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David Kempton: 4 small stocks for the oil rally

David Kempton: 4 small stocks for the oil rally

by David Kempton May 16, 2018 at 11:28

 

I hold four small oil companies, and topped up my holding in three of them last week.

Oil trading at $77 a barrel delivers quite a different scenario for the small producers, who were suffering as the price of Brent crude plunged to $28 over two years ago.

So too for oil majors BP (BP) and Shell (RDSb), where revenues are up and costs down. Even with the shares in both having rallied 60% over the last two years, they still offer yields of 5%.

But for those looking for producers at the smaller end of the spectrum, here are my picks.

Diversified Gas & Oil (DGOC) floated in February last year. Since making four acquisitions and increasing output this year by 170%, it is now paying quarterly dividends to yield 5%, while maintaining profit margins at 40%. It produces conventional gas and oil in Ohio at a significantly lower cost than fracked production.  Forecasts have profit next year at $28 million (£21 million), with the shares trading on a price/earnings ratio of 13, and a price/earnings to growth ratio of 0.3.

Hurricane Energy (HUR) is almost a binary play. Oil analysts consider that their North Sea licences could show them sitting on a quarter of total UK continental shelf resources. Clearly that’s massive, but how much is economically recoverable is currently unknown. This is a classic exploration company, where the value could shoot up next year when the Lancaster basin is properly evaluated, or not. All the well tests have been successful to date and they are well funded with £70 million of cash, so I’m watching for news flow and may buy more as the project develops through the year.

Ophir Energy (OPHR) is well run and with £50 million cash can afford its ambitions. Currently operating in Mexico and Thailand, it also runs a floating liquefied gas platform in Equatorial Guinea, where it has just announced a 40% farm out in exchange for a full 3D seismic survey of the block, to commence immediately.   

Ophir has just announced an agreement with Santos to acquire the Australian producer’s South East Asia assets for $205 million. This includes production facilities in Vietnam and Indonesia and exploration and appraisal assets in Malaysia, Vietnam and Bangladesh. The price paid looks covered by production and development valuations with exploration in for free.

Ophir has cash, ambitions and good management. It’s worth buying with oil at the current price and looks very good value.

Amerisur Resouces (AMER) looks really good value too, but then it has for years and constantly disappoints. I’ve bought a few more as an act of faith, but they really do seem to be coming right this year. An operations update was very positive and three new wells are due to spud by the end of June, yielding an additional 26 million barrels. The ‘new’, much-delayed pipeline is up to expectations in reducing transport costs to $4 per barrel. Oil is now being sold at over $70 and costs $15 to produce – that’s a very high margin producing terrific cash flow, but still the board is not trusted and the shares nowhere near match apparent value. I’ve bought twice recently and expect the stock to revalue soon or get taken over.    

David Kempton is non-executive chairman of Hawksmoor Investment Management and a non-executive director of Impax Funds Ireland. He is an experienced investor, proprietor of Kempton Holdings and a non-executive director of a number of quoted and private companies. He may have an interest in any of the investments which he writes about.

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Comments  (4)

  • Micawber: 

    I bought DGOC at 72p in June last year, adding in October and again in April this year. It looks a good proposition while Rusty is running it and credit is good for further acquisitions of second-hand conventional wells in the USA. Not convinced by the others. Nor am I convinced the oil price will stay up at present levels, let alone go higher - shale potential in enormous quantities at over $50 pb level is an effective cap, leaving geopolitical volatility aside... Offshore is far more costly to survey, prove and extract which is a negative for Hurricane.

    15:39 on 16 May 2018

  • Richard_L: 

    But why, and what is the case for, the short interest in DGOC?

    20:06 on 16 May 2018

  • Razzgox: 

    "...... He is an experienced investor, proprietor of Kempton Holdings and a non-executive director of a number of quoted and private companies. He may have an interest in any of the investments which he writes about."

    Is this legal?

    If he has interests in theae companies then we should know which ones in which he is invested?

    If he can't/won't tell us, then ignore these articles!

    20:57 on 16 May 2018

  • richard tomkin: 

    I bet he was not a buyer at 55 dollars a barrel !

    21:14 on 16 May 2018

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