But while many of us were guzzling mince pies and turkey, takeover activity has been ramping up in the oil market.

In the run-up to Christmas, North Sea firm Faroe Petroleum (LSE: FPM) received an offer from Norwegian firm DNO. And when markets opened on 2 January, the Ophir Energy (LSE: OPHR) share price rose by nearly 35% when management confirmed that takeover talks are under way.

Today I want to take a look at the latest updates from Faroe and Ophir, and ask whether Premier Oil could be the next company to be targeted by a larger rival.

This offer seems too low to me

DNO’s attempt to buy Faroe Petroleum has triggered a war of words between the two firms. Faroe management said that DNO’s 152p per share bid is “opportunistic and substantially undervalues Faroe”.

In contrast, DNO thinks that “Faroe has failed to deliver consistent shareholder returns over the last 15 years” and suggested the firm could struggle to realise the full value of its assets.

In a statement on Wednesday, Faroe said that an independent valuation of its assets suggested a fair price of 185p to 225p per share. That’s 22% to 48% above the existing DNO offer.

My view: I think DNO’s offer of 152p probably is too low. But there’s no guarantee it will offer more and the offer could still fall through. I’d sit tight, but would not buy more Faroe shares.

Ophir surges 35% as talks confirmed

The share price of Asia- and Africa-focused oil and gas firm Ophir Energy flicked higher on New Year’s Eve. When the City returned to work on 2 January, the company issued a formal statement revealing that it’s in takeover talks with Indonesian firm Medco Energi.

I’ve written about the potential appeal of Ophir’s assets before. Today’s news has lifted the group’s share price by more than 30% to about 47p, but as yet there’s no guarantee that Medco will make an offer for the stock.

My view: I think Ophir shares could still be cheap enough to offer an opportunity, but there’s still a risk that no agreement will be reached. I’d hold.

A Premier buy?

One thing both Faroe and Ophir have in common is that they have low debt levels and plenty of cash. This isn’t true of Premier Oil, where net debt was expected to be $2.4bn at the end of 2018.

The company does have a plan in place to repay borrowings and also has the support of its lenders. However, last year’s oil price slump could slow the pace of debt reduction. And the firm’s high level of debt means that management needs the approval of lenders for any major investment decisions. This could restrict the company’s ability to grow.

My view: I think a potential bidder might decide that it could squeeze more profit out of Premier’s assets if the firm was freed from its debt burden. In my view, the current depressed share price could trigger an opportunistic bid.

The post Is the Premier Oil share price now good value, after 50% fall? appeared first on The Motley Fool UK.

More reading

• I’m targeting an £8,299 annual income from £20,000 in this transformed FTSE energy star!

Roland Head owns shares of Premier Oil. 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.

Today I want to highlight another reason why I believe Tullow’s shares could be too cheap to ignore. I also want to consider another oil stock which looks much riskier, but which could also deliver big gains over a fairly short period.

Poised for lift-off?

In my previous piece, I noted how Tullow’s cash operating costs are now 43% lower than they were in 2014. The group’s net debt is roughly the same as it was then, but the difference is that spending is now falling and cash flow is rising rapidly.

The group’s latest results showed free cash flow of $401m during the six months to 30 June, double the $205m generated during the first half of 2017.

I believe the figure for the second half of the year could be significantly higher, based on recent oil price gains. During the first half of the year, the price of Brent Crude remained below $70 until April. Tullow’s average oil sale price for the period was $67.50.

So far in the second half, oil has traded between about $71 and $80. So unless the price falls sharply over the next couple of months, I think it’s fair to assume that the average oil sale price for the current six-month period will be over $70.

In my view, this suggests that free cash flow for the full year should be $900m-$1bn, which should speed up debt reduction.

The firm’s shares currently trade on a 2018 forecast price/earnings ratio of 11.6, falling to a P/E of 9.2 in 2019. At this level, I rate Tullow as a buy.

An under-the-radar buy?

Shares of Africa and Asia-focused oil and gas firm Ophir Energy (LSE: OPHR) are now worth nearly 90% less than five years ago. What’s gone wrong?

