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Bombed-Out Shares Selling Below Cash Value

If you like the idea of buying £1 coins for 92p, then I’d urge you to read on…

…because there may be opportunities to scoop up some bargains in an unloved market sector.

You could have bought for less than 20p and then sold for £16

My trawls for cheap shares suggest the oil industry could be ripe for future gains.

Now I am no oil expert, but a quick scan of the sector suggests valuations look somewhat depressed.

In fact, I’ve pinpointed some promising plays that are supported by tempting dividend yields and/or cash-rich balance sheets.

Furthermore, the oil sector – especially among the smaller operators – always gives you the chance to strike it lucky and enjoy immense long-term gains.

You only have to look at this chart of Tullow Oil (LSE: TLW) to see what I mean.

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 Source: Capital IQ

Had you timed your trades to perfection, you could have bought for less than 20p and then sold at £16 – an 80-bagger return – during the last twenty years.

That life-changing price gain was supported by Tullow finding enormous oil resources in Uganda and Ghana during 2006 and 2007.

However, the price performance since hitting £16 has not been so great, as Tullow’s sales and profits stagnated…

…while the wider market has become a lot more circumspect about the sector.

Still, enjoying a double, triple or even a quadruple on Tullow – rather than the full 80-fold gain – would have been good enough for me!

Ideal material for high dividends within a diversified portfolio

You don’t have to look too far in the oil sector to find potential opportunities for your portfolio.

In particular, anybody holding BP (LSE: BP) (NYSE: BP.US) or Royal Dutch Shell (LSE: RDSB) won’t need me to remind them that the sector has missed the FTSE’s rally since mid-November.

In fact, BP’s share price has been flat while Shell’s has dropped 11%.

Yet both blue chips still look set to up their dividend this year, with BP on for a 22.5p per share payout and Shell on for a 112p per share payout.

Those projections put both shares on 5%-plus yields, and offer some comfort for shareholders missing out on the wider market action.

One day I am sure BP and Shell will have their day in the sun.

Until then, the pair look ideal material for anyone seeking high dividends within a diversified portfolio of blue chips…

…although there could be better income plays further down the sector.

This is the first oil share I have ever owned

Here’s a possibility: Soco International (LSE: SIA). It’s a share I actually own, having taken the plunge last year.

Right now this £1.3bn mid-cap operator offers:

  • A track record of finding large oil reserves (albeit far away in Vietnam);
  • Substantial current production and profits ($200m-plus);
  • A significant net cash position ($360m), and;
  • The prospect of an annual payout representing half of the group’s free cash flow.

On the latter point, I’ve seen payout forecasts ranging from 20p all the way to 30p per share, indicating the potential income yield on Soco may be in excess of 6%. I’d be very happy with that.

He says they are worth 350p – you can buy for 260p

Another mid-cap oil operator I’m keen on – though I do not have a holding – was mentioned by top Fool investor Nate Weisshaar late last year.

You see, the ace stock-picker from Motley Fool Share Advisor noted the £1.5bn market cap of this FTSE 250 business equalled its cash and investments…

…which effectively left the group’s undeveloped fields and potential reserves ‘in for free’.

Valuing the possible oil in the ground at between $5 and $12.50 a barrel, Nate tells me the shares could be worth 350p.

The price now is about 260p – around the same level seen at the time of Nate’s mention within Share Advisor.

So this is another oil share that has missed out on the wider market action – at least up to now.

I must admit, I do like the asset simplicity of this particular Share Advisor oil selection.

The downside should be limited by the cash and investments, while the possible upside is supported by fields going into production and/or the exploration coming good.

Anyway, Nate’s pick feels like a very good risk-reward situation to me, as investments in the somewhat unpredictable oil sector go that is!

Tremendous upside possibilities from bombed-out shares selling below cash value

Trawling for other opportunities even further down the sector brings me to a barrel of bombed-out operators that could one day strike it lucky and perhaps make Tullow-like fortunes for ordinary investors.

Sticking to the simple asset theme, the following names all appeared on a stock-screen highlighting oil shares with net cash as well as balance-sheet values greater than their market caps:

Cadogan Petroleum, Falkland Oil & Gas, Gulfsands Petroleum, Mediterranean Oil & Gas, Northern Petroleum, Serica Energy, Regal Petroleum and Trap Oil.

A quick check on the names throws up a few interesting avenues for further research.

Cadogan for example has net cash of $63m, which converts to £39m and is £3m larger than its £36m market cap.

Meanwhile, Falkland Oil & Gas has net cash of $161m, which converts to £101m and is £8m larger than its £93m market cap.

Although both firms are unprofitable and may well blow all their money on fruitless exploration…

…right now you can acquire their cash piles at the rate of buying £1 for just 92p.

So while I would not say both shares are no-brainer bargains, it does seem very little – if anything – is priced in for any exploration success.

That could make for tremendous upside possibilities if either firm does strike it lucky.

Of course, all smaller oil companies come with higher risk and I would urge you to do your own research before investing.

But I think all the names I’ve mentioned above provide a good shortlist to start your own investigations. Good luck if you do take a flutter.

> Maynard owns shares in Soco International.