My top oil penny stock to buy right now

Considering the outlook for this penny stock, this Fool believes it is one of the best companies in the oil sector to buy right now.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

My top oil penny stock to buy right now is EnQuest (LSE: ENQ). This is not the only small-cap oil producer on the London market, but I think it is in the best position to profit from rising sector prices. 

Not only will the enterprise benefit from higher prices, but I think investors will also benefit as the company’s profits grow, enabling the group to stabilise its balance sheet. 

Penny stock qualities

Most oil and gas companies hedge the price of their production. By using this approach, these enterprises can lock in future cash flows at predefined prices. This means they have some protection from a substantial fall in oil prices. Unfortunately, it also limits gains from rising prices. 

According to EnQuest’s latest trading update, the company has locked in 8.6 mmbbls of oil production this year with an average floor price of c.$63/bbl and an average ceiling price of c.$78/bbl.

If the firm is able to meet the upper end of its output target of 51,000/bbl a day in 2022 this means it has hedged roughly 50% of its production at these prices. With the current price of oil averaging more than $100/bbl, EnQuest could be on track for windfall profits this year. 

Even if oil prices fall substantially, the company’s decision to lock in a $63/bbl floor should help minimise the risk. 

Rising oil prices are one of the reasons why this group is my favourite oil penny stock to buy right now. Another factor is the corporation’s debt. Investors have been avoiding EnQuest for years due to its high level of debt. At the end of December, the company’s net debts amounted to $1.2bn (£900m) compared to its market capitalisation of £422m. 

Management was already projecting that debt would fall this year, thanks to lower costs and higher oil prices. With oil prices surging above the company’s expected range, it looks as if the business will have even more flexibility to reduce borrowings.

A stock to buy today

Still, the corporation will have to overcome some challenges. Rising maintenance and wage costs could increase operating costs. There are also growing calls for a windfall tax on energy producers. Such a tax could have a significant impact on the company’s projections. It would undoubtedly force me to revisit my expectations for the business over the next few years. 

Even after taking these risks into account, EnQuest remains my top oil penny stock to buy right now, and I would be happy to add it to my portfolio.

In the base-case scenario, I think the company will be able to start reducing debt over the coming year while investing in its operations.

In the best-case scenario, if oil prices remain high, I think the business will be able to take a significant chunk out of its borrowings. In this situation, the market’s opinion of the company could change significantly as it repositions itself on a more sustainable footing. 

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.

Rupert Hargreaves 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.

More on Investing Articles

Investing Articles

Could the JD Sports Fashion share price double in the next five years?

The JD Sports Fashion share price has nearly halved in the past five years. Our writer thinks a proven business…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

If interest rate cuts are coming, I think these UK growth stocks could soar!

Falling interest could be great news for UK growth stocks, especially those that have been under the cosh recently. Paul…

Read more »

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »