3 top oil stocks I’d buy today

With oil prices stabilising, Rupert Hargreaves highlights the three stocks he’d buy to profit from the oil industry’s return to growth.

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Over the past 12 months, the price of oil has rallied from around $60/bbl to $71/bbl where it sits today — more than double the low of 2016.

Off the back of this rally, a lot of oil stocks have already recovered significantly from their 2016 lows. However, not all companies have recovered to the same degree. Here are three stocks that I believe could have further to go.

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Uncertainty prevails 

Tullow Oil (LSE: TLW), Enquest (LSE: ENQ) and Rockhopper (LSE: RKH) all seem to have missed out on the wider oil sector rally over the past 12 months. It appears the reason why investors have been slow to return is due to the uncertainty hanging over these businesses.

Tullow and Enquest are both struggling under an enormous mountain of debt while Rockhopper’s future is dependent upon the development of the Sea Lion Field in the northern waters of the Falkland Islands.

Rising oil prices are already starting to lift the uncertainty for Tullow and Enquest.

Last year, Tullow returned to profit for the first time in three years, and for 2018 the producer is projecting free cash flow generation from operations of $650m — a significant figure. During the first half, the group churned out $300m of cash pushing net debt down to $3.1bn.

Compared to Tullow’s market value of £3bn ($3.8bn) this debt mountain is enough to scare away even the most risk-tolerant investors. Still, at the beginning of 2018, the group had net debt of $3.5bn, so the balance is rapidly moving in the right direction. Although a legal dispute with rig operator Seadrill has cost the company $250m, I expect to see a substantial reduction in net debt for the firm at the end of 2018.

Enquest is heading in the same direction. The firm is projecting production to hit between 50,000-58,000 boe per day in 2018, that’s up from 37,000 boe per day in 2017. 

Increased output at a higher oil price should enable the company to start chipping away at its near $2bn debt pile. Indeed, management is confident that higher output, coupled with low levels of capital spending will allow the group to do just that. 

Last year, City analysts predicted that Enquest could generate free cash flow of $700m a year at the higher output rate, which would be more than enough to reassure investors that the company can maintain its obligations to creditors. 

Project green light 

As Enquest and Tullow start to reduce debt, sentiment towards the two companies should improve as the level of risk reduces. I believe this should drive a re-rating in the shares pushing them significantly higher.

Meanwhile, the rising price of oil makes it more likely that Rockhopper’s Sea Lion project will get the green light from its development partner Premier Oil (Rockhopper currently owns 40%). Premier is also set to report a jump in cash flow this year, giving the group more capital to fund development projects.

If all goes to plan, Rockhopper’s management has stated that it believes Sea Lion could be sanctioned by the end of 2018, which would be a significant development for the company. Investors are bound to return when this colossal project gets the green light. After construction begins, it will only be a matter of time before the profits start flowing. 

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Rupert Hargreaves owns no share 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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