As the price of oil languishes at a multi-year low, there are plenty of bargains seemingly to be had in the petroleum sector.
However, picking a single stock as a play on the sector’s recovery is a risky bet. Picking stocks is tough. Even the so-called experts get it wrong most of the time. That’s why investors should always build a well-diversified portfolio, to reduce risk and improve their chances of long-term wealth creation.
And with this in mind, the best way to play a recovery in oil prices could be with a broad selection of oil producers and explorers. Four of the best producers and explorers are Gulf Keystone Petroleum (LSE: GKP), Premier Oil (LSE: PMO), Falkland Oil and Gas (LSE: FOGL) and Frontera Resources (LSE: FRR).
Four diversified plays
Gulf Keystone, Premier, Falkland, and Frontera are four different companies, in four various stages of their lives, all operating in four different regions around the world. You couldn’t pick a more diversified basket of stocks.
Frontera Resources is the smallest of the group, but that doesn’t mean that the company should be avoided. Frontera is a small company with big ambitions. Management is targeting production of 7 million cubic feet per day of gas and approximately 1,000 bbls per day of oil by the end of 2015.
Frontera’s exploration activities within Georgia have also yielded significant results. The company believes that its South Kakheti Gas Complex is a world-class gas play, which could yield substantial results for the company over the long-term. Moreover, unlike many other small-cap oil and gas explorers, Frontera is already generating revenue. Revenues from crude oil and gas sales totaled $3.2m during the first half.
Falkland Oil and Gas isn’t generating any income, but the company’s cash-rich balance sheet will help it fund the development of its prospects in the Falkland Basins. These prospects look set to yield excellent production numbers over the medium to long-term.
Falkland and its regional peer, Rockhopper Exploration, are planning to begin oil production from the Falklands prospects, assuming everything goes to plan, by 2019. The recently revised field development plan will cost the two companies $2bn. And as I’ve written before if everything does indeed go to plan, Falkland’s shares could rise by more than 700%.
Both Frontera and Falkland are exploration plays, Premier Oil, and Gulf Keystone are two production plays currently trading at rock-bottom valuations. Premier is trading at a low not seen since the financial crisis, but 60% of the company’s production for the rest of the year is hedged at $92/bbl, and 30% of 2016 production is hedged at $68/bbl.
Analysts are expecting a pre-tax profit of £65m for 2016, and Premier’s principal $2.5bn bank facility is not up for refinancing until mid-2019. So, the group has plenty of balance sheet flexibility.
Gulf Keystone is also trading near its all-time low, but the company is in a stronger position now than it has been for many years. Payments from the Kurdistan Regional Government have started to arrive, and the company is finally starting to repair its bruised balance sheet.
Gulf Keystone’s production costs are some of the lowest in the industry, so the company is better placed to weather the industry’s storm more than most.
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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.