The big disappointment is that the firm has so far failed to find a partner to finance the development of its Fortuna LNG gas field, off the coast of Equatorial Guinea. A previous joint venture deal collapsed during the first half when US oil services firm Schlumberger withdrew.

Time is now running short, as the firm’s licence to exploit this discovery runs out at the end of 2018. Without a financing deal before then, Ophir could lose this asset altogether.

Moving on?

In today’s results, interim chief executive Alan Booth stressed that he’s “continuing to work to deliver value for our shareholders while we are in possession of the licence”. But to be honest, I think the company is already moving on.

The firm has acquired a string of production assets in Asia, and today’s strategy update made it clear that this will be the main focus from now on.

A hidden bargain?

Ophir expects its production assets to generate free cash flow of $300m over the next three years. Averaging this to $100m per year gives the stock a price/free cash flow ratio of just 3.5, which is very cheap indeed.

Analysts’ forecasts also suggest a potential bargain. Full-year profits are expected to rise from about $19m to $61m in 2019, putting the shares on a 2019 forecast P/E of 5.6.

Although Ophir isn’t without risk, I think the shares could prove to be cheap at current levels.

The post Thinking of buying the Tullow Oil share price? Read this first appeared first on The Motley Fool UK.

More reading

• £50 put into Nvidia stock at the start of 2015 is now worth…
• How these 2 shares in a Stocks and Shares ISA could deliver life-changing passive income
• Here’s why the Diageo share price is up 12% in a month!
• What on earth’s going on with UK shares today?
• How am I targeting an annual passive income of £14,754 from just a £20,000 holding in this FTSE financial giant?

Roland Head 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.

However, Tullow’s focus on debt reduction means that shareholders have had to take a back seat over the last few years. The group hasn’t paid a dividend since 2013, and the shares have lost more than 75% of their value over the last five years.

The Africa-focused firm is expected to return to profit this year, with analysts forecasting earnings of $0.20 per share. That puts the stock on a forecast P/E of 15.6. This seems about right to me, so I’d rate Tullow as a hold rather than a buy.

I believe there’s better value elsewhere in the oil market, including my next stock.

This stock could rise by 226%

Shares of FTSE 250 oil and gas group Ophir Energy (LSE: OPHR) rose by 6% this morning, after the company announced a $205m deal to acquire producing oil and gas assets in South-East Asia.

The planned acquisition will see Ophir buy a portfolio of producing assets in Vietnam and Indonesia from Australian firm Santos Limited. A number of exploration and appraisal assets in the region will also be included.

These new fields should fit together well with the production assets the firm acquired when it bought Salamander Energy in 2015. Chief executive Nick Cooper expects the new assets to add about 13,500 barrels of oil equivalent per day (boepd) to the group’s pro forma production in 2018, taking total production to 25,000 boepd.

The deal will increase Ophir’s proven and probably (‘2P’) reserves by 43% to 70.6 million barrels of oil equivalent. And it’s also expected to bring the group closer to its objective of generating free cash flow from production.

This is significant, because it should protect the long-term value that’s hidden on the firm’s balance sheet. Ophir’s accounts showed a net asset value of 206p per share at the end of 2017, 226% above the last-seen share price of 63p.

Why I’m excited

Ophir is a business of two halves. The group’s production assets provide useful cash to keep the company going.

But before it started buying these mid-sized production fields, Ophir discovered a number of large gas deposits off the coast of Africa. Finding commercial partners to develop these is taking time. But I’m confident it will happen eventually.

Based on its track record to date, Mr Cooper’s plan is to find larger partners to fund these projects in return for a slice of the asset. Ophir itself has steered clear of borrowing to fund development and this has paid off. The group came through the oil market crash with a strong balance sheet and ended last year with net cash of $117m.

I believe that Ophir’s growing production means that the worst-case scenario for shareholders is that the shares remain flat for the next few years. The best-case scenario is that the stock could double or more.

Although this has been a disappointing investment so far, I believe the shares now deserve a buy rating. Buying Ophir stock today and tucking it away for a few years could be very profitable, in my view.

