The risks are still there, for sure, but a stronger oil price lessens them a little while significantly boosting the potential rewards. But which companies might I go for?

Profit next year?

I’m increasingly liking the look of Hurricane Energy (LSE: HUR), as recovering oil has helped push the share price up by 50% since the start of 2018 — though it’s fallen back a little since oil has declined from its $86 peak.

Hurricane’s operational update this month showed that its progress is very much on track, with first oil from its Lancaster field now targeted for the first half of 2019. Together with other assets, we’re looking at total 2P reserves and 2C contingent resources attributable to Hurricane of around 2.8bn barrels of oil equivalent.

Commercial viability

Potential reserves aren’t enough, though, as others have come unstuck in being unable to extract them commercially or just not having enough cash. But though there’s a modest loss on the cards for this year, Hurricane is forecast to turn in a pre-tax profit of £98m in 2019, followed by £185m the year after.

Forecasts for 2019 also suggest a P/E of only around 15, and I see Hurricane Energy shares as good value at that level.

There’s still a question of whether the oil price will hold up, and the recent reversal is very likely holding some investors back. But it might just be giving us an extra buying opportunity at bargain prices before the price of a barrel steadies — and even a stable price around today’s $76 makes Hurricane look attractive to me.

No profit yet

One thing Sound Energy (LSE: SOU) doesn’t have that Hurricane does is profit forecasts — and that’s surely the reason the shares have lost more than 35% of their value so far this year while Hurricane shares have gained.

Earlier I explained why I wouldn’t buy Sound Energy shares, but is that just me being conservative and risk-averse in my old age? Successful oil explorers were all once in a similar position, and just because some won’t make it doesn’t mean they all won’t.

The cash situation looked pretty reasonable at the halfway point at 30 June, with £14.7m on the books — and that was boosted by a new equity issue in July which raised a further £11.4m before costs. But that has to be seen in the context of a total loss in 2017 of £34m — admittedly £22m of that was from discontinued operations, but it’s still a high cash-burn rate.

Prospects look good

The company does have some tempting-looking prospects, with exploration progress at its sizeable acreage in Morocco coming along nicely. 

But though I really don’t mind a bit of uncertainty and I often see it as presenting buying opportunities, there are two big classes of risk here. One is that we still have no idea of how much of Sound’s estimated hydrocarbons will make it to the surface. The other is that we don’t know how much it is going to cost to reach first profit and how much dilution current shareholders will endure along the way.

Sound Energy is still at too early a stage for me, even if oil exploration prospects are improving.

The post Could Hurricane Energy be set to smash the Sound Energy share price? appeared first on The Twelfth Magpie.

Unfortunately, as Alan went on to cover in his article, since the beginning of 2018 Amerisur has issued a series of depressing trading updates.

However, while I’m no longer convinced that this is one of the market’s most undervalued stocks, I still believe Amerisur has a bright future.

Looking ahead

So, what’s to like about this business? Well, after a slow summer, the company has now resumed its exploration efforts, a development CEO John Wardle said he is “delighted” to announce.

Amerisur was one of the few oil companies in the world to enter the oil bear market in 2014 with a cash-rich balance sheet. It didn’t waste any time deploying its capital, snapping up assets from other explorers and producers that needed to raise cash. 

Over the next few months, the company is going to spend a considerable amount of time on completing seismic and exploration drilling activity on this new acreage.

At the same time, after a “frustrating” cycle of well work on Amerisur’s existing producing wells over the first two quarters of 2018, work is now complete, and production has stabilised. Average daily production was 4,927 barrels of oil per day (bopd) in August, producing a steady stream of cash flow for the firm to reinvest in the development of newly-acquired assets.

And on top of Amerisur’s positive production and exploration news, the company also informed the market today that it has completed the construction and installation works at the Chiritza re-pumping station, on budget, and six weeks ahead of schedule. When commisioned, the re-pumping station will boost the company’s minimum throughput capacity in the fundamentally important OBA pipeline to 9,000 bopd. This is a critical part of the group’s plan to increase production over the next few years.

