If you have tears, prepare to shed them for investors inUS-focused oil development and production companyNighthawk Energy (LSE: HAWK). Over the last 12 months they have seen their shareholding plungefrom just over 8p to around 3.50p. Then pity the investor inSoco International (LSE: SIA), whose share price has crashedfrom 327p to 185p over the last year.
Nowdry your eyes, because anybody investing in smaller oil explorersknows the risks they take. Also, you will need your wits about you to work out whether these two stocks are worthbuying today.
AIM-listed shale driller Nighthawk ended 2014 on a high, withan upbeat production update highlightingincreased production in newly-drilled wells. Management boldly statedthat with operating margins of 60% to 70% Nighthawk could survive $50 oil. Investors arent as confident, as the share price confirms.
Recent half-year results showed year-on-yearoil sales volumesrising slightly from 345,558barrels to 351,609. This is impressive given the fact that Nighthawk pretty muchstopped new drilling activity after admitting in June that 70% of its 2013/14 wells were uneconomic at $60 a barrel. Instead, it has beenworking to maximise production from its existing wells.
With a realised oil price of around $44 a barrel, including hedging, Nighthawk is clearly under pressure. First-half revenues fellfrom$25.4m last year to $16m in 2015. EBITDA operating profits droppedfrom $17.4m to $6.6m. This left Nighthawkdown to its last $2.3m in cash, a situation since remedied by raising$10mthrougha zero coupon unsecured convertible loan note. That should fund its 2015 and 2016 drilling programme, helping Nighthawk boost production and cash flow, and strengthen its balance sheet. It has no debt due for repayment before 2019.
It cant do much else about cheap oilapart from slash costs, which it is doing with gusto, shedding staff and streamlining financial and corporate functions. Nighthawkneeds pricier oil. No sign of that yet.
Soco International is up 12% over the last month, as its share price reacted more strongly than expected to the recent oil price rebound. Too strongly, according to Macquari, leaving the stock overvalued, only a penny or so offthe brokerstarget price of 185p. Currently trading at 65 times earnings, Sococertainly doesnt look cheap. The ahead-of-schedule H5 exploration project gives somegrounds for hope on the production side, and sharing$51m ofdividends with investors in June isa sign of positive intent. Currently, Socoyields 5.45%.
Operating cash flow for the first six months of this year was $45.3m, sharply down from $141m in the first half of 2014. Its cash balance stood at $96.6m in June, waybetter than Nighthawks. That is down from$166.4m at the end of last year, although much of the erosion wasdueto that dividend. Futurepayouts are likely tobe far less generous unless oil quickly recovers. Happily, Socois free ofdebt.
If the oil price rebounds, investors can expect a rapid relief rally in both stocks, but with China slowing and supply still holding up, this one could go to the wire. Over to you, Opec.
The oil sector is a risky play right now and you might want to look for opportunities elsewhere. Opportunities like this one.
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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.