The price of oil has jumped over the past few days as a massive wildfire in Canada's oil sand region has knocked out over a million barrels of daily production capacity; that's almost a third of the country's typical daily production.
The oil markets are also watching Saudi Arabia today, where a government shake-up over the weekend included the appointment of Khalid al-Falih as head of the new Ministry of Energy. He replaced veteran oil minister Ali al-Naimi, who was seen as many by the mastermind behind Saudi's policy of keeping production high to squeeze out marginal producers.
These two developments have sent to the price of oil higher this morning as traders bet that these events will help the oil market rebalance faster than many expect this year.
Close to rebalancing?
If the oil market is indeed close to rebalancing, then investors could be running out of time to buy into the sector at rock bottom prices. Premier Oil(LSE: PMO), Tullow Oil(LSE: TLW) and Genel Energy(LSE: GENL) are the UK's three premier small/mid-cap oil producers, and they could all prove to be highly lucrative investments if oil prices do start to make their way back to $100 a barrel.
That being said, these producers remain very high-risk investments and are only suitable for the most risk-tolerant investors. For example, Premier has warned that if prices continue to languish the company is in danger of breaching its banking covenants. While it's likely that Premier's banks will allow the group some wriggle room and won't cut the group off immediately, there's still a chance that the company could fall into liquidation if trading continues to prove difficult.
Tullow Oil is facing a similarly difficult situation. Net debt stands at $4bn yet the company expects to generate free cash flow in the final quarter of 2016 and management believes that the firm can start to pay down its debt during 2017.
City analysts expect Tullow's pre-tax profit to hit around $100m this year as the company's TEN project finally starts to generate a return for the group. Analysts are expecting the company to report a pre-tax profit of $285m for 2017. These forecasts are based on the assumption that oil prices will remain below $55 per barrel.
The strongest balance sheet
With a relatively cash-rich balance sheet, Genel isn't facing the same leverage pressures as Tullow and Premier. In fact, management's decision to repurchase $55m of bonds at only 63% of face value at the end of March has dramatically improved Genel's balance sheet.
Also, on an operational basis, Genel is also better positioned than Tullow and Premier to profit from a recovery in oil prices.
You see, 2016 could be the first year that the company receives a full 12 months of oil payments from the Kurdistan Regional Government. The lack of a regular payment schedule for oil shipments from Genel's Kurdistan operations has always held the company back. But if oil prices recover to more attractive levels, then it's likely the KRG will ramp-up back payments - great news for Genel and the company's investors.
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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has recommended Tullow Oil. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.