As Amerisur’s production grows, I believe the stock could recover all of its losses of the past five years, returning to 50p or more. Indeed, I believe the outlook for the company is brighter than it is for peer Sound Energy (LSE: SOU).

Uncertain future

Oil and gas exploration is a risky business. More often than not, that world-beating hydrocarbon find turns out to be nothing more than hot air. That’s why I’m sceptical on the outlook for Sound Energy.

This year, the company is carrying out a drilling programme at its acreage in Morocco, which Sound believes could yield more than 8rtn cubic feet (tcf) of gas. The firm has the right to drill on this acreage for the next eight years, but management is hoping to make a significant discovery before the end of the licensing period (hopefully before the end of 2018) and sell up to a larger peer with deeper pockets.

There’s already a lot of good news factored into the Sound Energy share price, which makes me wary of the stock. If Sound’s exploration plans struggle, the shares could slump as investors rush for the exits. 

If this is the case, I would buy Amerisur over Sound as we know Amerisur already has real production potential.

The post Could this tiny growth stock potentially smash the Sound Energy share price in 2019? appeared first on The Twelfth Magpie.

But what are the prospects for a renewed bullish phase? Earlier in August the company updated us on its seismic acquisition programme in Eastern Morocco, telling us the project was completed on time and within budget. Reducing the seismic unknowns certainly lowers the risks associated with the field, and it’s allowed the company to finalise the location of its TE-10 exploration well.

The new seismic data also indicates further structures to the northwest of the existing target, providing a new candidate for the planned TE-11 well.

Petroleum agreement

We now have a further reduction in risk, with Friday’s news of an eight-year agreement uniting a number of the firm’s earlier agreements, and including its production concession application for the Tendara discovery.

Chief executive James Parsons was “delighted to announce that we have contractually secured our rights on this potentially transformational acreage up to 2026,” and it does seem to be a significant step. So why am I not convinced to buy the shares?

Well, it’s a huge job moving from identifying and quantifying a company’s oil and gas prospects to actual drilling and production, and oil investors have a chronic tendency to overvalue a set of prospects while underestimating the practical difficulties and costs of getting them to market.

Sound Energy is still at too early a stage and is too risky for me.

A better play?

Enter AIM-listed Eco (Atlantic) Oil & Gas (LSE: ECO), a tiddler which flew under my radar until its share price started to soar this year. After a 7% gain on Friday morning, we’ve now seen the shares more than double over the past 12 months, though we’re still look at a very modest market cap of £56m.

The latest news is actually about a different company, ExxonMobil, which has announced a new discovery in Guyana. With 60 metres of net pay of “high-quality, oil-bearing sandstone reservoir,” it does sound like a significant find, but what’s it got to do with Eco?

The company said: “Exxon’s Hammerhead-1 oil discovery is located approximately 7km from Eco’s Orinduik licence boundary.” The Orinduik licence is operated by Eco with a 40% interest, and Tullow Oil holding the other 60%. Eco reckons the Exxon well “has very positive implications for Eco and Tullow’s adjacent acreage,” and it’s hard to disagree.

Any cash?

At Eco’s last year-end, cash on hand stood at C$14.3m (£8.45m), with chief executive Gil Holzman describing it as “our best financial results yet” though that has largely been the result of payments for farm-in options, private placements, etc. Net losses came in at C$8.36m (£4.94m).

Eco could be just another oily hopeful that’s sitting on attractive-looking assets, but assets which are nowhere near production, and it’s still burning cash. On the other hand, it has a strong partner in Tullow, and those nearby Exxon assets do sound good.

My main fear is that we could be at the same point Sound Energy was before the initial bullishness started to wane.

The post Could this tiny growth stock smash the Sound Energy share price in 2018? appeared first on The Twelfth Magpie.

The Morocco-focused oil explorer revealed a new basin model of Eastern Morocco Portfolio targets at the end of June, which prompted exploration director Brian Mitchener to say: “We expect this new oil play to be the target of our forthcoming third exploration well. In addition, this basin model significantly derisks the charge available to our individual prospects.“

Further, at year-end at 31 December 2017, the company reported a cash balance of £21.2m, which looked healthy enough, and this month reported a successful new $15m placing.

