Will Nighthawk Energy Plc Or Soco International Plc Drill Through Their Cash Pile First?

If you have tears, prepare to shed them for investors in US-focused oil development and production company Nighthawk Energy (LSE: HAWK). Over the last 12 months they have seen their shareholding plunge from just over 8p to around 3.50p. Then pity the investor in Soco International (LSE: SIA), whose share price has crashed from 327p to 185p over the last year.

Now dry your eyes, because anybody investing in smaller oil explorers knows the risks they take. Also, you will need your wits about you to work out whether these two stocks are worth buying today.

Night, Night

AIM-listed shale driller Nighthawk ended 2014 on a high, with an upbeat production update highlighting increased production in newly-drilled wells. Management boldly stated that with operating margins of 60% to 70% Nighthawk could survive $50 oil. Investors aren’t as confident, as the share price confirms.

Recent half-year results showed year-on-year oil sales volumes rising slightly from 345,558 barrels to 351,609. This is impressive given the fact that Nighthawk pretty much stopped new drilling activity after admitting in June that 70% of its 2013/14 wells were uneconomic at $60 a barrel. Instead, it has been working to maximise production from its existing wells. 

With a realised oil price of around $44 a barrel, including hedging, Nighthawk is clearly under pressure. First-half revenues fell from $25.4m last year to $16m in 2015. EBITDA operating profits dropped from $17.4m to $6.6m. This left Nighthawk down to its last $2.3m in cash, a situation since remedied by raising $10m through a zero coupon unsecured convertible loan note. That should fund its 2015 and 2016 drilling programme, helping Nighthawk boost production and cash flow, and strengthen its balance sheet. It has no debt due for repayment before 2019.

It can’t do much else about cheap oil apart from slash costs, which it is doing with gusto, shedding staff and streamlining financial and corporate functions. Nighthawk needs pricier oil. No sign of that yet.

So-So Soco

Soco International is up 12% over the last month, as its share price reacted more strongly than expected to the recent oil price rebound. Too strongly, according to Macquari, leaving the stock overvalued, only a penny or so off the broker’s target price of 185p. Currently trading at 65 times earnings, Soco certainly doesn’t look cheap. The ahead-of-schedule H5 exploration project gives some grounds for hope on the production side, and sharing $51m of dividends with investors in June is a sign of positive intent. Currently, Soco yields 5.45%.

Operating cash flow for the first six months of this year was $45.3m, sharply down from $141m in the first half of 2014. Its cash balance stood at $96.6m in June, way better than Nighthawk’s. That is down from $166.4m at the end of last year, although much of the erosion was due to that dividend. Future payouts are likely to be far less generous unless oil quickly recovers. Happily, Soco is free of debt.

If the oil price rebounds, investors can expect a rapid relief rally in both stocks, but with China slowing and supply still holding up, this one could go to the wire. Over to you, Opec.

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Harvey Jones 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.