With oil now trading below $28 per barrel, I believe investors looking to invest in oil stocks need to ignore revenue and profit forecasts and focus on assets.
Im looking for companies with cheap oil and gas reserves and enough cash to ride out the slump. I believe this approach has the potential to deliver big gains when oil prices do recover to more sustainable levels.
In todays article Ill look at three popular stocks that have issued market updates this week. Do they meet my requirements?
Genel Energy
Genel Energy (LSE: GENL) issued a trading update this morning. The group said that 2015 revenue would be below expectations, at $342m versus a forecast of $350 to $375m. Genel also said that production will fall from about 85,000 barrels of oil per day to between 60,000 and 70,000 BOPDin 2016, due to spending cuts.
Genel shares are down by more than 10% as I write, but todays news doesnt really concern me. For investors with a long-term view, I think its more important to focus on Genels assets and low costs.
According to todays update, Genel can break even in 2016 with a Brent Crude price of $20/bbl. Cash spend is expected to average $20m per month, less than the $25m the group is currently receiving each month from the Kurdistan government.
Genel still has a cash balance of $455m and while it does have some debt, this doesnt mature until 2019. In the meantime, the groups 429m barrels of proven and probable reserves are currently valued at just $1.50 per barrel. In two years time, this could seem very cheap.
Victoria Oil & Gas
Cameroon gas producer Victoria Oil & Gas (LSE: VOG) makes most of its money by selling gas to local industrial companies thatuse it to generate electricity. The firm has a similar deal with a Cameroon power utility.
Victoria said today that it sold 2,867.7m cubic feet (mmscf) of gas in 2015, a 125% increase on 2014.
Sadly, no information about 2015 profits or capital expenditure was released. The group ended the year with net cash of $5.9m, broadly flat on last year, but well have to wait until May to find out if Victoria made a profit last year.
In the meantime, one concern is that Victorias revenue share will fall from 100% to 60% at some point in 2016, as its partners right to 40% of revenue kicks in. Its not clear to me whether sales growth is likely to cancel out this fall.
Cairn Energy
Like Genel, Cairn Energy (LSE: CNE) is an oil play for patient and brave investors. The group had a major discovery offshore Senegal last year, which it expects to make a material contribution to the firms reserves.
Cairn is also invested in the Catcher and Kraken developments in the North Sea. These are expected to start producing oil in 2017 and will provide valuable revenue for Cairn.
In the meantime, Cairn has net cash of $603m and an undrawn $300m lending facility. Its fully funded through to 2017.
The stocks current enterprise value (market cap minus net cash) putsCairns proven and probable reserves at just $4.22 per barrel. That could seem cheap if oil recovers to $50 per barrel over the next couple of years.
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Roland Head 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.