The company is sitting on some tempting looking oil prospects and investors seem to be happy to pony up the cash needed to get them pumping. So why would I avoid the shares?

How risky?

I’m minded of UK Oil & Gas, whose shares hit the buffers when early flow tests proved disappointing. I do actually have high hopes for UKOG, but it highlights the big risk faced by oil explorers in their early days.

In 2017, Sound Energy recorded a total loss of £34.1m, though £21.8m of that was from discontinued operations, and losses are expected to continue for a few years yet. There’s no guarantee that its assets will live up to the optimism, and how much more cash will be needed and how much dilution that will bring is anybody’s guess. It’s way too risky for me.

Steady growth

Turning to a very different company, but one which has been a pretty successful growth investment, I was impressed by the latest update from Computacenter (LSE: CCC).

In its second quarter update, the provider of IT infrastructure services told us it has enjoyed a “strong start to the year” and that it believes its full-year results “will now be comfortably in excess of its previous expectations set out in the Q1 trading update.“

Its supply chain business has been doing well, especially in Germany.

Existing forecasts suggest a 6% rise in earnings per share for this year, which would have put the shares on a forward P/E of 20. Perhaps stretching? Well, we’ve been seeing steady year-on-year growth that has taken EPS from 43.7p in 2013 to 65.9p last year, and I reckon that warrants a premium valuation. And new forecasts should improve the outlook.

Cash too

On top of that, Computacenter has been pursuing a progressive dividend policy, with its annual payment rising from 17.5p per share to 26.1p over the same period, and that’s expected to reach 29p by 2019. 

You might not be too impressed by predicted yields of only around 2%, but the key thing for me is that dividends have been pushing well ahead of inflation. They should also be covered around two and a half times by earnings. Oh, and Computacenter has oodles of cash.

And that is really what I look for in a long-term dividend stock. High yields today are very valuable, but tomorrow’s cash cows can bring some long-term stability to your portfolio.

With the shares having put on 160% over five years, those who bought back in 2013 at around 600p will have locked in an effective 2018 dividend yield of 4.6% on their purchase price. I reckon there’s more to come.

The post Why I’d shun the Sound Energy share price and buy this growth-plus-dividend stock instead appeared first on The Twelfth Magpie.

Five years on and the company is worth nearly 90% less than it was at the 2012 peak. But the critical question is, is this an opportunity to buy ahead of further growth, or should you give up on Tullow and buy its smaller peer Sound Energy (LSE: SOU) instead? 

Where’s the growth gone? 

Since 2012, Tullow Oil has gone into survival mode. Low oil prices have curtailed the business’s ability to pay down debt and fund exploration. As a result, the company’s capital spending is set to fall to just $300m this year, compared to the peak of $2.4bn for 2014. 

Luckily, the group’s most significant capital spending obligation, its TEN project, is now complete and producing cash flow. Thanks to better than expected production from this asset, as well as its Jubilee field, net debt fell to $3.6bn at the end of October, down from $3.8bn three months before. For the full-year, management is forecasting free cash flow generation of $400m. 

Tullow is making progress, but the company is still held captive by its debt. Getting that down to more acceptable levels will be management’s biggest priority in the years ahead. 

Growth flexibility 

Meanwhile, Sound Energy is pushing ahead with what could be a transformational project for the company in Africa. 

After completing the acquisition of its interests in the Oil & Gas Investment Fund in Eastern Morocco, which it funded by placing 27% of its share capital, management believes that this prospect could be utterly “transformational for both Sound Energy and Morocco“. The latest surveys suggest these prospects could yield a best-case scenario of 8.9trn cubic feet of gas.

However, management is also warning that investors should not stake everything on success at the drill bit just yet, warning: “There can be no guarantee that its current estimates of volumes of gas originally in place will be substantiated by exploration drilling or would actually be available for extraction”.

Still, unlike Tullow, Sound has a strong balance sheet with which to pursue the development of its Morocco prospects. At the end of June, the firm reported a cash balance of $50m and debt of just under $18m, giving a net cash balance of $32m.

