The oil sector has seen its share price get crushed in the last eight months. Some more than others. Well, you can divide the oil sector into three groups.
Group 1 - oil majors
The first group stands heads over heels above the rest; they're the oil majors. I'm talking about BP and Shell. Both these businesses are highly diversified, and you could easily view half their businesses as being defensive. They are less reliant on the oil price because their only business isn't about extracting oil, it also includes manufacturing, refining, trading and transportation.
In my view, BP is weaker than Shell because of the on-going Gulf of Mexico compensation claims, as people speculate there they may need to stump up another $13bn in clean-up costs. Furthermore, BP has some credible assets in Russia, but the political risk over there remains high due to Western sanctions. There is a chance BP may face a backlash if their assets get seize in Russia if Russian assets get frozen in Western countries.
Mystic Meg, must be advising Shell to purchase BG Group for $70bn or £47bn. The move IMO is about adding value to its business as they try to reduce its coal business and be more involved in natural gas. As pollution ran rampant in China and India because of heavy usage of coal, it has affected the quality of life and health of its citizens. I expect these governments to be using less coal and more natural gas in the future if they want to keep the peace. Shell's management is smart to say they don't expect the BG deal to be profitable until late 2016/17.
Group 2 - heavily indebted oil stocks
The second group is on the other side of the spectrum. These are highly indebted businesses, which saw its share price get crushed badly!! Companies like Gulf Keystone, Igas and Afren are in this group. Take Afren as an example. The shares are trading at 3p (down from 130p a year ago, a fall of 98%).
Looking at Afren's bond price that trades at 40 and 50 cents on the Dollar, ones need to understand the implications it will have on the shareholders. Shareholders' of oil companies should 'pay attention' to the bond prices of the business because bondholders have first claimed on the company's assets if they struggle to meet interest payments!!
If, the same oil businesses go…
