The oil and gas sector is under severe pressure as the European benchmark for crude oil Brent briefly slips below $70 per barrel to its lowest level in five years.
If you share our view that the lower prices, which follow OPEC's decision (27 Nov) not to cut output, will be temporary then there are potential opportunities. EnQuest (ENQ) is highly geared to crude due to the higher costs associated with its North Sea fields and $989 million of debt on its balance sheet. As such it has been among the biggest victims of the macro-inspired sell off, the shares losing two thirds of their value in the last six months. It is therefore likely to be among the key beneficiaries of any recovery in crude.
We think this is a matter of time. As Westhouse Securities notes: 'Oil is a high cost commodity, one that cannot trade at low prices for prolonged periods of time. The current level, in our view, will lead to capital expenditure cuts (there is already evidence of this) and slowing production growth and reserve replacement. This will have to be countered by the oil price reversing its downward movement.'
For those looking to retain exposure to the sector but with a more cautious outlook – major Royal Dutch Shell (RDSB) stands to benefit from internally-driven catalysts (from cost-cutting, divestments) and enjoys an enviable track record of having not cut its dividend since the Second World War. Its prospective dividend yields 5.5%.