Will 88Energy Ltd, Cairn Energy plc and Faroe Petroleum plc be THE oil shares of the next decade?

Can 88 Energy Ltd (LON: 88E), Cairn Energy plc (LON: CNE) and Faroe Petroleum plc (LON: FPM) live up to the hype?

| 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.

It’s early days for 88 Energy (LSE: 88E) in its new acreage in Alaska, but the company’s first well there showed considerable promise that the decade to come could be a major one for the small producer. Results from this first exploratory well suggest the company could be sitting on significant conventional and unconventional assets. However, for the company to become a major player in the next decade, several things need to fall in line perfectly.

A second, horizontal, test well in early 2017 will be a critical test of whether horizontal fracking will be feasible in the field. Crude prices will also need to continue rising because, although 88 Energy’s field is well-connected to pipelines, it’s much more expensive to drill in Alaska than in traditional fracking locales such as East Texas. Fundraising will also need to go off without a hitch, as the company’s cash-light balance sheet will require several equity and debt placements to build the estimated five to 10 wells necessary before first oil is reached, if it is at all. These significant ‘ifs’ are enough to scare me away from 88 Energy for the time being, despite its long-term potential.

Worth a look

Cairn Energy (LSE: CNE) also doesn’t currently produce a drop of black gold, but is far ahead of 88 Energy in the race to first oil. Cairn’s stake in the UK North Sea Catcher and Kraken fields will begin producing oil in early 2017. With estimated production costs of $20 and $14/bbl respectively, these two fields will provide considerable free cash flow for Cairn. The company plans to invest this cash in building out what it believes are world-class assets off the coast of Senegal.

Continued good results from test wells in these fields have resulted in several upward reratings of total reserves, and the company’s proven and probable working interest now amounts to 49.5m barrels of oil equivalent. With $603m net cash, Catcher and Kraken coming online shortly, and the potential for a blockbuster asset in Senegal, Cairn certainly appears to have a bright decade ahead of it if all goes to plan.

One to watch

Small Norwegian North Sea oil & gas producer Faroe Petroleum (LSE: FPM) was wise in the boom years of $100-plus crude prices not to overextend itself and leverage to the hilt as many competitors did. Now that prices have cratered, Faroe has taken advantage of its healthy balance sheet to snap up assets at bargain prices. Alongside the reclassification of significant assets, Faroe’s proven and probable reserves jumped a full 88% in 2015.

Of course, the major task will be developing these new assets in a cost-effective manner. Faroe has a history of this as its oil & gas assets, despite fetching their lowest prices in a decade, were cash-neutral last year and the company retained net cash of £68.5m at year-end. With generous rebates from the Norwegian government for exploratory capex, major partners in its highest potential fields and cash-generating assets already in production, Faroe is one to watch in the years to come.

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.

Ian Pierce has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investor looking at stock graph on a tablet with their finger hovering over the Buy button
Investing Articles

Forget Lloyds’ cheap share price! I’d rather consider this FTSE 100 bargain share

Lloyds' share price might appear too cheap to miss at first glance. But this FTSE-listed share could be a better…

Read more »

Market Movers

Down 6% today, is the BT share price gearing up for a larger fall?

Jon Smith points out why the BT share price has tumbled today, but flags up why the reasoning behind the…

Read more »

Silhouette of a bull standing on top of a landscape with the sun setting behind it
Investing Articles

This FTSE 100 stock is down 25% from its 52-week high. Should I buy?

Analysts think the price-to-earnings ratio of this FTSE 100 stock could fall by half in the next two years if…

Read more »

Investing Articles

£10,000 invested in Nvidia stock just two weeks ago is already worth…

Nvidia stock's been making big losses and big gains so far in 2025, at least on paper. But long-term valuation…

Read more »

Stack of British pound coins falling on list of share prices
Investing Articles

Here’s why Lloyds shares have dipped sharply

Lloyds shares got a boost recently when the Treasury petitoned the Supreme Court to go easy on the car loan…

Read more »

A young woman sitting on a couch looking at a book in a quiet library space.
Investing Articles

A £10,000 investment in BAE Systems shares 5 years ago is now worth…

BAE Systems' shares have lifted off since the start of the decade. But can the FTSE 100 defence giant continue…

Read more »

Dividend Shares

£8,000 invested in high-yield dividend stocks could make this amount of passive income

Jon Smith explains how dividend shares with yields in excess of 8% can be used carefully in order to build…

Read more »

Investing Articles

£5,000 invested in Tesco shares 2 years ago is now worth…

Over the last two years, Tesco shares have provided investors with gains of around 30% per year when dividends are…

Read more »