The energy price slump has been bad news for oil majors and explorers alike, drilling a hole through all their planning assumptions. Smaller explorers have been hit particularly hard, as confidence and investment money dries up. Some explorers have been hit harder than others.
US-focused oil development and production company Nighthawk Energy (LSE: HAWK) was always a risky play, whatever the oil price. Over the last year its share price has absolutely collapsed from 7.50p to today’s rock-bottom purchase price of a meagre 1.70p. This penny stock now reads like a penny dreadful.
It all looked so much more optimistic in December last year, when management issued an upbeat production update following increased production in newly drilled wells. It claimed that with operating margins as high as 60% to 70% it could earn a reasonable rate of return on its drilling capital even if oil fell hit $50 per barrel. Today, it is $45 a barrel. But that isn’t the main cause of its current woes.
Nighthawk announced in August that it was running a five-well drilling programme for late 2015, and the results so far have been mixed. Results from its Arikaree and Crested Butte wells remain promising but management had to plug and abandon its Monarch well, after sinking around $550,000 into the project. November brought more bad news, with the Happy Jack 7-10 well also plugged and abandoned, and last Thursday management announced that the Northstar 1-14 would suffer the same fate. There is no further drilling planned for this year.
Nighthawk recently bought itself time by raising $10m through a zero coupon unsecured convertible loan note, which should fund its 2016 drilling programme. But investors tempted by today’s rock bottom share price face a nerve wracking 2016 as they await drilling success and pricier oil. That is a double dare I want nothing to do with.
Soco, So Good
Things aren’t quite so desperate at Vietnam-focused Soco International (LSE: SIA), but the outlook is still tough. At today’s 135p, the share price is well down from its 52-week high of 317p. Again, cheap oil is the major problem, but a disappointing recent production update in mid-November dealt a further blow to sentiment. Its H5 well gladdened investors when it started pumping early this year but latest figures show that production is a saddening 9,000 barrels of oil equivalent per day (boepd), against initial expectations of 11-12,000.
The subsequent share price slump has listed its yield to a hefty 11.33%, but I wouldn’t buy this stock for the dividend, as further oil price weakness or drilling disappointments will put it under increased pressure. Only buy if you are gambling on a recovery. Soco looks less risky than Nighthawk, with forecast revenues of around £140m next year, only slightly down on 2015, and pre-tax profits holding steady at around £38m. Predictions like these make me edgy because they are subject to so many variables. There is big money to be made from the oil rebound, but equally big risks. Soco looks safer than Nighthawk, but is still too risky for me.
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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.