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Two rising oil shares to buy today?

Oil seems to be settling around the $45 level amid talk of possible OPEC action to stabilise prices. That’s still low, but most observers are expecting a decent recovery in the next 12-18 months, so how can we best take advantage of that today? I’m looking at two very different approaches.

The explorer

One option is a small oil explorer and producer like EnQuest (LSE: ENQ), whose share price is up 5.7% today, to 28p, and up 140% since February’s low.

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EnQuest has a market cap of approximately £215m, and it operates mainly at productive assets in the UK’s North Sea. So it’s not a firm that concentrates on high-risk exploration in far-flung parts of the world, although at the same time the North Sea tends to suffer from relatively high production costs. It’s tough to value EnQuest shares too, as it’s in a net loss phase and not expected to generate any profits this year or next, so traditional measures like P/E and dividends are meaningless.

The company’s most recent operational update in May reported a 39% rise in production for the four months to April (over the same period in 2015), to 42,752 barrels of oil equivalent per day (boepd), with average April production of 45,933 boepd and full-year guidance of between 44,000 and 48,000 boepd. The firm’s Kraken development was also progressing nicely, and we’ve since heard that EnQuest is planning a 20% farm out to Delek Group. Capital and operating costs are also coming down.

The big risk right now is EnQuest’s debt, which stood at approximately $1.63bn at the end of April — we’ll know more when first-half results are out in early September. EnQuest really needs to see the oil price rise to $60 or more, or it could be facing the need for a dilutive new equity issue. But if you’re prepared to take that risk, anything above $60 could send EnQuest shares nicely upward.

Picks and shovels

An alternative approach is to look for services companies that should do well regardless of which oil companies are the most successful. One I’ve been watching for a while is Gulf Marine Services (LSE: GMS). Gulf bills itself as “the largest provider of self-propelled, self-elevating accommodation jackup barges in the world.” While that might not sound glamorous, its fleet of vessels (which it builds and maintains in Abu Dhabi) are used by a number of major firms in the Gulf region including Royal Dutch Shell, Saudi Aramco, BG Group and Hyundai.

Gulf has had a few contracts cancelled, and while it isn’t attracting much new work at the moment, it’s at least doing reasonably well from maintenance and from existing contracts. The firm does have significant net debt, which stood at $408.5m at 1 May, but it still had undrawn headroom of $200m and it’s still in profit — a pre-tax profit of $77m in 2015 with a forecast for only $48m this year, but that hopefully should keep it safe from risk of default.

Sentiment seems to have picked up a little today with a 5% share price rise to 34.6p, but the shares are still valued on a forward P/E of a meagre 3.4 for this year, rising only as far as 3.7 next year. If Gulf Marine can keep itself above water, it could be another very nice winner on a rising oil rice.

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Alan Oscroft has no position in any shares mentioned. The Motley Fool UK has recommended Royal Dutch Shell. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

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