Does Royal Dutch Shell Plc, Falcon Oil And Gas Limited & Premier Oil PLC Have Most Recovery Potential?

After BP’s market-pleasing turn earlier this week, the $7.89 billion write-off at Royal Dutch Shell (LSE: RDSB) was an embarrassing pratfall. It also shows the danger of investing in oil stocks given the crashing price of black gold. If ever a sector was ripe for a recovery, this is it.

Shell Sinks

Shell’s write-offs have cleared most of the bad news out of the way, but it doesn’t resolve the underlying problem of the oil price collapse. Like BP,  downstream profits are holding up, but cheap oil has cost Shell billions in upstream impairments, redundancy, restructuring, abandoned projects, not to mention its Napoleonic retreat from the frozen wastes of Alaska.

We often talk about juicy yields on the Fool. Shell’s looks positively succulent at 8.71%, but unless oil dramatically reverses its collapse, it could leave a nasty aftertaste. Shell will do everything to maintain its proud post-war dividend record but, like Napoleon, it may finally meet its Waterloo. I have no idea where oil is going next but it needs to move upwards fast or Shell will end up going nowhere.

Falcon Swoops

Falcon Oil & Gas  (LSE: FOG) has shown forward momentum lately, its share price defying wider market worries to rise 8% in the last month. Smaller oil explorers are mostly hurting in an era of cheap oil, but Falcon is flying on recent drilling success in the Beetaloo Basin, Australia, where it retains a 30% stake with co-venture partners Origin and Sasol. Better still, Falcon is fully carried for all 2015 drilling and evaluation costs.

Further success could drive the price higher, and Falcon has decided to start horizontal drilling at the site in the coming weeks, a year sooner than planned. With six more projects across Hungary and South Africa, investors have plenty to pin their hopes on.

Falcon looks attractive with no debt and a nine-well programme running until 2018. Better still, at 7.25p it is still trading well below its year-high of 10.75p. It may look like a rare point of light in a dark and troubled sector, but it remains risky. Last summer Charles Stanley called Falcon a buy with a target price of 19.7p. Ouch.

Premier Or Championship?

Last time I looked at Premier Oil (LSE: PMO) it was up 30% in a month on a more positive outlook for the oil price. Sentiment has slipped since then, and so has Premier. Its share price has now halved in the last six months. Oil needs to hit at least $60 a barrel to revive Premier but the signs don’t look good, and Goldman Sachs is predicting a rough start to next year as well.

Premier is on course to make a pre-tax loss of £95m this year, but that is forecast to convert into a £53m profit in 2016. As we have just seen, a slight rise in the oil price equals a sharp rise in Premier’s share price.Trading at just 67p, well below its year-high of 262p, this is a tempting buy for oil bulls. The problem is that nobody knows where the oil price will go next. Gambling is absolutely fine, as long as you only do it with a small chunk of your portfolio.

If playing the oil price is too much of a gamble for you, there are other equally exciting options.

I'm thinking of this company, which the Motley Fool's Head of UK Investing has singled out as the 1 'under-the-radar' pharmaceutical stock with blockbuster potential.

The stock has already delivered a strong return and our top expert believes there could be more to come. In fact, he reckons it offers investors potential upside which may be as high as 45%!

To find out which stock we consider one of the best small caps in the country, simply download our brand-new wealth report. It is free and without obligation, so click here now.

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.