Why Genel Energy PLC, Victoria Oil & Gas plc And Cairn Energy PLC Can Ride Out The Oil Crash

Are Genel Energy PLC (LON:GENL), Victoria Oil & Gas plc (LON:VOG) and Cairn Energy PLC (LON:CNE) offering investors the chance to buy quality assets on the cheap?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

With oil now trading below $28 per barrel, I believe investors looking to invest in oil stocks need to ignore revenue and profit forecasts and focus on assets.

I’m looking for companies with cheap oil and gas reserves and enough cash to ride out the slump. I believe this approach has the potential to deliver big gains when oil prices do recover to more sustainable levels.

In today’s article I’ll look at three popular stocks that have issued market updates this week. Do they meet my requirements?

Genel Energy

Genel Energy (LSE: GENL) issued a trading update this morning. The group said that 2015 revenue would be below expectations, at $342m versus a forecast of $350 to $375m. Genel also said that production will fall from about 85,000 barrels of oil per day to between 60,000 and 70,000 BOPD in 2016, due to spending cuts.

Genel shares are down by more than 10% as I write, but today’s news doesn’t really concern me. For investors with a long-term view, I think it’s more important to focus on Genel’s assets and low costs.

According to today’s update, Genel can break even in 2016 with a Brent Crude price of $20/bbl. Cash spend is expected to average $20m per month, less than the $25m the group is currently receiving each month from the Kurdistan government.

Genel still has a cash balance of $455m and while it does have some debt, this doesn’t mature until 2019. In the meantime, the group’s 429m barrels of proven and probable reserves are currently valued at just $1.50 per barrel. In two years’ time, this could seem very cheap.

Victoria Oil & Gas

Cameroon gas producer Victoria Oil & Gas (LSE: VOG) makes most of its money by selling gas to local industrial companies that use it to generate electricity. The firm has a similar deal with a Cameroon power utility.

Victoria said today that it sold 2,867.7m cubic feet (mmscf) of gas in 2015, a 125% increase on 2014.

Sadly, no information about 2015 profits or capital expenditure was released. The group ended the year with net cash of $5.9m, broadly flat on last year, but we’ll have to wait until May to find out if Victoria made a profit last year.

In the meantime, one concern is that Victoria’s revenue share will fall from 100% to 60% at some point in 2016, as its partner’s right to 40% of revenue kicks in. It’s not clear to me whether sales growth is likely to cancel out this fall.

Cairn Energy

Like Genel, Cairn Energy (LSE: CNE) is an oil play for patient and brave investors. The group had a major discovery offshore Senegal last year, which it expects to make “a material contribution” to the firm’s reserves.

Cairn is also invested in the Catcher and Kraken developments in the North Sea. These are expected to start producing oil in 2017 and will provide valuable revenue for Cairn.

In the meantime, Cairn has net cash of $603m and an undrawn $300m lending facility. It’s fully funded through to 2017.

The stock’s current enterprise value (market cap minus net cash) puts Cairn’s proven and probable reserves at about $6.50 per barrel. That could seem cheap if oil recovers to $50 per barrel over the next couple of years.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Roland Head 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.

More on Investing Articles

Mature couple at the beach
Investing Articles

6 stocks that Fools have been buying!

Our Foolish freelancers are putting their money where their mouths are and buying these stocks in recent weeks.

Read more »

Black woman using loudspeaker to be heard
Investing Articles

I was right about the Barclays share price! Here’s what I think happens next

Jon Smith explains why he still feels the Barclays share price is undervalued and flags up why updates on its…

Read more »

Investing Articles

Where I’d start investing £8,000 in April 2024

Writer Ben McPoland highlights two areas of the stock market that he would target if he were to start investing…

Read more »

View of Tower Bridge in Autumn
Investing Articles

Ahead of the ISA deadline, here are 3 FTSE 100 stocks I’d consider

Jon Smith notes down some FTSE 100 stocks in sectors ranging from property to retail that he thinks could offer…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

Why I think Rolls-Royce shares will pay a dividend in 2024

Stephen Wright thinks Rolls-Royce shares are about to pay a dividend again. But he isn’t convinced this is something investors…

Read more »

Investing Articles

1 of the best UK shares to consider buying in April

Higher gold prices and a falling share price have put this FTSE 250 stock on Stephen Wright's list of UK…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

The market is wrong about this FTSE 250 stock. I’m buying it in April

Stephen Wright thinks investors should look past a 49% decline in earnings per share and consider investing in a FTSE…

Read more »

Black father and two young daughters dancing at home
Investing Articles

1 FTSE 250 stock I own, and 1 I’d love to buy

Our writer explains why she’s eyeing up this FTSE 250 growth phenomenon, and may buy more shares in this property…

Read more »