What will be the most profitable sectors to invest in during 2018? I believe one potential choice is oil and gas. Although the shares of most big oil producers have already risen in response to higher oil prices, I can still see potential buying opportunities among the smaller firms in this sector.
Today I’m going to highlight two companies where I believe opportunities may exist.
Onshore market “strengthened”
Oil services firm Hunting (LSE: HTG) has been a big beneficiary of the recovery in the US shale sector. According to the company, its ‘H1 Perforating System’ is increasingly the mandated choice for US onshore drillers, thanks to its reliability.
Trading in the Hunting Titan business, which sells the H1 system, has “strengthened throughout the year”. The other arms of its US business that sell to onshore operators are also expected to report an operating profit this year.
Unfortunately the group’s other US ops plus its regional ops in Canada, Europe, Middle East and Asia Pacific all “remain lossmaking at the operating level”.
Impressive financial performance
It’s clear that the group still faces tough market conditions. But I’ve been impressed by the strength of Hunting’s financial performance.
The group expects to end the year with a net cash position, versus a net debt of about $130m three years ago. By cutting costs and controlling spending, it has continued to generate cash through the downturn.
Negotiations are currently under way with lenders to return the firm’s banking facilities to normal operation. That means that restrictions on dividend payments and spending should be lifted.
A full-year profit of $32m is forecast for 2018. That puts the stock on a forecast P/E of 37. But my view is that Hunting’s shrunken cost base should accelerate profit growth if market conditions continue to improve as I expect. I think this stock could surprise to the upside in 2018.
An overlooked bargain?
Ophir Energy (LSE: OPHR) made a name for itself with several huge gas discoveries off the coast of Africa during the first half of the decade.
However, although the firm’s stake in these discoveries could be worth billions of dollars, finding investors to buy or fund the development of these giants is proving more difficult.
A planned financing deal with “a group of Chinese banks” to develop the Fortuna Floating LNG project off the coast of Equatorial Guinea seems to have ground to a halt.
Ophir announced today that it’s now seeking alternative funding of up to $1.2bn from “a leading Asian bank”. Ophir hopes to close this deal early in 2018, but even if successful it could be several years before gas starts to flow.
In the meantime, revenue is restricted to sales from the firm’s more modest oil and gas fields in Asia. These assets were purchased from Salamander Energy in 2015. Over the 12 months to 30 June, they provided net funds of $68.7m to help support the group’s operations.
A dilemma
At 66p, Ophir shares trade at less than half their book value of around 160p per share. But finding investors to develop the firm’ gas assets and potentially close this discount seems likely to be a slow process. I see these shares as a potential bargain, but patience will be required.
