Three favourite oil stocks

There's a bit of an oil theme on Interactive Investor Tuesday. Still less than a week since OPEC agreed to cut production for the first time in eight years, veteran fund manager Paul Mumford tells us which oil shares he fancies. And we've also heard from analysts at Barclays who reveal here their three favourite oil stocks in the aftermath of this historic deal.

From January, production from the oil cartel will be cut by 1.2 million barrels per day (bpd) to 32.5 million barrels, as agreed three months earlier in Algiers. Saudi Arabia cuts 486,000 barrels. Russia is in on the act, too, agreeing to chip in half the 600,000-barrel non-OPEC reduction.

"The immediate impact is to accelerate the rebalancing of an already tightening market with inventories likely to return to more normal historical levels, potentially within six months based on our calculations," writes Barclays analyst Lydia Rainforth.

"Critically we see market participants pricing this in ahead of the physical inventories actually normalizing and as a result we could see a further meaningful upwards move in the oil price as evidence that the market is really tightening emerges.

Cynics say any committee will have no more success making producers stick to quotas "This is not to say that the current environment is easy for the industry - it isn't - but with OPEC back and effective, the forward curve for Brent in 2017 now above $50 per barrel and natural gas prices and refining margins both above year-ago levels, it does appear that the worst of the downturn has passed."

Of course, given OPEC's track record, cynics argue that any monitoring committee will have no more success in making producers stick to new quotas than before. And they're right to be.

We've also just heard that most of the major oil producing nations cranked up output last month. OPEC pumped a record 34.19 million bpd in November, up from 33.82 million in October, according to a Reuters survey. In Russia, output ran at its highest in nearly 30 years.

Brent crude prices are down on the day, but still trade within sight of $55 a barrel.

Positive implications

It's also worth remembering, as Barclays analyst James Hosie points out today, that sterling weakness means the UK-listed exploration and production (E&P) companies, the current oil price is equivalent to when Brent was nearly $70 in the second quarter of 2015.

And Rainforth still believes the OPEC deal has "positive implications" for the European sector.

BP remains her top pick among the integrated oil companies, repeating an 'overweight' rating and 600p share price. That implies 29% potential upside from here.

Among the E&P plays, Rainforth goes for Ophir, which, despite surging around 30% in the past month, could be worth an extra 42% profit.

"Ophir Energy…has been able to move its Fortuna FLNG [floating liquefied natural gas] project towards sanction through the downturn and has the finances and prospect inventory to provide optimality on frontier exploration activity during 2017-18," said Rainforth in a note yesterday.

Finally, in the European services subsector, Petrofac is tipped to be worth 1,250p, about 55% more than the current share price. That chimes with the view of James Hubbard, an analyst at Numis Securities.

On Monday, Hubbard named Petrofac as his "top pick" among the largest UK oilfield engineering and construction firms.

"We like Petrofac for its leading [return on equity], Middle East exposure, discounted valuation and the fact that its rating-suppressing problem projects are being put behind it," he said, slapping a 1,244p target on the shares.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.