The post The Tullow Oil share price may keep rising, but I’d buy this stock first appeared first on The Motley Fool UK.

More reading

• £50 put into Nvidia stock at the start of 2015 is now worth…
• How these 2 shares in a Stocks and Shares ISA could deliver life-changing passive income
• Here’s why the Diageo share price is up 12% in a month!
• What on earth’s going on with UK shares today?
• How am I targeting an annual passive income of £14,754 from just a £20,000 holding in this FTSE financial giant?

Roland Head 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.

Reporting on Wednesday was one stock which is due to record a return to profitability over the next couple of years after a difficult period. Similarly, another 5% yielder also reporting Wednesday could return to share price growth after a disappointing year. Both stocks could be worth buying right now.

Improving outlook

 Oil and gas explorer and producer Ophir Energy (LSE: OPHR) experienced a somewhat challenging 2017 financial year, having failed to achieve the Fortuna project final investment decision despite having made significant progress on the project. However, progress was made on meeting operational targets, as well as in rebalancing its portfolio.

The company appears to be approaching a more sustainable business model. It was able to reduce general and administrative expenses by 17%, while growing reserves by 13% and increasing net funds flow from production by 46%. It also seems to be in a strong position to deliver on its goals of growing production and cash flow in the 2018 financial year.

Clearly, the last few years have been tough for Ophir Energy. A lower oil price and reduced confidence in the industry have led to a disappointing financial performance. However, with the oil price having risen and its strategy beginning to have an impact on its performance, the company is due to return to profitability in the 2019 financial year. This could boost investor sentiment and lead to a rising share price.

Transitional period

Also offering turnaround potential is British American Tobacco (LSE: BATS). The company’s share price has fallen by around 18% in the last year as uncertainty surrounding the prospects for the US tobacco industry have caused investor sentiment to decline. The FDA (US Food and Drug Administration) has mooted potential proposals for major reductions in the nicotine content of various products, which could severely hurt sales in the country.

With British American Tobacco increasing its exposure to the US following the acquisition of Reynolds, it could be hit hard by the potential changes. However, with the stock now having a dividend yield of around 5% and a price-to-earnings growth (PEG) ratio of just 1.6, it seems as though investors have fully priced in its risks.

The company has a solid balance sheet and strong cash flow, while its exposure to next generation products means it could be in a good position to deliver long term earnings growth. As such, and while its near term share price performance may disappoint, its long term investment potential appears to be excellent.

The post One turnaround stock I’d buy alongside this unloved 5% yielder appeared first on The Motley Fool UK.

More reading

• Time to buy cheap British American Tobacco shares before they reach 4,900p?
• How much do investors need in an ISA to target a £31,353 yearly passive income
• State Pension of £12,548 not enough? Here’s how to aim to add another £31,352 to your retirement income
• 5 steps that could turn £5 a day into a £500 a month passive income
• I’m targeting £9,089 a year in dividends from £20,000 in this powerhouse FTSE income share

Peter Stephens owns shares in British American Tobacco. 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.

Meanwhile, the chatroom buzz, which at one time surrounded Africa- and Asia-focused Ophir Energy (LSE: OPHR), is rather muted these days. A trading statement from the company this morning generated little excitement, as it contained no revelation on the finalisation of funding arrangements for its big Fortuna FLNG project in Equatorial Guinea.

Could the overdue news from both UKOG and Ophir send their shares soaring ? And which stock offers investors the better value?

Production

As I’m writing, shares of AIM-listed UKOG are dealing at 3.4p, valuing it at £124m. Two of the 10 licences in which it has an interest have fields in stable production. Last year, one produced 144 gross barrels of oil per day (bopd) and the other 47. UKOG’s interests are 10% and 5% respectively, and its revenue for the year was £151,000.

Ophir is listed on the main market, where it’s a member of the FTSE SmallCap index. Its shares are trading at 73.5p (3% down after this morning’s trading statement), giving it a market cap of £519m. Last year, Ophir generated $107m revenue on 10,800 boepd from two fields in Thailand and one in Indonesia.

