Potential problems in the oil pipeline remain

NOT long ago, the peak oil consensus painted a picture of a future of uncontrollably spiking oil prices. The rapid rise of developing market demand would lead to a squeeze on oil markets and surging oil prices. But as oil and gas producers can attest, many of these forecasts have come to nothing – a loose short to medium-term supply balance has put the brakes on any dramatic price rise.

Rather than floating on a cushion of huge fuel price increases, oil producers are instead facing a challenging future. And rather than global economic growth of 4 per cent or more, oil-demand driving GDP is now closer to 3 per cent.

But if stock-picking oil and gas producers was as simple as looking at oil and gas demand, life would be very easy. As the two big recent movers – BP and Shell – show, oil firms have more complex concerns.

It’s difficult to look at BP without talking about its $4.5bn (£2.8bn) settlement with the US Department of Justice and the Securities and Exchange Commission (SEC) over the 2010 Deepwater Horizon Gulf of Mexico oil spill. The settlement was larger than many had expected – and dwarfs the $1.3bn fine handed down to Pfizer in 2009. But the silver lining is that this clarification on the level of criminal penalties leaves both BP and its investors with a quantifiable problem to surmount. “The only thing that investors have to contend with relates to Macondo [the site of the spill] and so sadly there still remains a degree of uncertainty surrounding the stock,” says Angus Campbell, head of market analysis for Capital Spreads.

So is BP a buy? After the battering the stock took following the initial disaster, investors certainly thought so, piling in to buy on the dip. And following the sale of half of its Russian joint venture to Rosneft, BP looks like the cheapest of the so-called supermajors – the six non-state owned oil producers. A possible share buyback in the pipeline also gives hopes of a boost to share prices. But anybody looking to treat BP as a buy has to be prepared for the effects of litigation, which could stretch for years into the future. There has been chatter of a potential takeover, but the anti-monopoly regulatory hurdles would likely rule this out.

Though it has avoided the troubles that have beset BP, Royal Dutch Shell has nevertheless had a choppy year to date. When it made its third quarter announcement at the beginning of the month, Shell reported a 2 per cent rise in net profits to $7.14bn, but said that it faced volatile energy markets. Total production fell by 1 per cent over the quarter. But stripping out Nigerian security problems and asset sales, the supermajor’s underlying production was up 1 per cent. “Shell has been optimistic about its profits, but the share price shows that investors remain rather cautious,” says Christopher Beauchamp, analyst at IG. “I think BP might be the more promising for the moment, if only because expectations got so bad that almost any news will be better.”