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Oil prices continue to fall

Screen Shot 2014-11-25 at 00.11.12Shell, BP and Petrofac shares close down as Opec decides not to cut oil production. Stocks of major oil producers were in the firing line as their profits are hugely dependent on the price of oil they extract. Royal Dutch Shell, for example, fell 4.3 percent while Total SA dropped 4.1 percent.

LONDON — Oil companies saw their shares take a beating Thursday as crude prices slid to their lowest in more than four years after OPEC’s decision to maintain production levels even though prices have fallen sharply in recent weeks.

Unsurprisingly, the stocks of major oil producers were in the firing line as their profits are hugely dependent on the price of oil they extract. Royal Dutch Shell, for example, fell 4.3 percent while Total SA dropped 4.1 percent.

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Oil prices have fallen 30 per cent this year, as a glut in supply was exacerbated by a boom in shale gas in the US.

OPEC seems at a loss about how to cope with this new source of competition and is also struggling to influence other big producers outside the organization like Russia and Brazil. Unable to come up with a strategy for handling these new developments, the cartel has decided not to intervene, evidently hoping that low prices will eventually curb production in the United States.

From The Motley Fool

BP’s Prospects

BP has ‘issues’, there’s no doubt about that. Uncertainty surrounds forward earnings’ potential from the firm’s Russian venture with Rosneft following the imposition of Western sanctions on Russia over the Ukraine affair. On top of that, the District Court for the Eastern District of Louisiana has declared BP grossly negligent with respect to the Gulf of Mexico oil blowout accident, opening the door to higher fines under the Clean Water Act — as much as $4,300 per barrel of oil spilled, rather than $1,100 per barrel in the case of ‘simple’ negligence.

That said, I’ve always admired BP’s gargantuan cash-generating ability, which, up until now, has seen the firm through challenging times. Low valuations rarely arrive without good reason, yet any improvement in the outlook for BP could see the shares re-rate upwards, which is the great attraction of a value situation.

Is Shell safer?

Shell’s forward strategy involves asset sales and re-focusing in a plan that seems to emulate BP post its Gulf of Mexico disaster. Shell aims to improve investor returns by concentrating on what it describes as better financial performance, enhanced capital efficiency and strong project delivery. The strategy involves a selective approach to project execution and some $15 billion of divestments occurring during this year and through 2015.

There’s not that much between the valuations of Shell and BP, the main difference is that Shell isn’t recovering from an oil blowout disaster. However, oil exploration and production is a dangerous activity and such operational setbacks can occur at any time, which is a good reason for the firms’ valuations to remain low.

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