The oil price offered little fuel for UK oil producer stocks on Thursday, holding steady as they were at $40 per barrel, but BG Group and Cairn Energy rallied nonetheless after BG posted a bumper set of quarterly results.
Oil prices have been stuck in a tight trading range for weeks now as the market focuses on slowing economies, rock-bottom demand, and the prospect of oil-filled ships floating around with nowhere to go.
In midday deals Thursday, US light crude for March deliver was virtually unchanged at $40.34/bbl – more than $100 less than the record high of $147 reached last summer – while London Brent crude crept up 30 cents to $44.45/bbl. Yesterday’s oil inventories data from the US EIA revealed a jump in stockpiles last week of 7.2 million barrels, the sixth consecutive weekly rise and now the highest level of crude inventories in a year and a half.
Initial estimates for January demand show a lousy start to the year too, with global demand down 2.8%, according to Oil Market Intelligence, while US government figures yesterday showed the nation’s petroleum product demand for the month had fallen by about 1 million barrels per day from December.
The combination of shrinking demand and rising stockpiles has seen oil prices hover in the low $40s for some time now – a trading pattern that is a little ominous, according to analysts at MF Global. “We can’t help but wonder whether the quiet sideways trading is the calm before some impending storm,” they commented in today’s Daily Energy Report. The report added that “the market appears likely to break out in a decisive manner relatively soon; it’s just the direction of breakout that’s up for debate.”
And recent OPEC rhetoric has failed to help. The oil producing countries have sanctioned a series of output cuts in an attempt to boost oil price momentum but to no avail. OPEC will reportedly propose another reduction in demand when it meets next month, thought to be in the region of 1 million barrels per day, but whether this will have the desired effect remains to be seen.
Despite the dramatic collapse in the oil price, oil & gas producer BG Group this morning reported extremely strong numbers that put BP and Royal Dutch Shell to shame. The news sent shares in BG rallying almost 8% higher and also provided a positive fillip for peer Cairn Energy, 5% ahead in midday deals.
BG reported net income up 25% year-on-year and 15% ahead of market forecasts, with a very strong performance in LNG (liquefied natural gas), where operating profits rose by 180%.
Exploration and Production (E&P) profits were down 11% on the year, “but this compares favourably with BP (-32%) and Shell (-42%) despite a 4% drop in volumes,” analysts at SNS Securities said.
“BG has demonstrated it has a very, very strong business but remains concerned that the market is undervaluing this business and that it remains vulnerable to predator if the shares fail to re-rate,” Evolution Securities said in a note following the results. Analyst Richard Griffith’s valuation for the shares, based on an oil price assumption of $70/bbl long-term, is 1,605p including a bid premium – 70% above the current price – and 1,267p without a bid. Assuming $55/bbl long-term, Griffith values the stock at 1,441p with a bid and 1,136p without. In conclusion, Evolution sees BG’s shares as highly attractive.
At 12.30pm, BG shares were 70p higher at 1,021p and Cairn Energy was up 80p at 1,941, while peers BP and Shell underperformed, down 2.75p at 497p and 35p at 1,623p respectively. The FTSE 100 index slipped 27.79 points to 4,200.81.
