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?

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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.

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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.

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