Should you buy, sell or hold these small caps after recent updates?

Can these two popular oil and gas stocks deliver further gains or should investors lock in some profits?

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Shares of Kurdistan oil producer Genel Energy (LSE: GENL) rose by more than 7% this morning. The group issued a statement confirming that its partner DNO ASA had received a $30m payment for oil exports from the Tawke field.

The payment represents part settlement of the pair’s $38.41m invoice for oil sales in June and will be shared between DNO and Genel. A further payment for the remaining balance is likely to follow in due course.

Genel’s share price has fallen by 73% over the last year, but the firm’s recent results suggest to me that the worst may now be over. The firm’s very low operating costs mean it was able to generate positive free cash flow of $6.2m during the first half of the year, even after interest payments of $26.9m were deducted.

Chief executive Murat Özgül said that more regular and predictable payments from the Kurdish authorities meant that Genel was able to make firmer commitments to spending. Mr Özgül said this is “already having an impact on production levels following the declines seen earlier in the year.”

Although Genel still has a $412.4m backlog of payments due from the KRG, this has fallen from $422.9m at the end of last year. If improving payments combine with a rising oil price and higher production, I believe Genel investors could see strong returns from current levels.

Are further gains likely after 277% rise?

Shares of Mediterranean oil and gas producer Sound Energy (LSE: SOU) bubbled nearly 10% higher this morning after the firm confirmed details of its Tendrara gas discovery in Morocco.

According to Sound, the TE-6 well encountered 28 metres of net gas pay. Under testing, it achieved a stimulated gas flow rate of 17m standard cubic feet (MMscf) per day. Sound describes this as “above initial expectations” and “highly commercial.”

Sound and partner Schlumberger now plan to drill two more wells to further appraise this discovery.

However, while Tendrara appears to be a promising asset, Sound Energy’s share price has already risen by 277% since the start of July. This has added about £240m to the firm’s market value. How does this compare to the potential value of Tendrara?

In a recent presentation, Sound estimated that its 27.5% interest in Tendrara could have a discounted net present value (NPV10) of €249m. That’s the total profit Sound would expect to make if the field was developed and put into production.

To reach that stage, pipeline infrastructure costing an estimated $50m would be required. One of Sound’s partners, OGIF, has expressed an interest in funding this, but I suspect this would come at a cost. OGIF might want a royalty stake in Tendrara, for example.

Sound recently issued €28.8m of bonds, but most of this cash will be used to repay existing loans. What’s more, these carry an effective interest rate of more than 11%, so interest payments will be a drain on the limited revenues from Sound’s Italian assets.

I suspect Sound will need to raise further cash if it’s to retain its large stake in Tendrara. On that basis I think the firm’s shares look very expensive. I’d take profits after recent gains.

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.

Roland Head 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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