The price of crude oil charged higher to $45 a barrel yesterday afternoon after reports emerged that Saudi Arabia and Russia had held discussions on freezing oil production.
This is great news for small producers such as Premier Oil (LSE: PMO) and Genel Energy (LSE: GENL). Over the past few weeks there seems to have been a fundamental shift in the oil market as prices have steadily ground higher from the lows seen at the beginning of the year. Indeed, year-to-date the price of Brent crude is up by around 50%.
All in all, it looks as if the oil market is finally starting to rebalance and with this being the case it could be time for investors to start hunting for bargains in the oil & gas sector.
Two bargains
Premier Oil and Genel Energy are two such bargains. Both companies are run by extremely experienced management teams who been preparing these groups for the worst over the past year or so. These preparations have put Premier and Genel in a position to stage a rapid recovery as oil prices return to more normal levels.
At a time when many other oil producers are cutting capital spending and reporting falling output, Premier is targeting oil production of 65,000 to 70,000 barrels a day this year, up from 57,600 barrels a day in 2015. And today, the company announced that its major Solan field in the UK North Sea has produced its first oil, which is a major step in the right direction as the field is expected to produce 20,000 barrels of oil per day during the second half of the year. Alongside Solan’s output, Premier’s production will also get a boost from the company’s recently acquired assets in the North Sea from E.ON.
Then there’s Premier’s tax bill to consider. In the 2016 Budget, Chancellor of the Exchequer George Osborne completely overhauled the way North Sea oil producers are taxed, essentially abolishing the Petroleum Revenue Tax by permanently reducing the rate from 35% to 0%. This move, among others, is predicted to save the industry £1bn per annum going forward.
With production surging, oil prices rising and the company’s tax bill falling, Premier could be on track to report a net profit this year for the first time since 2013.
A landmark year
This could be a historic year for Genel. You see, 2016 could be the first year that the company receives a full 12 months of oil payments from the Kurdistan Regional Government. The lack of a regular payment schedule for oil shipments from Genel’s Kurdistan operations has always held the company back. However, now the payments seem to be being made on a relatively regular basis, Genel has suddenly become a more attractive investment.
Moreover, management’s decision to repurchase $55m of bonds at only 63% of face value at the end of March has improved the group’s balance sheet and shown that the company is indeed working to unlock value for investors.
