Without the cushion of steady cash flows from a downstream business, mid-cap oil and gas producers are going through a tough patch. The price of Brent crude oil has slumped to barely above $30 a barrel and worse may be ahead. With excess supply in the oil market likely to persist until at least 2017, investor sentiment towards the sectoris very low.
Shares in Africa-focused E&P company Ophir Energy (LSE: OPHR) have fallen 14% this year. But theres cause for optimism: its sizeable portfolio of gas assets in Thailand, Indonesia and Africa positions it to benefit from rising Asian gas demand. Theres substantial upside potential because Ophirs largely untapped resource base is high quality clean gas, which makes it easy to convert to LNG, and therefore is cost competitive too.
The company also benefits from a strong balance sheet, with $650m of cash at the end of 2015. This should cover all capex needs and exploration costs until at least the end of 2017.
Recently, Ophir Energy announced a deal to farm-out a 40% equity stake in its Fortuna floating LNG project to Schlumberger in exchange for reimbursing 50% of Ophir Energys past development costs, estimated to be around $250m to $300m. Achieving this deal at that price whileoil prices are so low demonstrates the quality of the asset and reduces the cash flow needs of the company.
On the downside, Ophir Energys high capex needs mean its bottom line is expected to linger heavily in the red for at least another two years. Despite efforts to cut costs, Ophiris still forecast to remain free cash flow negative for at least another three years, leading to speculation that further farm-out deals or a capital raise may be needed before first gas is produced from its major developments.
Meanwhile, shares in Gulf Keystone Petroleum (LSE: GKP) have performed better. Its shares are up 9% thisyear, thanks to news that oil producers in the Kurdistan Regional Government may soon resume regular payments to producers for crude exports. Repayment of Gulf Keystones nearly $300m in arrears would allow it to organically fund capex. This would massively improve its cash flow outlook and balance sheet.
Kurdistan-focused producer Genel Energy (LSE: GENL) has remained profitable throughout the recent turbulence in the oil sector, but its shares have fared even worse. After a 77% decline in 2015, Genel has lost another43% of its value since the start of the year, leavingthe former 3bn company with a market capof just 275m.
Falling oil production only made matters worse. Genel decided to cut back on new drilling in 2015 because of payment issues with the Kurdistan government. It expects to produce only between 60,000 and 70,000 barrels of oil a day this year, compared with 85,000 in 2015.
Genel should be able to cover its capex needs over the next two years without additional funding, as its owed some $400m in arrears by the Kurdistan government and has over $400m in cash on its balance sheet. Whats more, analysts expect Genel to have earned underlying earnings of 10p per share in 2015, giving it an estimated P/E of 10.
All three mid-cap oil stocks seem to be attractiveplays on higher long-term oil prices, but timing is also an important issue to consider. I feel that the oil price could fall further, so I would stay out of these stocks. Unless the oil price bottoms out, these oil stocks could have much further to fall.
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Jack Tang has no position in any shares mentioned. 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.