Flexibility 

Sound is a high-risk growth play, but compared to Tullow, the group looks to me to be the better buy. With a cash-rich balance sheet, Sound has more flexibility and cannot be controlled by its creditors.

If Tullow’s creditors decide to pull the plug on the business, shareholders will be hung out to dry. So, you could argue that an investment in Tullow is, in fact, riskier than a similar investment in Sound.

All in all then, as a growth buy, I believe Sound is a better bet than Tullow. 

The post Which is the better growth stock: Tullow Oil plc or Sound Energy plc? appeared first on The Twelfth Magpie.

Therefore, could now be the right time to buy it? Or could there be a more opportune moment to buy the small-cap resources play?

Risk/reward

Clearly, as with any exploration stock there are significant risks. The company’s future share price performance is closely linked to the quality of its news releases. However, it appears to have an asset base which could deliver positive news flow. Its Eastern Moroccan operations could provide a catalyst for its share price, with it having sought to de-risk its exploration potential. As well as this, it has a cash balance of $50.1m (as at 30 June), which indicates that its exploration activities may be well-funded over the medium term.

Industry outlook

As well as the quality of its news releases, Sound Energy and sector peers such as Cairn Energy (LSE: CNE) are also highly dependent upon the outlook for the wider oil and gas industry. In 2017, there has been a marked improvement in the prospects for the oil price. It has risen to a two-year high and many investors are now becoming more bullish about its future growth potential – especially since OPEC and non-OPEC members have stated that they are keen to support the oil price at its current level.

Of course, there is scope for the oil price to fall. Disagreement among OPEC members could mean the supply cuts that have helped to push its price higher are discontinued over the medium term. As such, it remains a risky place to invest compared to other industries and sectors.

Growth potential

However, the inherent risks of the industry could mean the potential rewards are also greater. As mentioned, Sound Energy now trades 25% lower than it did a year ago, and this could mean there is greater upside potential on offer. Similarly, Cairn Energy has ambitious production plans over the next few years which could see its financial performance transformed. Although it trades on a price-to-earnings (P/E) ratio of 30 using forecast earnings for 2018, in future years it has the capacity to deliver rapid growth in earnings as production increases.

Therefore, both stocks seem to offer upbeat investment outlooks for the long term. Neither may be suitable for more risk-averse investors, since they are likely to remain volatile in 2018 and beyond. However, for investors seeking exposure to exploration companies in the oil and gas sector, Sound Energy and Cairn Energy could offer relatively strong share price growth potential for the long term.

The post Should we now pile into Sound Energy plc after crashing 25%? appeared first on The Twelfth Magpie.

Investors who followed Warren Buffett’s mantra to be “greedy when others are fearful” have seen some spectacular gains. Even FTSE 100 heavyweight Shell (LSE: RDSB) has shown an impressive turn of foot in emerging from the valley of the shadow of death.

Is Shell still good value and set to continue its advance? And whatever the answer to that question, could an under-the-radar 50p stock outperform its blue-chip peer?

Brilliant opportunity

Shell’s shares hit a low of 1,278p on 20 January 2016. Anyone buying at that price is sitting on a gain of 84%, with the shares trading at 2,355p as I’m writing. They’ll also have received over 250p in dividends, representing a yield of 19.6% in less than two years. You didn’t even need to buy at the bottom to enjoy a highly profitable return, as the shares were available at prices below 1,800p for the best part of six months.

But so much for the brilliant opportunity Shell offered in the recent past. What of its valuation and prospects today?

Outlook then and now

Back at the time of the 2016 low, the stock was trading at the bargain-basement level of 10 times forecast 12-month earnings with a prospective dividend yield of 9.6%. The dividend actually turned out to be more generous, due to its sterling value being enhanced by the pound’s subsequent weakness against the dollar.

Today, Shell is trading on 16.4 times forecast 12-month earnings and the prospective dividend yield is 6.1%. The earnings multiple suggests to me that the share price is up with events and that it (and the price of oil) may struggle to move significantly higher in the absence of a favourable shift in the oil supply-demand outlook. The dividend yield may still be attractive for income seekers but, on balance, I’d rate the stock a ‘hold’ rather than a ‘buy’ at this time.