News round the corner

Flow tests at Horse Hill, in which UKOG has a 34.4% interest, produced a total aggregate rate from three horizons of 1,688 bopd. However, as these were recorded over just 8.5, 7.5 and four hours, they don’t tell us too much. In this respect, I suspect the current flow tests at Broadford Bridge will be similarly unsatisfactory, because testing has already overrun by a month, due to problems.

Delays to Ophir’s negotiation of funding for its Fortuna FLNG project have been frustrating but I’m optimistic about the news round the corner here. If all goes to plan, we’d see first gas in 2020 with 16,000 boepd to Ophir.

Weighing up

There’s little solid by which to value UKOG at the moment. The most recent trade sale of a Horse Hill licence interest valued the acreage at £142,215 per km². If we were to apply this to UKOG’s entire 67% interest in the total 928 km² of the 10 licences — which would be extremely generous, as much of the area is far behind Horse Hill– we’d get a valuation of £88m versus the market cap of £124m.

Based on this valuation and the fact that the company is being funded by what is colloquially known as ‘death spiral financing’, I’m inclined to rate the stock a ‘sell’.

By contrast, Ophir has significant commercial production, total liquidity of $427m, net cash of $117m and 1bn boe of reserves and resources offering asymmetric upside. For these reasons, I’m inclined to rate this stock a ‘buy’.

The post Is UK Oil & Gas Investments plc about to make investors £millions? appeared first on The Motley Fool UK.

More reading

• £50 put into Nvidia stock at the start of 2015 is now worth…
• How these 2 shares in a Stocks and Shares ISA could deliver life-changing passive income
• Here’s why the Diageo share price is up 12% in a month!
• What on earth’s going on with UK shares today?
• How am I targeting an annual passive income of £14,754 from just a £20,000 holding in this FTSE financial giant?

G A Chester 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.

Today I’m going to highlight two companies where I believe opportunities may exist.

Onshore market “strengthened”

Oil services firm Hunting (LSE: HTG) has been a big beneficiary of the recovery in the US shale sector. According to the company, its ‘H1 Perforating System’ is increasingly the mandated choice for US onshore drillers, thanks to its reliability.

Trading in the Hunting Titan business, which sells the H1 system, has “strengthened throughout the year”. The other arms of its US business that sell to onshore operators are also expected to report an operating profit this year.

Unfortunately the group’s other US ops plus its regional ops in Canada, Europe, Middle East and Asia Pacific all “remain lossmaking at the operating level”.

Impressive financial performance

It’s clear that the group still faces tough market conditions. But I’ve been impressed by the strength of Hunting’s financial performance.

The group expects to end the year with a net cash position, versus a net debt of about $130m three years ago. By cutting costs and controlling spending, it has continued to generate cash through the downturn.

Negotiations are currently under way with lenders to return the firm’s banking facilities to normal operation. That means that restrictions on dividend payments and spending should be lifted.

A full-year profit of $32m is forecast for 2018. That puts the stock on a forecast P/E of 37. But my view is that Hunting’s shrunken cost base should accelerate profit growth if market conditions continue to improve as I expect. I think this stock could surprise to the upside in 2018.

An overlooked bargain?

Ophir Energy (LSE: OPHR) made a name for itself with several huge gas discoveries off the coast of Africa during the first half of the decade.

However, although the firm’s stake in these discoveries could be worth billions of dollars, finding investors to buy or fund the development of these giants is proving more difficult.

A planned financing deal with “a group of Chinese banks” to develop the Fortuna Floating LNG project off the coast of Equatorial Guinea seems to have ground to a halt.

Ophir announced today that it’s now seeking alternative funding of up to $1.2bn from “a leading Asian bank”. Ophir hopes to close this deal early in 2018, but even if successful it could be several years before gas starts to flow.

In the meantime, revenue is restricted to sales from the firm’s more modest oil and gas fields in Asia. These assets were purchased from Salamander Energy in 2015. Over the 12 months to 30 June, they provided net funds of $68.7m to help support the group’s operations.

