Investing in small oil explorers is a rollercoaster ride and if you buckled up and bought Soco International (LSE: SIA) at some point, you will be feeling a little queasy today.
Out of Africa
The international oil and gas exploration company’s stock peaked at 448p in February 2014, but it has been downhill ever since. Today it trades at just 87p and has a market cap of £297m, but the worst may now be over.
Soco is selling off its final African interests as part of a process of portfolio rationalisation, banking $10m from assets in Brazzaville, Congo, and another $5m from interests in Cabinda, Angola. Its main operations are now in Vietnam, but today it announced its acquisition of the Merlon Petroleum El Fayum Company for $215m, a privately owned oil company with an onshore concession in Egypt.
This should help the group diversify its resource base and expand both in Egypt and the wider Middle East and North Africa. President and CEO Ed Story has a good tale to tell in today’s six-month interims, with a first-half focus “on execution of our strategy of portfolio rationalisation and finding new growth projects, whilst returning cash to shareholders”.
It reported a strong balance sheet, with a cash and liquid investments balance of $128.8m and no debt, and low cash operating costs of just under $14 a barrel against an average realised crude price of $74.08 (up from $53.90 last year).
The future does look brighter, with forecast 11% earnings per share (EPS) growth in 2019, and a current yield of 6.3%. This is a shrinking concern and in 2013 revenues topped $608m against a forecast $165m for 2019, but it now has a more solid platform for the future. Peter Stephens calls it risky but potentially rewarding, and that sounds about right.
Tullow to go
FTSE 250 share Tullow Oil (LSE: TLW) has also had it tough, its share price peaking at $1,333 in 2012 then plunging to just $242 today. Recent times have been kinder, though, with the stock up 45% in the last year.
Tullow is exploring again after several years of retrenchment when its stretched balance sheet restricted operations. It now aims to ramp up production from current assets in West Africa, progress two large onshore developments in East Africa, and step up the search for new fields in Africa and South America.
Free cash flows
The £3.38bn group recently turned a $557.9m first-half loss into a $150.5m profit, helped by the stronger oil price and a small increase in production. My Foolish colleague Roland Head reckons it offers seriously good value at today’s price.
Tullow also reported a free cash flow of $401m, which has doubled in a year, and can now make serious inroads into its net debt pile, which fell from $3.8bn to $3bn by 30 June. With its massive Ghanaian field producing tens of thousands of barrels a day, the cash should keep flowing.
Trading at a forecast 11.6 times earnings, Tullow does not look overpriced. Both oil stocks have weathered the worst, although Tullow looks the safer bet.