Shares in Cairn Energy (LSE: CNE) have risen by around 7% today after it released an upbeat operational update. The company has successfully completed its second appraisal well offshore in Senegal and was delighted with the results, which Cairn feels validate the scale and growth potential of the SNE field.
It conducted two drill-stem tests within the upper reservoir of the SNE-3 well, with the first producing a maximum flow rate of 5,400 barrels of oil per day (bopd) and the second a maximum flow rate of 5,200 bopd. Encouragingly, Cairn feels that the results demonstrate the ability of the upper reservoirs to flow at commercially viable rates and is looking ahead to further progress being made in its drilling programme.
Clearly, Cairn’s future prospects are closely linked to the price of oil and the company therefore comes with increased risk. And with Cairn not being forecast to generate revenue in the current year, it may be prudent to focus on profitable resources companies at the present time given the potential for further challenges within the resources space. Still, Cairn has a strong balance sheet and impressive asset base, so may be of interest to less risk-averse investors.
Take a risk?
Also reporting today was UK Oil & Gas (LSE: UKOG). Its shares are down by 10% after updating on progress with regard to the Upper Portland Sandstone interval. Its results were disappointing in comparison to the other two wells in the Kimmeridge zone, with it producing at a stabilised rate of 168 bopd. However, when this figure is added to the flow rates from the other two reservoirs, it equates to 1528 bopd of high quality crude, which is ahead of management’s previous expectations.
Looking ahead, the 20% stake that UKOG holds in the Horse Hill project has the potential to deliver significant profitability in the long run for the company’s investors. As such, UKOG has the potential to double, but it remains relatively risky due to the potential for a fall in the price of oil. Therefore, despite today’s share price fall, UKOG could be worth a closer look for less risk-averse investors.
Safer bet
Meanwhile, BP (LSE: BP) continues to offer a relatively appealing risk/reward ratio. Although it’s also highly dependent on the price of oil, it’s a highly profitable business and so provides a wider margin of safety than is the case for oil exploration plays such as Cairn and UKOG. As such, its shares are less likely to halve than its two sector peers, and could even double in the long run.
That’s at least partly because BP is expected to increase its earnings by 131% in 2017. Clearly, forecasts are subject to change, but at the present time BP trades on a price-to-earnings growth (PEG) ratio of just 0.1, which indicates that it offers growth at an exceptionally low price. And with the oil major also yielding over 7%, it offers superb income potential – even if dividends are reduced over the medium term. As such, it seems to be a strong buy and a preferred option for investors seeking out a long-term play within the resources space.