Sound prospect?

When Shell’s shares hit their 2016 low, those of Sound Energy (LSE: SOU) were changing hands for 16p. They’ve eclipsed the FTSE 100 giant’s gains with a 225% rise to 52p as I’m writing. Furthermore, with the number of shares in issue having doubled from just over 500m to just over 1bn, the market value of this AIM-listed company has increased 550% from £81m to £526m.

Sound is a very different kettle of fish to Shell. It has negligible revenue, negative earnings, no dividend and an accumulated deficit of £102m. A drilling programme in Italy, which it had been very optimistic about, ultimately proved to be sub-commercial. It’s now engaged in a drilling programme in Eastern Morocco, which it’s very optimistic about. However, it is rightly cautions: “There can be no guarantee that its current estimates of volumes of gas originally in place will be substantiated by exploration drilling or would actually be available for extraction.”

With little in the way of proven commercial reserves and everything resting on potential, this is not the sort of stock that interests me. Indeed, if I happened to have been gifted shares I’d be inclined to sell them, as the market cap of £526m seems awfully high in the circumstances.

The post Is this 50p oil stock now a better buy than Royal Dutch Shell plc? appeared first on The Twelfth Magpie.

Sonic boom

This upstream gas company has been hit by the languishing oil price and disappointing results from its Badile onshore project in Italy, currently being plugged and abandoned. It is now shifting its focus to Africa, after completing the acquisition of its interests in the Oil & Gas Investment Fund in Eastern Morocco, which it funded by placing 27% of its share capital.

The AIM-traded firm holds a 75% position, of which 27.5% is shared with Schlumberger, giving it a net 47.5% stake. It has previously said this new hydrocarbon province in Eastern Morocco should be absolutely “transformational for both Sound Energy and Morocco”.

High Energy

That sounds exciting but there is still a long way to go operationally, and investors will want to see drilling underway before getting excited all over again. We should discover more on 5 October when Sound Energy holds an investor event in London to detail a series of new programmes set to commence in the fourth quarter. If that goes well, the recent recovery in the oil price, which has lifted Brent crude to $57, could trigger renewed interest.

Sound Energy’s share price is up 20% in the last month, so investors are already edging back. Some will be tempted to get in ahead of upcoming news announcements, but you must also understand the risks.

There is better visibility at Faroe Petroleum (LSE: FPM), an independent oil and gas company focusing on Norway and the UK, which has just announced its interim results for the six months to 30 June.

So Faroe, so good

The share price is up around 1.5% on the report, which is pretty solid. Over two years, the stock is up 48%, despite the unsuccessful Goanna exploration well in the Norwegian North Sea, in which it held a 30% stake. Its Brasse appraisal well looks more promising, benefitting from a “significant resource upgrade” that lifted recoverable volumes around 20% to 56m-92m barrels of oil equivalent (mmboe).

Today’s results reported “good production performance and all projects progressing to plan and on budget”. This was even through average first-half production of 14,800 barrels of oil equivalent per day was down from 18,800 last year, as its Njord and Hyme facilities temporarily close for life-extending refurbishment and upgrades. With average operating costs of approximately $26 per barrel, Faroe looks well set to survive cheap oil, and even better placed if oil kicks onto $60 a barrel. Either way, it has hedged 30% of oil production to December 2018 at an average of $55 a barrel.

Recovery play

CEO Graham Stewart hailed Faroe’s growing recoverable resource range, low cost exploration and appraisal programme, and rapid payback on its recent purchase of four fields from DONG. “Faroe now has a strong and diversified asset base with a clear path to increase profitable production to over 40,000 boepd within the next five years, with robust project economics even at low commodity prices.”

If you think the oil price recovery is set to continue, Faroe might be a good way to play it.

The post Why I’d buy this North Sea energy play instead of Sound Energy plc appeared first on The Twelfth Magpie.

Growth potential?

