With oil prices continuing to confound economists, investors seeking exposure to the sector have been left in limbo with little guidance on where the industry is likely to head next.
Prices have fallen dramatically over the past few years as global growth has slowed and as shale extraction technology has flooded the US market with cheaper sources. 
Indeed, low prices have prompted the Organisation of Petroleum Exporting Countries (OPEC) – a cartel of the largest producers – to coordinate efforts to arrest the slide in prices.
More recently, falling crude stocks in the US have helped to boost prices. However, the long-term outlook remains uncertain.
Alec Cutler, manager of the five crown-rated Orbis Global Balanced fund, said: “For something as important and ubiquitous as oil, there sure is a lot of confusion about what its price should be.
“Predictions range from ‘Tesla will make oil obsolete’ to ‘underinvestment will send oil back to $100 per barrel’.
“While we can see legitimate arguments for less extreme bullish and bearish outcomes, we find it tough to call the direction of the oil price.”
Over the past year oil prices have fluctuated as the chart below shows, although they have followed a downward trend generally.
Performance of oil indices over 1yr
Source: FE Analytics
Despite the uncertainty over oil prices, FE Alpha Manager Cutler said he can make a “decent call” on the other side of the profit equation, namely production costs.
He explained: “Indeed, the more we examine costs, the more it appears that investors’ focus on the oil price is blinding them to how dramatically some companies are driving down costs.
“This lays open the possibility that, even if oil price bears are right, some oil companies could still do well.”
Cutler (pictured) said BP was an example of a company that may thrive despite the low oil prices and is a top holding in the Global Balanced fund, representing a 3.2 per cent weight in the £23.5m portfolio.
He explained: “This is not because it’s been a great company historically. In fact, its historical mediocrity is part of the appeal.
“The oil majors, with few exceptions, have never been highly efficient. They’ve had their hands in everything—exploring for crude in far-flung places, operating fleets of tankers, building city-sized refineries, and running gas stations.
“As the biggest players in each segment, they have not had to push their businesses very hard. They grew complacent.”
Cutler said BP’s complacency ended with its 2010 Gulf of Mexico disaster with then-CEO Tony Hayward “disastrously” downplaying the incident and to later be replaced by Bob Dudley.
“Dudley recognised that ‘sometimes it takes a near death experience to radically change a company’, and he immediately set out to recreate BP,” he explained.
“In a quirk of timing, this gave BP a head start on the rest of the industry. Four years before the oil price collapse, BP was forced to treat every decision as if the company’s life depended on it.
“The total cash outlay from the disaster exceeded $60bn, but the company survived through over $45bn of divestments, shrewder investments, and an intense focus on improvements in operational efficiency.”
As the below chart shows BP has underperformed the FTSE 100 index, having failed to recover from the sharp loss witnessed following the Deepwater Horizon oil spill.
Performance of BP over 10yrs
Source: FE Analytics
Weakness in oil prices has made it difficult for BP to return to previous levels. However, Cutler is more bullish about the FTSE 100 constituent’s prospects highlighting the lessons learned during the past few years.
He added: “That truly one-off expense has passed, but BP’s survival instincts remain. Dudley has driven a lean manufacturing ethos into the production side of the business, with a focus on deploying ‘big win’ big data initiatives as well as practical ‘no brainer’ technologies.
“Big data and predictive analytics are being used for things like taking project screening times from months to minutes.”
Cutler explained how initiatives such as installation of 3D printers on offshore rigs to print replacement parts, as well as comparing operating performance with non-energy companies had helped the firm.
“These efforts are starting to bear fruit in everything from [oil] well decline rates, to production costs, to expected growth rates,” the manager said.
“BP has reduced its oil price break-even from $80 per barrel in 2014 to $60 in 2016, with the prospect of this dropping to $40 as a cohort of recently developed basins start producing crude.”
However, upstream efficiency is not the only thing supporting BP’s potential profitability, said Cutler, noting the positive impact of cheaper oil on its “huge” downstream energy businesses.
“In these businesses, BP has focused on driving more consistent cash flow and growth, and Dudley’s improvements are starting to realise benefits,” he said.
“That has put the company on a more confident footing, with their own free cash flow forecasts recently revised higher, and more positive than those of most analysts.”
Cutler added: “If BP’s operational performance is anywhere close to its guidance, and energy prices hover at recent levels, the company should generate $10bn in free cash flow next year, with more growth from there.
“Importantly, this would comfortably exceed what BP is expected to pay out in dividends, settling any questions about the company having to cut its distributions to shareholders.
“Quelling those concerns should force the market to reassess the massive spread between BP’s dividend yield and those of other stable yield investments.”
Should oil prices begin to show signs of strengthening, however, the company will also be well-placed to take advantage of that trend, said Cutler.
“Of course, should oil and gas prices move markedly higher, BP will do better than the discussion above implies,” he explained.
“But it will not do nearly as well as pure exploration and production companies and feast-or-famine drillers.
“The fundamentals of those companies are more tightly linked to a bet on the oil price. With BP and fellow integrateds Royal Dutch Shell and Woodside Petroleum, we are not making a bold oil price call. We are investing in fundamentally stable companies when they are temporarily thought to be risky.”
Cutler has managed the fund since 2014 and over three years it has returned 51.98 per cent compared with a 27.29 per cent gain for the IA Mixed Investment 40-85% Shares sector average.
The fund carries an ongoing charges figure of 0 per cent. However, it carries a performance fee of 50 per cent of the outperformance of its custom benchmark: weighted 60 per cent to the MSCI World index and 40 per cent to the JP Morgan Global Government Bond index. Last year the performance fee stood at 3.68 per cent, according to the fund’s key investor information document (KIID).