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A small-cap growth stock I’d buy ahead of Hurricane Energy plc

Last year, shares in Hurricane Energy (LSE: HUR) four-bagged after the company reported the “largest undeveloped discovery” of oil in UK waters. Following last year’s breakthrough, over the past 10 months management has been working hard to get the project’s development underway, and the company is now on-track to for first oil to flow in 2019. 

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A long way to go 

Over the summer, Hurricane raised $547m through a mix of convertible debt and equity to finance its Lancaster North Sea oil project. The regulatory green light for the project was given at the end of September and construction of the infrastructure required to start production during the first half of 2019 is already underway. 

But there’s still a lot to do before Hurricane is actually producing oil. For example, the early production system, which will initially target production of 17,000 barrels of oil per day, needs to be commissioned and manoeuvred into place. 

On the other hand, Hurricane’s peer Amerisur Resources (LSE: AMER) is already producing oil. And unlike Hurricane, which now has a mountain of debt to maintain and repay, Amerisur has a squeaky clean balance sheet. 

Strong balance sheet 

For the six months ending 30 June 2017, Amerisur reported cash and equivalents of $29m, and a cash inflow from operations of $8.5m. Thanks to the commissioning of a new pipeline allowing the company to export its oil production without having to rent oil tankers, the operating netback per barrel produced increased by 164% year-on-year to $29.6, up from last year’s $11.2. Adjusted EBITDA for the period rose 986% to $7.6m. 

The fact that the South America-focused oil producer is netting nearly $30/bbl from its oil production and generating cash with oil prices at $50/bbl is a testament to the firm’s low-cost operations and management’s cost-cutting actions. 

As well as cost-cutting, management has been busy using the firm’s cash-rich balance sheet to acquire distressed assets during the past few years. On these assets, the firm is targeting 16 gross new wells by the end of 2018 as it looks to boost production and cash generation. All drilling activity is expected to be funded by existing cash resources and cash generated. 

Profitable growth 

For 2018, City analysts are expecting Amerisur to report earnings per share of 1.9p, up 280% from 2017’s figure of 0.5p. Based on these numbers, the shares are trading at a forward P/E of 13.1. 

Hurricane, meanwhile, isn’t expected to produce any income until 2019, and plenty could go wrong for the business both before and after its Lancashire prospect comes online. 

With this being the case, I believe that Amerisur is a better buy. The firm is already generating cash, has a strong balance sheet, and is well positioned to profit as oil prices move higher. 

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Rupert Hargreaves has no position in any share mentioned. The Motley Fool UK has recommended Amerisur Resources. 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.

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