As my colleague Alan Oscroft pointed out at the end of August, when I last looked at small-cap oil producer Amerisur Resources (LSE: AMER), I concluded that it was one of the “market’s most undervalued small-cap oil stocks“, based on the information available to me at the time.
Unfortunately, as Alan went on to cover in his article, since the beginning of 2018 Amerisur has issued a series of depressing trading updates.
However, while I’m no longer convinced that this is one of the market’s most undervalued stocks, I still believe Amerisur has a bright future.
Looking ahead
So, what’s to like about this business? Well, after a slow summer, the company has now resumed its exploration efforts, a development CEO John Wardle said he is “delighted” to announce.
Amerisur was one of the few oil companies in the world to enter the oil bear market in 2014 with a cash-rich balance sheet. It didn’t waste any time deploying its capital, snapping up assets from other explorers and producers that needed to raise cash.
Over the next few months, the company is going to spend a considerable amount of time on completing seismic and exploration drilling activity on this new acreage.
At the same time, after a “frustrating” cycle of well work on Amerisur’s existing producing wells over the first two quarters of 2018, work is now complete, and production has stabilised. Average daily production was 4,927 barrels of oil per day (bopd) in August, producing a steady stream of cash flow for the firm to reinvest in the development of newly-acquired assets.
And on top of Amerisur’s positive production and exploration news, the company also informed the market today that it has completed the construction and installation works at the Chiritza re-pumping station, on budget, and six weeks ahead of schedule. When commisioned, the re-pumping station will boost the company’s minimum throughput capacity in the fundamentally important OBA pipeline to 9,000 bopd. This is a critical part of the group’s plan to increase production over the next few years.
As Amerisur’s production grows, I believe the stock could recover all of its losses of the past five years, returning to 50p or more. Indeed, I believe the outlook for the company is brighter than it is for peer Sound Energy (LSE: SOU).
Uncertain future
Oil and gas exploration is a risky business. More often than not, that world-beating hydrocarbon find turns out to be nothing more than hot air. That’s why I’m sceptical on the outlook for Sound Energy.
This year, the company is carrying out a drilling programme at its acreage in Morocco, which Sound believes could yield more than 8rtn cubic feet (tcf) of gas. The firm has the right to drill on this acreage for the next eight years, but management is hoping to make a significant discovery before the end of the licensing period (hopefully before the end of 2018) and sell up to a larger peer with deeper pockets.
There’s already a lot of good news factored into the Sound Energy share price, which makes me wary of the stock. If Sound’s exploration plans struggle, the shares could slump as investors rush for the exits.
If this is the case, I would buy Amerisur over Sound as we know Amerisur already has real production potential.
