the opposition from the international cartel of oil producers – OPEC, or the Organization of the Petroleum Exporting Countries – to cut back production. And finally, the U.S. has become the largest producer and consumer by adding significant domestic capacity.
The Bottom is Missing
The southward journey of crude is in no mood to stop. Major investment management firms like Citigroup (C) and Goldman Sachs (GS) are following suit, lower their 2015 and 2016 crude oil projections. Citigroup expects crude prices to stay low for long so as to ease the supply glut. Société Générale, a French multinational banking and financial services company, also lowered 2015 WTI price forecasts to $51 per barrel and Brent to $55 per barrel.
Goldman reduced its three-month price forecast for West Texas Intermediate (“WTI”) to $41 per barrel from $70 and Brent crude price to $42 per barrel from $80. Moreover, the investment management firm slashed its 2015 estimates for WTI and Brent to $47.15 and $50.40 from $73 to $83.75, respectively.
WTI has fallen over 50% and Brent over 60% since Jun 2014, and most analysts have given up deciphering a bottom.
Is the Punishment Universal?
We feel that falling crude prices will have mixed impacts on producers worldwide. For example, Saudi Arabia, with its $900 billion in foreign exchange reserves, should comfortably tide over the oil carnage. But players shouldering heavy international sanctions like Russia and Iran are fast losing a key component from their exchequer to earn the much-needed foreign exchange.
We fear the tumble would take its toll on Western oil players with high-cost projects due to maturing and expensive fields in the North Sea. The North Sea tax revenues have already raised an alarm. U.K. government figures point to almost one-fifth decline in revenues from their historical high, touched only five years ago. The debacle was compounded by heavy tax discounts on investments in new fields and infrastructure. Then there were the sharply cascading oil prices.
And now, to make matters worse, major oil players are planning headcount reduction to quickly cope with falling prices. Even U.K. government sources apprehend over 37,500 people – 10% of the industry – losing jobs.
Top Oil Stocks to Dump
In view of the overall negative sentiment, the case for exiting positions in this sector appears quite strong. Accordingly, a smart strategy to adopt now would be to identify stocks profoundly affected by any change in the North Sea that have an unfavorable Zacks Rank and are seeing negative earnings estimate revisions.
Below are 3 stocks with chances of further downside on these parameters. The share prices of each of these Zacks Rank #5 (Strong Sell) stocks have nosedived lately.
BP plc (BP)
London-based BP plc is one of the world's major energy companies, providing fuel for transportation, energy for heat and light, retail services and petrochemical products. The stake is high for BP as it employs about 10,000 contractors and employees in the North Sea. And with a potential U.S. federal fine of up to $18 billion hanging over the oil giant, the North Sea has only complicated matters.
Estimate Revision – BP has seen 1 negative estimate revision in the last 60 days for 2014. Yearly earnings consensus has dropped from $1.01 a share to 98 cents.
Share Price – The stock has lost 12.1% over the last three months.
Royal Dutch Shell plc (RDS.A)
Royal Dutch Shell owns one of the largest integrated oil and gas businesses in the world. The group is involved in various activities related to oil and natural gas, chemicals, power generation, renewable energy resources and other energy-related businesses. The company divides its operations into three major segments: Upstream, Downstream, and Corporate. Its payroll includes around 12,000 people from the North Sea area. This European oil major is already beleaguered by a falling bottom line and has been hiving off its North American and international assets.
Estimate Revision – Royal Dutch Shell has seen 1 negative revision each in the last 60 days for the fourth quarter and full-year 2014 estimates. Quarterly earnings consensus has declined from $1.39 to $1.34 a share. Yearly earnings consensus has dropped from $7.64 to $7.49 a share.
Share Price – The stock has lost 3.9% over the past week.
ConocoPhillips (COP)
Houston, TX-based ConocoPhillips is a major global exploration and production (E&P) company with operations and activities in 30 countries including the U.S., Canada, UK/Norway, China, Australia, offshore Timor-Leste, Indonesia, Libya, Nigeria, Algeria, Russia and Qatar. Facing higher costs and lower returns, the company announced that it will let go of 230 jobs across the U.K., including at its main office in Scotland by March.
Estimate Revision – ConocoPhillips has seen 2 negative estimate revisions in the last 7 days for the fourth quarter and 3 downward revisions for 2014. Quarterly earnings consensus has declined from 86 cents to 81 cents a share. Yearly earnings consensus has dropped from $5.63 to $5.54 a share.
Share Price – The stock has lost a marginal 0.5% over the last four weeks. However, it has lost 5.4% over the last five days and 7.3% over the last three months.
End Note
Even if oil prices stabilize a bit as we proceed further into 2015, we would remain apprehensive about prospects in the North Sea. Our bearishness stems from the fact that unlike the cheap Saudi Oil, North Sea prospects need considerable investments – deemed a losing proposition in an overflow of cheap oil. This is why it may be a good idea to drop these stocks from your portfolio for the time being.
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