The effect of a plummeting oil price has, needless to say, hammered investor appetite for the fossil fuel sector in recent months as earnings projections come under the cosh.
Given these concerns, today I am looking at three oil explorers whose ultra-low price could arguably have already factored in the impact of a worsening market imbalance and consequently could deliver plenty of shareholder upside.
Chairman of the independent explorers’ association Brindex, and a director at Premier Oil (LSE: PMO), Robin Allan, sounded the klaxon again this week by warning that “it’s almost impossible to make money” in the North Sea with prices camped around or below $60 per barrel.
The business has seen production explode recently as its assets in Vietnam and Indonesia have ramped up output, and volumes surged 12.6% during January-October to 64,000 barrels of oil equivalent per day. But with low prices endangering its operations in the British Isles, and Premier Oil warning that new projects will only be sanctioned at its long-term oil price target of $85, the firm’s growth prospects could come under pressure.
Still, Premier Oil is expected to see earnings gallop 40% higher in 2014, in turn creating a P/E multiple of just 4.4 times prospective earnings, which is comfortably below the bargain watermark of 10 times. Although the business is expected to see the bottom line droop 36% next year, Premier Oil still carries a tiny P/E reading of 6.6 times.
And the oil play’s terrific ‘paper’ price is underlined by a price to earnings to growth (PEG) readout of 0.1 for this year, some way under the value marker of 1.
Exploration play Enquest (LSE: ENQ) — which specialises in rejuvenating and extending the life of oil fields — has seen sentiment dip in recent months as development of its Alma/Galia project in the North Sea has been subject to significant delays. On top of this, a backcloth of rising costs has exacerbated concerns over the firm’s profits prospects.
Consequently, earnings at Enquest are expected to remain under pressure in the near-term, and the business is expected to see the bottom line slump 57% in the 2014. Still, this projection leaves the business dealing on a P/E multiple of just 5 times. But investors should be aware that a further 40% decline in 2015 pushes this to a far-less-appealing 13.2 times.
Like Premier Oil, Enquest’s exploration strategy in the North Sea could come get hammered should oil prices continue to lag. But in the long term, the company’s international expansion could still deliver surging revenue growth, particularly once its projects in Tunisia and Malaysia heat up.
Irish oil specialist Circle Oil (LSE: COP) boasts a raft of top-notch assets across North Africa and more specifically in Tunisia and Egypt. And the company’s recent expansion into Morocco represents a wise strategic play due to the government’s oil-friendly fiscal incentives as well as a strong local demand base.
The business has got off to a promising start in the country, with Circle Oil striking first gas back in June and announcing a second successful discovery at its Sebou permit in October. Another four wells are due to be drilled in the area and the company is priming its assets for future production.
As a result of an expected 22% earnings dip, Circle Oil currently changes hands on a P/E multiple of just 5.5 times earnings for 2014. And this slips to just 4.4 times for next year owing to an estimated 3% bottom line bounceback.