Are ASX oil shares at cheap prices?

Credit: rabiem22

Shares in major oil players BHP Billiton Limited (ASX: BHP), Oil Search Limited (ASX: OSH) and Woodside Petroleum Limited (ASX: WPL) are expected to receive a welcome boost in Tuesday trade after Russia said it was prepared to join an OPEC supply accord overnight.

Russian rocket

Based on preliminary reports, the world’s largest oil producing nation is expected to join OPEC countries in limiting supply if a deal between OPEC nations is finalised in November this year.

A move to cut back oil production is regarded as a huge positive for oil supply, pushing the price of crude oil over 2 percent higher overnight on the back of the announcement.

Naturally, oil companies should all benefit from the higher crude oil price, with the S&P/ASX 200 Index (ASX: XJO) expected to outperform regional bourses given the relative weight of oil-related stocks in the index.

Accordingly, here are two stocks you should watch on Tuesday.

BHP Billiton

American depositary receipts (ADRs) in Australia’s largest miner rallied 1.5% overnight in the US, auguring well for its ASX-listed shares when the market opens.

BHP’s diversification in iron ore, coal, copper and oil has seen its shares rise over 30% this year alone as a broad rebound in commodity prices bodes well for profitability. With BHP’s large petroleum division placing it in good stead to benefit from the uptick in the oil price compared to fellow iron ore focused miners Fortescue Metals Group Limited (ASX: FMG) and Rio Tinto Limited (ASX: RIO), BHP’s shares trade on an underlying price-earnings of just over 100x (based on its reported 22.8 cents underlying EPS at 30 June 2016).

Although its earnings should rebound materially in 2017, I believe its shares are currently fully-priced and recommend investors wait for certainty on the Russia deal before buying shares in the mining giant.

Woodside Petroleum

Woodside remains my pick for investors seeking exposure to the oil and gas sector.

Woodside’s strong balance sheet and recent acquisition of BHP’s Scarborough area assets leaves it well placed to capitalise on the persisting weakness in oil prices.

Although profitability for the oil and gas behemoth remains tied to prevailing oil prices, Woodside’s ability to increase production and reduce debt through free cash flows enables it to leverage its solid capital base and come out meaningfully stronger if, and when, crude oil eventually rebounds.

As such, I regard Woodside as a long-term buy at current prices.

Foolish takeaway

Investors must note that the overnight announcement to cut oil production by Russia is not binding until executed, meaning any crude oil gains are predominantly driven by sentiment. Whilst the assertion that Russia will join an OPEC accord implies a deal is imminent, investors should not buy oil stocks for that reason alone.

Instead, investors should focus on building a diversified portfolio of high quality companies at the right price based on market signals.

This includes selling wealth destroying stocks like these 3 Rotten Shares to Sell today.

After a double-digit rally for the ASX since 2016 lows, investors should be on high alert. You'll find a full rundown below of 3 shares we think you should avoid today plus one top pick worth buying, even if the market turns south and the RBA keeps rates at an "emergency low." Simply click here to uncover these stocks.

Motley Fool contributor Rachit Dudhwala has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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