I don’t know whether “tough” is the right word to describe investors still clinging onto stocks at the more speculative end of the energy sector. Crazy. Daft. Reckless. Dozy. Those might be better descriptions. 2015 has been a dreadful year for oil and commodity stocks, wiping out both loyal shareholders and contrarian knife-catchers alike. But nothing lasts forever, however bad, and at some point the sector must surely turn.
Nighthawk Drills Deeper
Should oil rebound, fortunes will be made. Could you make yours by investing in Nighthawk Energy (LSE: HAWK)? This US-focused oil development and production company has been hunted rather than hunter this year, with its share price crashing from 7.45p one year ago to just 1.1p today. Last week it released a positive production update, reporting increased production in newly-drilled wells, with average gross production in October rising to 1,886 barrels of oil a day.
It’s also capturing more reserves from existing wells by reconfiguring them and has identified 17 new drilling locations within its Snow King Discovery area. This upbeat report follows a series of underwhelming updates that knocked faith in the company’s prospects, but has done little to revive the share price.
Yet Nighthawk may be worth a closer look. With reported operating margins of up to 60% or 70% it should be able to survive cheap oil, management claims, even if the price remains as low as $50 a barrel. A week is a long time in oil exploration, however, and oil is now heading towards $36, crashing through those calculations. If you think buying oil exploration stocks is the tough thing to do – rather than crazy, daft, reckless – you might want to swoop on this opportunity. Be warned, you could get clawed.
AIM-listed oil appraisal and development company Xcite Energy (LSE: XEL) has also had a troubled year, its share price falling from 44p to around 15p. The big challenge it faces is convincing today’s worried oil markets to invest in its flagship entry Bentley heavy oilfield in the Northern North Sea, which is thought to have reserves worth around $2.3bn over a 35-year timescale.
Xcite’s third-quarter update in late November saw management claiming progress with a number of funding options and reckoning it can exploit Bentley with total lifecycle costs of $35 a barrel. That sounded okay at the time but doesn’t look so good with oil at $37, and speculation that it could slump to $30 next year.
The company is working hard to reduce drilling and operational costs, using innovative but proven technology such as its mobile offshore production unit. It has now completed technical and economic due diligence with one partner, and is ready to move into commercial discussions. Again, that was when oil stood at $50.
With a cash balance of $27.9m at the end of September, and a net Q3 loss of just $0.3m, debt isn’t a problem right now. Finding funds in today’s market is. The lower oil falls, the harder it will get. This stock is speculation upon speculation, and is way too tough for a scaredy-cat like 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.