Hurricane Energy (LSE: HUR) has certainly attracted a lot of attention following its discovery of potentially the biggest oil find in the North Sea this century. The stock has been in a strong uptrend the past year; however, it’s not the only small-cap oil explorer on the rise.
Nostrum Oil & Gas (LSE: NOG) may be a better pick for investors looking for better value and near-term catalysts. Like Hurricane, Nostrum’s share price has bounced back strongly since its lows in 2016 and has been on a seemingly unstoppable rally. Its share price has more than doubled since April last year, and has gained 22% year-to-date.
The Kazakhstan-focused oil explorer is set to see production soar as it expects to complete construction of its giant GTU III gas treatment unit this year. Completion of GTU III would allow the company to greatly expand its production capacity to over 100,000 barrels of oil equivalent per day.
Additionally, Nostrum benefits from a favourable cost position, with average operational cash costs of production having fallen to $3.7 per barrel last year, from $4.3 in 2015. The company also has strong cash flow visibility due to its existing financing and hedging arrangements. Moreover, as capital expenditures will likely to taper following the completion of GTU III, the company could possibly return to positive free cash flow this year.
With a forward P/E of 26.3, valuations for Nostrum don’t seem too attractive at first glance. But assuming a generally favourable oil price environment, City analysts believe its shares are valued at 8.8 times its 2018 earnings, as profits are forecast to increase strongly on a potential doubling in production over the next two years.
Hurricane’s big discovery
So is Nostrum a better buy than Hurricane?
There’s a lot more certainty surrounding Nostrum’s future earnings growth and the company seems set to deliver meaningful profits much earlier than Hurricane. On the other hand though, Hurricane is sitting on possibly the largest undeveloped discovery on the UK continental shelf, with its true potential yet to be unveiled.
Current estimates of its Lancaster oil field point towards a resource base of around 1.29bn to 3.03bn barrels of oil, with potentially recoverable resources between 255m and 1.07bn barrels. The company sees 593m barrels as its base case, but its true size will only become apparent after further development work.
However, it’s hard to put a value on Hurricane’s shares. Although the company has enjoyed great exploration successes to date, the company has yet to make any profits. Hurricane is still at a relatively early stage in its development plan to build an Early Production System (EPS) and does not expect to deliver first oil until 2019. Moreover, there is great uncertainty with regards to its actual capital expenditure needs and how the development will be funded.
I reckon Nostrum is a better pick for investors looking for a less speculative value play in the sector, while Hurricane is a great choice for those willing to take a bigger risk on something out of the ordinary.
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Jack Tang has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.