Royal Dutch Shell (LSE: RDSB) is a FTSE 100 dividend champion that’s produced an enormous amount of wealth for investors over the past few decades.
However, while Shell’s record of wealth creation cannot be disputed, there’s one small-cap oil company out there that might be a better buy for capital gains-seeking investors.
Making rapid progress
Caspian Sunrise (LSE: CASP) formerly known as Roxi Petroleum, flies under the radar of most investors, but a trading update from the company today shows why they shouldn’t overlook this fast-growing firm.
Specifically today, the company announced that it has struck oil at its flagship BNG Contract Area, which is located in the west of Kazakhstan.
According to the update, the Deep Well A5 has been drilled. Completed initial flow rates were approximately 3,500 barrels of oil per day using a 11 mm choke. After flowing for four hours without artificial stimulation the well was shut, pending the arrival on site of additional high pressure testing equipment. According to management, well build-up dynamics indicating a “excellent reservoir quality“.
Commenting on these results, Clive Carver, executive chairman of Caspian Sunrise, said: “The volumes of high quality oil already recovered under natural pressure from the well indicates the huge potential of the deep horizons at BNG.”
Production of 3,500/bbl a day might not seem like much when compared to the likes of Shell, but for Caspian, with a market value of only £146m, it’s a significant development. Some 3,500/bbl a day, at $50, indicates annual revenue of £65m, according to my figures. Analysts are prodjecting revenues of £26m by 2018.
Aggregate production is already running at 3,424/bbl a day. So, the addition of the A5 production could take overall production to 7,000/bbl a day, or more.
This makes the company look like a better buy than larger peer. Shell may be one of the FTSE 100’s most trusted income stocks, but its size means growth is hard to come by. Analysts are projecting earnings per share growth of 201% for 2017, but this is mostly due to higher oil prices. For the second quarter, the oil major reported net profit – on a current cost of supplies basis – of $3.6bn, up 245% from $1bn for the second quarter of 2016, on revenue growth of $5bn year-on-year, thanks to higher oil prices.
But over the long term, the earnings trend is disappointing. In the past five years, earnings per share are actually down by more than 50%.
A better buy?
Shell is hobbled by its size. As one of the top four global oil giants, adding significant amounts of production is both difficult and costly. Caspian does not have the same problem. As well as the A5 well, management is drilling several other prospects, which could help drive production over 10,000/bbl a day. Income from this new production will help fund expansion into other regions and drill new wells.
Overall, I believe that as a growth buy, Caspian is the better investment. That said, there’s still plenty of risk in investing in this business. Shell might not be a top growth stock, but with a dividend yield of 6.1%, returns are steady and predictable. Shares in Caspian don’t have the same level of income or size protection.
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Rupert Hargreaves owns shares in Royal Dutch Shell. The Motley Fool UK has recommended Royal Dutch Shell B. 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.