Why I’d buy this North Sea energy play instead of Sound Energy plc

Harvey Jones says investors considering Sound Energy plc (LON: SOU) should also look at this oil exploration stock.

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If you had invested in Sound Energy (LSE: SOU) five years ago your stake would have risen tenfold by now, with the stock up 979% in that time. Recent investors have less to be happy about, with the stock trading 40% lower over the past year, despite a recovery in recent weeks.

Sonic boom

This upstream gas company has been hit by the languishing oil price and disappointing results from its Badile onshore project in Italy, currently being plugged and abandoned. It is now shifting its focus to Africa, after completing the acquisition of its interests in the Oil & Gas Investment Fund in Eastern Morocco, which it funded by placing 27% of its share capital.

The AIM-traded firm holds a 75% position, of which 27.5% is shared with Schlumberger, giving it a net 47.5% stake. It has previously said this new hydrocarbon province in Eastern Morocco should be absolutely “transformational for both Sound Energy and Morocco”.

High Energy

That sounds exciting but there is still a long way to go operationally, and investors will want to see drilling underway before getting excited all over again. We should discover more on 5 October when Sound Energy holds an investor event in London to detail a series of new programmes set to commence in the fourth quarter. If that goes well, the recent recovery in the oil price, which has lifted Brent crude to $57, could trigger renewed interest.

Sound Energy’s share price is up 20% in the last month, so investors are already edging back. Some will be tempted to get in ahead of upcoming news announcements, but you must also understand the risks.

There is better visibility at Faroe Petroleum (LSE: FPM), an independent oil and gas company focusing on Norway and the UK, which has just announced its interim results for the six months to 30 June.

So Faroe, so good

The share price is up around 1.5% on the report, which is pretty solid. Over two years, the stock is up 48%, despite the unsuccessful Goanna exploration well in the Norwegian North Sea, in which it held a 30% stake. Its Brasse appraisal well looks more promising, benefitting from a significant resource upgrade” that lifted recoverable volumes around 20% to 56m-92m barrels of oil equivalent (mmboe).

Today’s results reported “good production performance and all projects progressing to plan and on budget”. This was even through average first-half production of 14,800 barrels of oil equivalent per day was down from 18,800 last year, as its Njord and Hyme facilities temporarily close for life-extending refurbishment and upgrades. With average operating costs of approximately $26 per barrel, Faroe looks well set to survive cheap oil, and even better placed if oil kicks onto $60 a barrel. Either way, it has hedged 30% of oil production to December 2018 at an average of $55 a barrel.

Recovery play

CEO Graham Stewart hailed Faroe’s growing recoverable resource range, low cost exploration and appraisal programme, and rapid payback on its recent purchase of four fields from DONG. “Faroe now has a strong and diversified asset base with a clear path to increase profitable production to over 40,000 boepd within the next five years, with robust project economics even at low commodity prices.”

If you think the oil price recovery is set to continue, Faroe might be a good way to play it.

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.

Harvey Jones has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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