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Which is the best small-cap oil stock after today’s news?

The oil price may now be trading much higher than the $28 per barrel low of earlier in the year, but today’s updates from smaller oil companies Faroe Petroleum (LSE: FPM) and Roxi Petroleum (LSE: RXP) show that the sector remains risky. However, it also offers high potential returns, with today’s news also providing an insight into how both companies intend to boost growth over the long term.

Faroe Petroleum

Faroe Petroleum has today announced the commencement of drilling of the Njord North Flank-2 exploration well in the Norwegian North Sea. It will target Middle and Lower Jurassic sandstone reservoirs of the Ile and Tilje. If successful, it will add another tie-in opportunity for Faroe in the Greater Njord Area and follows on from the significant Faroe-operated Brasse oil and gas discovery well and side-track announced last month.

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As well as the drilling update, Faroe has also announced news on its acquisitions from Dong Energy. Since no existing partners in the Ula field have taken up their option, the transaction can proceed as expected.

Clearly, Faroe is adopting a fast pace of development in what remains a challenging oil environment. With costs having fallen across the industry, this strategy makes sense because it means that drilling costs are kept to an absolute minimum. This should provide the company’s investors with greater confidence in the financial capabilities of the business, while its asset base offers improving financial performance over the medium-to-long term.

As a small operator without the diversity of an oil major, Faroe remains relatively risky, but its potential rewards are also high.

Roxi Petroleum

Roxi Petroleum has today announced that it has spudded Well 141 as it seeks to replicate the success of Well 143 at its flagship BNG asset in Kazakhstan. Well 141 is located 1.1km from Well 143, with a planned depth of 2.5km. Well 143 has produced at a maximum rate of 815 barrels of oil per day (bopd) and the first indications from it were that the shallow horizon extends over a significant area. This bodes well for future drilling and means that the BNG asset continues to offer an upbeat long-term outlook for Roxi.

Roxi’s financial standing remains sound. In its most recent financial year, the company’s bottom line increased from a profit of $5.7m in 2014 to a profit of $10.6m in 2015. Furthermore, with it currently producing in aggregate 616 bopd from three shallow wells, its drilling programme appears to be relatively well-funded. This reduces the chance of a fundraising in the near future and means that the company could continue to deliver upbeat performance.

However, with Faroe having a stronger asset base and larger size and scale benefits, it’s the better long-term buy at the present time. Both companies could perform well, but Faroe has a more appealing risk/reward ratio than Roxi.

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Peter Stephens 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.

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