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Afren Plc, Premier Oil PLC And Tullow Oil plc Have Amazing Recovery Potential

Maybe it’s just a dead cat bounce, but do you get the feeling that the oil price crash has bottomed out?

Crude oil is stuck below $50 a barrel, but the precipitous falls seem to be over for now (and how much further can it fall anyway?).

If that’s the case, smaller oil explorers that have been hammered by the recent sectoral blow-out could stage a dramatic comeback.

If you agree, and if you’re very, very brave, you might want to plough some money into the shares of oil companies such as Afren (LSE: AFR), Premier Oil (LSE: PMO) and Tullow Oil (LSE: TLW).

Going Cheap

Afren’s share price has crashed from 148p to just 28% since July, when oil traded at $116 a barrel.

Premier Oil is down from 330p to 145p in that time, Tullow is down from its 52-week high of 898p to 369p.

These dramatic falls aren’t purely down to oil’s macro misery. Afren’s prospects were recently hit by the major downgrade to reserve estimates at its Barda Rash field in Kazakhstan.

But cheap oil is hurting, and played a major role in Premier’s recent decision to slash spending and cut costs,and Tullow’s painful $2.3bn asset write-down.

Supply Squeeze

Investment is being slashed across the oil sector, but this could be a good time to enter rather than make an exit.

The oil majors, explorers, frackers and renewables specialists are frantically redoing their sums and slashing production, to cope with this strange new world of cheap oil. They may be overdoing it.

As projects are cancelled, jobs are cut, capital expenditure culled, ambitions shelved and frontiers abandoned, supply is facing a major squeeze.

In the UK and Europe alone some £55bn of oil and gas developments will struggle to survive current price levels, according to Wood Mackenzie.

The Tide Is High

The International Energy Agency has already seen signs that the tide will turn. It has cut expectations of 2015 non-OPEC supply growth by 350 kilobarrels per day (kboepd) to 950 kboepd.

Cheap oil may also boost demand, as economies expand and put less of a premium on energy efficiency.

Some kind of oil price recovery seems likely, although maybe not until the second half of the year.

In the meantime, Afren, Premier and Tullow are trading at juicy discounts, and at today’s low prices, also make tempting takeover targets. Buy now and you could strike black gold. But remember, you’re taking a gamble.

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Harvey Jones has no position in any shares mentioned. The Motley Fool UK has recommended Afren and Tullow Oil. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.