The oil price has fallen over the last few days as tensions with Iran ease slightly, leaving a barrel of Brent crude trading at around $64. The price is becalmed, but I still think this is a good time to invest in the oil & gas sector.
One tempting option is upstream explorer Premier Oil (LSE: PMO), whose share price has jumped 15% over the last month and that was before today’s positive trading and operations update, which showed first-half production up 11% to 84,100 barrels of oil equivalent a day (boepd) year-on-year.
The group is now on track to meet its previously increased full-year production guidance of 75,000 to 80,000 boepd, boosted by a significant upgrade to the gross resource estimate at its Zama operations in Mexico, while its planned Tolmount UK growth product is scheduled to produce its first gas by the end of 2020.
The Premier Oil share price has been hit by concerns over its debt pile, but free cash flow generation of $180m over the last six months has allowed management to shrink this slightly to $2.15bn, with forecast full-year net debt reduction of more than $300m.
Chief executive Tony Durrant hailed “a strong first half”, and said he was particularly pleased with the continued high operating efficiency of its producing portfolio. It funded the cut in debt and “remains a top priority for the group”. He also reckoned its exploration portfolio offers “substantial upside exposure”.
FTSE 250 listed Premier Oil has a global spread of operations across the North Sea, South East Asia, the Falkland Islands and Latin America, which include some exciting offshore prospects. As always, it remains at the mercy of the oil price, and needs to keep chiselling away at that debt, which is still more than three times its market cap of £661m.
The ride may be too bumpy for some investors even though Premier Oil stock is valued at a tempting 9.9 times forecast earnings. Others may be put off by the fact that there is no dividend, and prefer my other oil sector pick instead.
Right Royal dividend
In these uncertain times, it may feel safer to invest in vertically integrated FTSE 100 behemoth Royal Dutch Shell (LSE: RDSB), whose market cap of £207bn dwarfs Premier Oil. Its stock is up a solid 12% so far this year, broadly in line with the wider index.
Interestingly, while the FTSE 100 trades at around 18 times earnings, the Shell share price looks better value at just 12 times. It looks a more rewarding dividend prospect as well, yielding 5.7% against 4.3% across the index.
Sure of Shell
Shell doesn’t offer the one-stop-shop diversification of a FTSE 100 tracker, but the above comparison still makes it look irresistible. That said, earnings are forecast to fall by around 5% over the next year, and we know what a slowing global economy does to the oil price.
The dividend looks solid with the oil price comfortably above Shell’s break-even point, while management is aiming to buy back at least $25bn of its shares by the end of 2020. It could be ideal for a starter portfolio. I would say, buy this dividend hero first, and maybe stick Premier Oil on your watch list.
Harvey Jones has no position in any of the 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.