With the price of Brent Crude oil hovering around $30 per barrel as I type, I suspect that there will be plenty of readers feeling the pain at the pace and severity of the decline in the oil price that seems to have taken everyone by surprise.
As is always the case, you’ll read plenty of predictions from brokers through to journalists. Currently, the oil bears are getting their call correct.
Not all bad
However, the falling oil price, while painful for some businesses and some economies as a whole, can be seen as a positive for several other business sectors.
In my view, this can be seen as a positive for businesses such as easyJet, which counts jet fuel as a significant cost in its operating model. This would follow through for companies such as Royal Mail that also incur significant fuel costs as they deliver to homes and businesses across the land.
And once this theme spreads into the wider economy, it should mean that consumers have more money in their pockets. I say this on the basis that for most of us, a significant cost in all of our lives is heating our home and running our car. Indeed both of these rank in the top five places of my own monthly expenditure.
This should bode well for consumer-focused businesses such as NEXT, Whitbread, Cineworld and Restaurant Group. All of them should be able to more-than-accommodate the coming National living wage given that operating costs will reduce. This, combined with consumers having more disposable income, should reflect positively in results going forward.
Survival of the fittest
That said, as I’ve already said, there’s plenty of pain currently being felt in several sectors that serve the oil and gas explorers. A recent example is a 40%-plus decline in the share price of Plexus Holdings on Monday following an ill-received trading update, this was followed by a further sell-off yesterday. The pessimist in me expects that there’s going to be much more of this to come as explorers either cut unprofitable production or cancel new drilling operations, or indeed both, while they wait for the oil price to recover.
The optimist in me however points towards fully vertically integrated operators like Royal Dutch Shell (LSE: RDSB) and BP (LSE: BP). These are operators at the top of the food chain, able to cut production at less profitable upstream operations while increasing efficiencies in the downstream side of the business in order to weather the current storm.
Of course, it’s true that in times like these the share price suffers. A quick glance at the chart below depicts Shell and BP’s under-performance over the last 12 months, even against a poorly performing FTSE 100.
However, it’s at times like these that investors should be looking to pick up shares at depressed prices, let’s not forget that these companies have been here before and survived. Indeed, I would argue that they’ve prospered.
And while you wait, you can pick up a 7% to 9% dividend yield, which I believe is safe for now.
