OPEC member’s decision to maintain oil production at 30 million barrels a day came as a surprise to many companies as a reduction could have averted further drop in prices. Despite the sentiments by the OPEC nations, Eastspring Investment’s Nicholas Ferres during an interview on CNBC reiterated that BP plc (ADR) (NYSE:BP) and Royal Dutch Shell plc (ADR) (NYSE:RDS.A) remains attractive oil plays on exciting oil plays.
“If you look at Europeans oil plays they are trading at blow out book value now as a basket and that includes the U.K majors so BP and Shell. They are trading at about seven times earnings BP plc (ADR) (NYSE:BP) and Shell, for example, are paying you 5.5% dividend yields. Quite possible that dividends get cut if oil prices get to fall further,“ said Mr. Ferres.
A drop in oil prices has gone to reduce the cost of spending on fuel for the end consumers but to the disappointment of oil companies like BP whose margins have been affected. Ferres maintains that a drop in oil prices could, on the other hand, be compared to tax cuts for the global consumers.
BP plc (ADR) (NYSE:BP) may at the moment be offering some of the most impressive dividends yields in the oil sector but a further slump in oil prices according to Ferres could affect the same. Ferres remains skeptical of investing in RD.A and BP plc (ADR) (NYSE:BP) as the market could swing either way at the back of gas natural gas being relatively cheap to oil.
“One of the things we are concerned about and I think is a genuine risk is you have seen U.S natural gas, for example, is still extremely cheap relative to oil. So if you can substitute for a while from oil to natural gas, for example, that could put ongoing secular pressure technology efficiency improvement over time could reduce global oil consumption,“ said Mr. Ferres.
Ferres argues that the likes of BP plc (ADR) (NYSE:BP) and Royal Dutch Shell plc (ADR) (NYSE:RDS.A) will continue to suffer a great deal going forward as they have higher costs of productions compared to other plays in the space. U.S energy stocks also continue to suffer a great deal as investors continue to shun them on the uncertainty of the space.
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