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Is Falcon Oil and Gas Limited A Better Buy Than Premier Oil PLC & Enquest Plc?

Many oil companies offer good value at the moment, and for many investors now is the time to buy. However, not all of the companies will spring back if the oil price rises. High levels of debt, operating in expensive regions and lack of drilling are three factors that I believe will hold back stock prices. 

Last week’s news from Falcon Oil & Gas (LSE: FOG) was brilliant for the company. Falcon announced that partners had drilled another successful well in the Beetaloo Basin, Australia. On the back of another successful well, the shares rose up more than 30%; following this, the third well of the campaign is being brought forward by 12 months (Falcon is in the middle of a nine-well campaign over three years). The company has no expenditure and lots of exposure to drilling and, due to this, is one of my top picks in the sector. Recently the shares have been trading at 52-week lows, but any more success in the drilling campaign should cause the shares to re-rate. 

Premier Oil (LSE: PMO) is still struggling after taking large write-downs on various assets. Subsequently, the shares are performing in the bottom half of its peer group. The company will make another loss this year, and I don’t think the situation will get better any time soon.  Operating primarily out of the North Sea is also a negative in my view, due to the high costs involved. The balance sheet doesn’t look good, and although debt covenants have been moved back, the company needs oil to gain a few dollars in order to make a return.

Enquest (LSE: ENQ) is very similar to Premier Oil and needs an oil price of above $60 to really make a profit. Revenues are 12% down in H1 2015 even though the company increased production by 17% to 29,665 boepd. The company has some exiting developments to come on-stream in the next few years, but it looks as if Enquest needs the oil price to rise quite substantially. The balance sheet isn’t very healthy with a net debt of $1.28bn, but it can afford to wait it out and won’t be in any danger of breaching debt covenants. Production is forecast to reach between 33,000-36,000 by year-end with Alma/Galia coming online, and this should help the company keep revenues up. 

Investing in the oil & gas sector is risky at the moment but the reward is huge. In the case of Falcon Oil & Gas, I think it offers one of the best investment cases in the sector. The company has no large capital expenditure for years, and has exposure to the high-impact drilling campaign of which the first two of nine wells have been successful. Even after the share price rose last week on the back of good well results, I believe Falcon is a good bet for the future and should outperform. 

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Jack Dingwall 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.