A small-cap growth stock I’d buy ahead of Hurricane Energy plc

Hurricane Energy plc (LON: HUR) looks like a laggard compared to this growth champion.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Last year, shares in Hurricane Energy (LSE: HUR) four-bagged after the company reported the “largest undeveloped discovery” of oil in UK waters. Following last year’s breakthrough, over the past 10 months management has been working hard to get the project’s development underway, and the company is now on-track to for first oil to flow in 2019. 

However, despite Hurricane’s bright outlook, there’s another small-cap oily that I believe presents a better buy for investors. 

A long way to go 

Over the summer, Hurricane raised $547m through a mix of convertible debt and equity to finance its Lancaster North Sea oil project. The regulatory green light for the project was given at the end of September and construction of the infrastructure required to start production during the first half of 2019 is already underway. 

But there’s still a lot to do before Hurricane is actually producing oil. For example, the early production system, which will initially target production of 17,000 barrels of oil per day, needs to be commissioned and manoeuvred into place. 

On the other hand, Hurricane’s peer Amerisur Resources (LSE: AMER) is already producing oil. And unlike Hurricane, which now has a mountain of debt to maintain and repay, Amerisur has a squeaky clean balance sheet. 

Strong balance sheet 

For the six months ending 30 June 2017, Amerisur reported cash and equivalents of $29m, and a cash inflow from operations of $8.5m. Thanks to the commissioning of a new pipeline allowing the company to export its oil production without having to rent oil tankers, the operating netback per barrel produced increased by 164% year-on-year to $29.6, up from last year’s $11.2. Adjusted EBITDA for the period rose 986% to $7.6m. 

The fact that the South America-focused oil producer is netting nearly $30/bbl from its oil production and generating cash with oil prices at $50/bbl is a testament to the firm’s low-cost operations and management’s cost-cutting actions. 

As well as cost-cutting, management has been busy using the firm’s cash-rich balance sheet to acquire distressed assets during the past few years. On these assets, the firm is targeting 16 gross new wells by the end of 2018 as it looks to boost production and cash generation. All drilling activity is expected to be funded by existing cash resources and cash generated. 

Profitable growth 

For 2018, City analysts are expecting Amerisur to report earnings per share of 1.9p, up 280% from 2017’s figure of 0.5p. Based on these numbers, the shares are trading at a forward P/E of 13.1. 

Hurricane, meanwhile, isn’t expected to produce any income until 2019, and plenty could go wrong for the business both before and after its Lancashire prospect comes online. 

With this being the case, I believe that Amerisur is a better buy. The firm is already generating cash, has a strong balance sheet, and is well positioned to profit as oil prices move higher. 

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Rupert Hargreaves has no position in any share mentioned. The Motley Fool UK has recommended Amerisur Resources. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Young mixed-race couple sat on the beach looking out over the sea
Investing Articles

I’d put £20K in an ISA now to target a £1,900 monthly second income in future!

Christopher Ruane shares why he thinks a long-term approach to investing and careful selection of shares could help him build…

Read more »

Mature couple at the beach
Investing Articles

6 stocks that Fools have been buying!

Our Foolish freelancers are putting their money where their mouths are and buying these stocks in recent weeks.

Read more »

Black woman using loudspeaker to be heard
Investing Articles

I was right about the Barclays share price! Here’s what I think happens next

Jon Smith explains why he still feels the Barclays share price is undervalued and flags up why updates on its…

Read more »

Investing Articles

Where I’d start investing £8,000 in April 2024

Writer Ben McPoland highlights two areas of the stock market that he would target if he were to start investing…

Read more »

View of Tower Bridge in Autumn
Investing Articles

Ahead of the ISA deadline, here are 3 FTSE 100 stocks I’d consider

Jon Smith notes down some FTSE 100 stocks in sectors ranging from property to retail that he thinks could offer…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

Why I think Rolls-Royce shares will pay a dividend in 2024

Stephen Wright thinks Rolls-Royce shares are about to pay a dividend again. But he isn’t convinced this is something investors…

Read more »

Investing Articles

1 of the best UK shares to consider buying in April

Higher gold prices and a falling share price have put this FTSE 250 stock on Stephen Wright's list of UK…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

The market is wrong about this FTSE 250 stock. I’m buying it in April

Stephen Wright thinks investors should look past a 49% decline in earnings per share and consider investing in a FTSE…

Read more »