Of course, the strategy being employed by Sound Energy could deliver improving performance in future. On Tuesday it confirmed the completion of its acquisition of the interests of Oil & Gas Investment Fund in Eastern Morocco. It now owns net 47.5% positions in the Tendrara petroleum agreement, the Anoual petroleum agreement and the Mararka reconnaissance exploration licence.

In order to fund the acquisition, the company is conducting a placing of 27% of its share capital. The new shares will start trading on 18 September. The company has already prepared exploration programmes for the acquired areas, and the news flow concerning them has the potential to positively catalyse its share price over the medium term.

However, with the outlook for the oil and gas industry being uncertain as demand growth remains sluggish and supply levels remain high, focusing on a different stock in a different sector within the resources industry could be a logical move.

Turnaround potential

The company in question is gold miner Petropavlovsk (LSE: POG). It has endured a hugely challenging period which has included a period of lossmaking that has caused its share price to decline by 98% in the last five years.

But according to its half-year results released on Tuesday, the company is making encouraging progress. Its revenue increased by 20%, while operating profit moved 91% higher. This was partly as a result of a rise in gold production from 195,600oz to 232,400oz, as well as a gold price which has been strong during the period.

Looking ahead, the price of gold could rise yet further if the geopolitical outlook for the world economy remains uncertain. The potential for conflict in North Korea, political risks in the US and a higher inflation rate could cause the price of gold to rise as investors may seek less risky assets.

Petropavlovsk has also been able to keep costs to a minimum. Total cash costs increased by just 2% in the last six months, while it was able to reduce net debt levels by 5% in order to create a financially stronger business. With a forecast growth rate in earnings of 19% next year, the company has a price-to-earnings growth (PEG) ratio of just 0.2. This suggests that while its past performance may have been disappointing, it could deliver stunning share price growth in the long run.

The post Why I’d sell Sound Energy plc to buy this turnaround stock appeared first on The Twelfth Magpie.

But maybe it’s different this time. Indeed, on the face of it, there’s plenty to like about Sound Energy: a respected management team with lots of industry experience, a nice thesis about Moroccan gas and European demand, and a solid base of partners including Schlumberger and government-backed Moroccan investment funds.

However, you’ll not find me buying shares of the company for a few very simple reasons. For one, it is still very much in the middle of what will likely be a long and twisting path to discover just how much natural gas lies in the fields it has a stake in.

As current investors know well, this will mean an incredibly volatile share price as good or bad news is released to the public. Furthermore, without knowing exactly how much gas it has an interest in, it’s incredibly difficult to accurately value the business and determine whether or not its current share price is attractive.

Second, while it’s great news that Moroccan investors may pay for the export pipeline and potentially some upstream processing facilities, shareholders will almost certainly still be tapped repeatedly for cash in the many years before production begins. Today’s news that a CFO has been appointed certainly makes a new rights issue likely in my mind, which will, of course, dilute existing shareholders unless they pony up more money.

In the end, Sound Energy could be a once-in-a-lifetime investment opportunity, but as hardened AIM investors will know there’s been plenty of companies before it that have spun a similar tale and gone nowhere.

A safer bet? 

If I were to make a semi-speculative investment on a small AIM-listed company, I’d be much more inclined to consider £150m market cap Alpha FX (LSE: AFX). As its name suggests, the company provides FX consulting and trading services with a focus on UK-based SMEs.

This is an industry that has plenty of competition but I see room for Alpha FX to continue to take market share from smaller competitors as well as the big banks that dominate with around 85% market share. This is because, rather than focusing solely on ginning up commission from sales, the company revolves around dedicated client support managers who offer free consulting services to their clients. This increases client loyalty and also serves to differentiate the company from rivals.

Thus far the strategy is paying off as well as revenue in the half to June jumped from £3.3m to £6.3m year-on-year, as it retained 97% of clients and brought on board new and larger ones. Plus, with operating profits of £2.4m recorded during the period and £14m in net cash on the balance sheet, the company won’t need to tap shareholders to fund expansion anytime soon following its recent IPO. At 36 times forward earnings there’s significant growth already priced-into its share price but I see plenty of reasons to take a closer look at Alpha FX.

The post One growth stock I’d buy ahead of Sound Energy plc appeared first on The Twelfth Magpie.