Right now the oil sector is full of bargains for the astute, long-term investor. Royal Dutch Shell (LSE: RDSB), Premier Oil (LSE: PMO) and San Leon Energy (LSE: SLE) are three of the best opportunities, to my mind.
Bigger is better
Shell has underperformed the wider FTSE 100 by around 20% excluding dividends year-to-date, making the company one of the index’s worst-performing stocks.
However, for the long-term investor, these declines present a once-in-a-lifetime opportunity. Indeed, Shell’s shares are now trading at their lowest level since the financial crisis, and the company is unlikely to go out of business any time soon. Net gearing was only 14.7% at the end of June and Shell’s management has begun an ambitious cost-cutting programme to boost the group’s profit margins.
Cost-saving measures have already reduced Shell’s per-barrel operating costs by $10. What’s more, management is only approving the development of new production projects if they are affordable according to the prevailing environment — e.g. $50 per barrel oil.
And according to my figures, these measures will ensure that Shell’s dividend yield of 7.9% remains safe for the time being.
Bright outlook
Like Shell, Premier Oil is also trading at a low not seen since the financial crisis. Also, just like Shell, for the long-term investor Premier presents a once-in-a-lifetime opportunity.
Unfortunately, City analysts expect the company to report a pre-tax loss of £71m this year, as one-off charges hit the group’s bottom line. Analysts are expecting a pre-tax profit of £65m for 2016 and this forecast is likely to be revised higher if oil prices recover.
Within Premier’s post-summer operational update, issued today, the company reported that 60% of its production for the rest of the year is hedged at $92/bbl, and 30% of 2016 production is hedged at $68/bbl. Further, the group is forecasting a significant reduction in year-on-year capex for 2016 and has $1.3bn of liquidity.
Existing banking covenants have been renegotiated out to mid-2017 and the group’s principle $2.5bn bank facility is not for refinancing until mid-2019. In other words, Premier’s not under any financial stress and the group has plenty of balance sheet flexibility.
In play
Picking stocks in the small-cap oil & gas sector is not for the faint-hearted. You’re more likely to lose your shirt than become the next John Rockefeller. However, San Leon Energy could just be one of the small-cap oilies that has a shot at making it to the big time.
Unlike other oil & gas minnows, the group already has producing assets and it is aiming to generate a profit from its core assets within three to four years. Four months ago the company announced that it had discovered more than 50bn cubic feet of proved and probable (2P) gas reserves at its Polish Rawicz project. And San Leon is one of Europe’s largest unconventional oil & gas companies in terms of acreage.
Moreover, San Leon’s management revealed last month that the group has received a takeover approach, although the status of this offer remains unknown.
