The bears are out in force in the oil sector, but there is also a bullish case to be made for many stocks. If the oil price recovers, the share prices ofSoco International (LSE: SIA) andFalcon Oil And Gas (LSE: FALC)could lead thestampede.
Soco Could Go
Vietnam-focused Soco has endured a tricky year, its share price falling 50% in that time. Last time I checked it out, in November, it had just published a disappointing production update showing that its H5 well producing just 9,000 barrels of oil equivalent per day (boepd), against initial hopes of asmuch as 12,000. That knocked 16% off its share price, although it was hardly panic stations, with solid forecast revenues of around 140m for 2016 and pre-tax profits holding steady at around 38m.
A new trading and operations update has delivered morepositive news, with a year-end cash balance of $104m with no debt, despite a generous$51m dividend splurge lastJune, and capex totalling$82m. Net production (including its TGT field) averaged 12,000 boepd realised at an average price of $54 a barrel, bringing in $215m of revenues. Better still, cash operating costs were under $10 per barrel.
Chief executive Ed Story had a good tale to tell, with low cost production, no debt and our disciplined approach to capital allocation, which he claimed puts Soco is in a good position to weather a prolonged industry downturn. Markets broadly welcomed the news, with itsshare price up nearly 7% in the last week, althoughtodays 136p it is still well below the stocks 52-week high of 134p.
Management is talking of being frugal,which is sensibleright now, and the next dividend payout is unlikely to be as generous as the last one, but forecast earnings per share growth of 54% this year looks promising, and Socos low production costs give it a cushionin case oil falls further.
Falcon Oil & Gas is down 26% over six months but inNovember I said it was more promising than most oil explorers and it still looks that way today. I was encouraged by its drilling success in the Beetaloo Basin, Australia, with positiveearly results from itsnine-well programme indicating favourable shale properties and excellentgas shows. Falcon is also debt-free, with$9.8m in cash. Experienced partners Origin and Sasol supply much-needed expertise in unconventional shale and gas to liquids
High-quality assets and a fully funded drilling programme do not guarantee success in todays world, especially with analysts warning that natural gas is next to collapse. Falcon management is also being frugal, with expenses fallingby 41% in the nine months to September 30, at US$1.8m. BrokerFinnCap just named it a buy with a target price of 23p, which suggests a potential upside of 460% on todays 5p.
Both Soco and Falcon look tempting for those for those who are bullish on the oil price recovery, especially since both seem equippedto survive if the pricestays lower for longer. There is a strong bull case to be made, but only for speculative investors.
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Harvey Jones 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.