A dilemma

At 66p, Ophir shares trade at less than half their book value of around 160p per share. But finding investors to develop the firm’ gas assets and potentially close this discount seems likely to be a slow process. I see these shares as a potential bargain, but patience will be required.

The post 2 top recovery plays for 2018 appeared first on The Motley Fool UK.

More reading

• £50 put into Nvidia stock at the start of 2015 is now worth…
• How these 2 shares in a Stocks and Shares ISA could deliver life-changing passive income
• Here’s why the Diageo share price is up 12% in a month!
• What on earth’s going on with UK shares today?
• How am I targeting an annual passive income of £14,754 from just a £20,000 holding in this FTSE financial giant?

Roland Head 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.

The company remains lossmaking for the moment but has net cash of $130m and total liquidity (cash and undrawn debt facilities) of $415m. It’s cut its global workforce by 15% to save an estimated $10m-$12m a year and is intent on delivering “lower risk and quicker returns to Ophir’s shareholders.”

Monetising 1bn barrels

Revenue of $181m forecast for the current year, on the back of reiterated company production guidance of 12,000 barrels of oil equivalent per day, falls well short of supporting Ophir’s market cap of £544m ($718m).

However, the company has substantial discovered resources in four core countries — Equatorial Guinea, Tanzania, Thailand and Indonesia — three of which are Ophir-operated and, with low development and production costs, are capable of delivering attractive returns without requiring higher commodity prices.

Ophir is focused on monetising these, with the priority for 2017 being to achieve the last primary milestone of project financing for its Fortuna FLNG Project in Equatorial Guinea, which it expects to conclude in Q4.

Well funded and with rising revenue from producing assets helping to support development of a geographically diversified net 1bn barrels of discovered resources, I see Ophir as one of the more attractive stocks to buy in this area of the market.

Remarkably cheap

AIM-listed Crossrider (LSE: CROS) is another company whose half-year results received a warm welcome from the market this week. At a current share price of 75p, the market cap is £106m and about half of it — $68.7m (£52m at current exchange rates) — is represented by cash.

In a research note paid for by the company, issued on the day of the interims, underlying earnings per share for the full year are forecast to advance 41% to 3.8 cents (2.9p), followed by a 71% leap to 6.5 cents (4.9p) next year. This gives a price-to-earnings ratio of around 25.9, falling to 15.3 (or 13.1, falling to 7.8, adjusted for the cash), which seems remarkably cheap for the tremendous growth forecast.

Controlling shareholder

Crossrider’s valuation looks hugely attractive but I note the company has a 73.4% controlling shareholder in Unikmind Holdings Limited and that “the entire shareholding of Unikmind Holdings Limited is held by a trust, the sole beneficiary of which is Teddy Sagi.”

Sagi did nine months jail time in the 1990s for “grave deceit, bribery and insider trading” after being found guilty of manipulating bond prices in Israel, but has since built a multi-billion dollar empire encompassing interests including gambling and money-moving software, ad tech and real estate.

He acquired Crossrider in 2012, moving it from being a nerdy pure technology start-up into the hot digital advertising space and floating it on AIM in 2014 at 103p a share. It made hay for a few years in what was then the Wild West of online advertising but like other companies in the sector, its revenues collapsed as the market underwent rapid technological and regulatory change, much of it due to advertisers realising they were often being ripped off.

Crossrider’s current transition and recovery, as a developer and distributor of digital products in the online security space, could pay off for investors. But personally, I’m avoiding it.

The post 2 growth stocks under £1 appeared first on The Motley Fool UK.

More reading

• £50 put into Nvidia stock at the start of 2015 is now worth…
• How these 2 shares in a Stocks and Shares ISA could deliver life-changing passive income
• Here’s why the Diageo share price is up 12% in a month!
• What on earth’s going on with UK shares today?
• How am I targeting an annual passive income of £14,754 from just a £20,000 holding in this FTSE financial giant?

G A Chester 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.

