1 small-cap and 1 giant oil stock I’d buy right now

Royal Dutch Shell (LSE: RDSB) is currently funding its 6.7% yield through debt. In recent years, the company’s combined capital expenditure and dividend payouts have been larger than free cash flow generation. This, combined with the acquisition of BG has led to a massive increase in debt levels. The market seems to doubt the sustainability of the dividend in the face of 49% gearing, but I believe the company could be a somewhat speculative, yet lucrative, purchase despite this.  

A recovery in the oil price saw free cash flow generation increase from $3.32bn in the third quarter to $5.74bn in the fourth, enough to cover the dividend. The company is also in the middle of selling $30bn in assets and combined, I believe these two factors will keep the dividend safe in the next few years.

In the long term, as long as oil remains around $55, the BG deal is likely to be a success too. The two massive operations have merged without a hitch, achieving cost synergies faster than expected. There’s certainly risk involved in buying Shell, but the upside could be significant, including a re-rating and the chunky dividend.

Pipeline success

Amerisur Resources (LSE: AMER) owns and operates low-cost oil fields in Colombia. It’s struggled in the last few years, swinging from profits to losses in the face of a low oil price, but I believe recent developments at the company are not reflected in the shares.

Amerisur has completed work on the OBA Pipeline and after much back and forth with local authorities it is now open for business. The company is currently shipping 1,500 bopd through the structure from its Platanillo oil field every day. This amount is expected to rise significantly in the coming months once the “adjustment of the dynamic measurement system” has been completed.

Opex costs per barrel are expected to decline significantly from an already impressive $26 to under $15. Furthermore, this development is expected to increase the amount the company is paid per barrel. In the past, the company’s oil was transported by truck and was sold at South Blend pricing, a discount to the new attainable pricing, WTI, available by using the pipeline.

The company had deliberately constrained production in the face of low prices and in anticipation of the pipeline, a solid long-term decision to extract maximum value out of its valuable low-cost reserves. The company currently produces around 4,500 bopd, but expects to increase that level to around 20,000 by 2019. The company has a massive £56m cash pile to help it achieve that level through new drilling initiatives and asset purchases.

Pumping value

The share price has been pretty stagnant over the last few years, but at a market cap of £287m and the aforementioned massive cash pile, I believe it to be cheap.  In 2013, the company achieved a £46m profit from an average output of 4,730bopd a day. If the oil price were to recover and the company hits its 20,000 bopd production target I believe it could easily see its market cap double.

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Zach Coffell owns Royal Dutch Shell shares. The Motley Fool UK has recommended Amerisur Resources and 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.