Right now the oil sector is full of bargains for the astute, long-term investor.Royal Dutch Shell(LSE: RDSB),Premier Oil (LSE: PMO) andSan Leon Energy (LSE: SLE) are three of the best opportunities, to my mind.
Bigger is better
Shell has underperformed the wider FTSE 100 by around 20% excluding dividends year-to-date, making the company one of the indexs worst-performing stocks.
However, for the long-term investor, these declines present a once-in-a-lifetime opportunity. Indeed, Shells shares are now trading at their lowest level since the financial crisis, and the company is unlikely to go out of business any time soon. Net gearing was only 14.7% at the end of June and Shells management has begun an ambitious cost-cutting programme to boost the groups profit margins.
Cost-saving measures have already reduced Shellsper-barrel operating costs by $10. Whats more, management is only approving the development of new production projects if they areaffordable according to the prevailing environment e.g. $50 per barrel oil.
Andaccording to my figures, these measures will ensure that Shells dividend yield of 7.9% remains safe for the time being.
Bright outlook
Like Shell, Premier Oil is also trading at a low not seen since the financial crisis. Also, just like Shell, for the long-term investor Premier presents a once-in-a-lifetime opportunity.
Unfortunately, City analysts expect the company to report a pre-tax loss of 71m this year, as one-off charges hit the groups bottom line. Analysts are expecting a pre-tax profit of 65m for 2016 and this forecast is likely to be revised higher if oil prices recover.
Within Premiers post-summer operational update, issued today, the company reported that 60% of its production for the rest of the year is hedged at $92/bbl, and 30% of 2016 production is hedged at $68/bbl. Further, the group isforecasting a significant reduction in year-on-yearcapexfor 2016 and has $1.3bn ofliquidity.
Existing banking covenants have been renegotiatedout to mid-2017 and the groups principle $2.5bn bank facility is notfor refinancing until mid-2019. In other words, Premiers not under any financial stress and the group has plenty of balance sheet flexibility.
In play
Picking stocks in the small-cap oil & gas sector is not for the faint-hearted. Youre more likely to lose your shirt than become the next John Rockefeller. However, San Leon Energy could just be one of the small-capoiliesthathasa shot at making it to the big time.
Unlike other oil & gasminnows, the group already has producing assets and it is aiming to generate a profit from its core assets withinthree to four years. Four months ago the company announced that it haddiscovered more than 50bn cubic feet of proved and probable (2P) gasreserves at its Polish Rawicz project. And San Leon isone of Europes largest unconventional oil & gascompanies in terms of acreage.
Moreover, San Leons management revealed last month that the group has received a takeover approach, although the status of this offer remains unknown.
Still, San Leon is an interesting company with plenty ofpotential. But like all early-stageoil minnows, until the company can bring its assets on stream and start generating cash, it is a risky bet.
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Rupert Hargreaves owns shares of Royal Dutch Shell B. The Motley Fool UK has no position in any of the shares mentioned. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.