Why I’d buy this 5% yielder alongside Frontera Resources Corp today

Oil explorer Frontera Resources Corp (LON: FRR) could be a great play on a rising oil price.

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The past few years haven’t been good for oil explorers and the share price of Soco International (LSE: SIA) has not done well — it’s down 74% in five years and down 25% over the past 12 months. But Thursday’s 2017 full-year results saw an uptick of a couple of percent.

Unlike some, Soco is generating cash and paying dividends — the 5.25p per share for 2017 was ahead of forecasts and provides a yield of 5.4% on the current 98p share price.

The firm did record a big loss of $157.3m, including a $152.3m write-off of exploration and evaluation (E&E) assets, although excluding those E&E assets gives an underlying loss of $5m. That’s not a big loss, but it’s close to the restated $6.4m loss from last year and it comes after a year of rising oil prices.

What do I like?

But the company stressed its “strong and robust balance sheet, zero debt, solid cash flow, and low cash operating costs.” Operating expenditure, while up slightly on last year, amounted to $13.73 per barrel and it ended the year with cash and equivalents of $137.7m. 

Based on my colleague Roland Head’s evaluation of Soco’s asset value, the shares look to be trading at a discount to NAV of around 26% and I find that tempting. But what’s likely to out the hidden value that I see in Soco?

The abandonment of the firm’s mooted merger with Kuwait Energy was, I think, a disappointment, as it could have produced a combined entity with nicely diversified assets. Something along those lines could still happen as Soco said it “continues to pursue growth opportunities of scale, which meet our investment criteria.”

No profit

Frontera Resources (LSE: FRR) is more typical of a startup oil explorer, still in its cash-burn phase and with no forecast profits on the horizon. But with the oil price having recovered strongly over the past 12 months and now pushing at $70 per barrel, we’re arguably in much better times for such enterprises. And exploration progress has been going well.

At Frontera’s T-45 well at the Taribani Complex in Georgia, drilling has uncovered 98.9m of combined pay interval in three targeted zones, with an additional 14.9m combined pay interval at a fourth zone. The firm “observed a number of oil and gas shows during drilling operation.” Wireline and pressure pumping companies are now set to move in.

In the last week, drilling operations have commenced at the next well in the complex, Dino-2, with a depth of 2,700m expected to be reached during April — aimed at three of the same targets as T-45.

Well stimulation

The latest update from the company on Thursday announced that pressure pumping equipment, intended for well stimulation operations at T-45, will start its journey from Romania in the next few days.

Fundraising in February raised $4m through two equity issues and Frontera appears fully funded for exploration at its three main targets. 

With no revenue or profits, it’s hard to put a valuation on the shares. But if a well-funded oily with promising assets is what floats your boat, Frontera looks like a good candidate — especially if you expect, as I do, oil prices will recover further in 2018.

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.

Alan Oscroft 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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