The fossil fuel giant announced further plans to get to grips with its cost base. It will halve the number of corporate positions in London and abroad, it said, measures which will reduce its global workforce by 15% and create annual cost savings of between $10m and $12m.

The move has been made “to further reduce the company’s underlying cost base in recognition of limited signs of an oil price recovery, and of lower exploration activity,” Ophir Energy said. Last week, the company announced the departure of chief operating officer Dr William Higgs as it grapples with reducing outgoings.

In other news, Ophir Energy announced that production averaged 11,300 barrels of oil equivalent per day during January-June, falling short of its target of 12,500 barrels, citing production problems at its Sinphuhorm and Kerendan gas fields.

Consequently, the London-based driller has scaled back its full-year output guidance to 12,000 barrels per day.

Murky outlook

Ophir Energy’s frantic efforts to reduce costs has seen investors flock to the exits in recent weeks. The firm’s stock value has fallen by more than a quarter so far in 2017, and sunk to eight-month troughs of around 70p per share just this week.

And it is little wonder as concerns over whether the company can continue to fund its expensive exploration projects, like the Fortuna LNG project off the coast of Equitorial Guinea, in the current climate. The driller is being hit by a declining oil price as the supply glut worsens, and its rapidly-shrinking cash reserves are a further concern: net cash slumped to $160m at the close of last year, from $355m a year earlier.

The number crunchers expect Ophir Energy to bounce back into the black this year, to punch pre-tax profits of £3.1m. And profits are expected to explode to £26.8m in 2018.

But these forecasts could be subject to hefty downgrades should the recent retracement in crude values continue, a very real possibility as US shale producers return to the pumps with gusto. So I reckon Ophir Energy is a risk too far right now.

Paper tiger

Those looking for stocks with smart earnings potential need to look at Smurfit Kappa (LSE: SKG), even though recent earnings weakness is expected to continue for a little while yet. City brokers currently expect Smurfit Kappa to follow last year’s 4% bottom-line reverse with a 7% fall in 2017.

However, the Irish packager is predicted to get profits chugging higher again from next year, a 9% bounceback is estimated for 2018 as containerboard prices steadily increase. And earnings should continue to grow as industry supply fails to keep up with demand.

Current forecasts mean the FTSE 100 giant deals on a forward P/E ratio of just 13.6 times. And Smurfit Kappa, unlike Ophir Energy, offers the handy bonus of a chunky dividend. For 2017 a payment of 80.5 euro cents per share is anticipated, yielding 3%. And the yield moves to 3.2% next year thanks to predictions of an 84.7-cent dividend.

I reckon the packaging powerhouse is worthy of serious attention at current prices.

The post One value stock I’d always buy over Ophir Energy plc appeared first on The Motley Fool UK.

More reading

• £50 put into Nvidia stock at the start of 2015 is now worth…
• How these 2 shares in a Stocks and Shares ISA could deliver life-changing passive income
• Here’s why the Diageo share price is up 12% in a month!
• What on earth’s going on with UK shares today?
• How am I targeting an annual passive income of £14,754 from just a £20,000 holding in this FTSE financial giant?

Royston Wild 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.

Recent news releases from the firm have sent the shares skyrocketing higher. But news today that estimated recoverable resources have risen by 162% to 523m barrels of oil caused the shares to fall by 2%. Why was this?

As expected

Hurricane’s recent drilling results have made it clear that a significant increase to the company’s resource base was likely. So today’s good news was already reflected in the firm’s share price.

The company’s new Competent Person’s Report (CPR) for the Lancaster field assigns 2P reserves of 37.3m barrels to the planned six-year early production system (EPS). According to the CPR, producing this oil should generate a discounted net present value (NPV10) of $525m. That’s a measure of the cash profit expected from the production, discounted at a rate of 10% per year.

In my view, today’s report provides confirmation that Hurricane’s Lancaster field has genuine commercial potential over the medium term. However, it’s clear that this value is already reflected in the group’s market cap of £742m. I’d need to see significant additional value to consider investing at current levels.

$3bn upside potential?

Today’s reserves report and NPV imply a value of about $11 per barrel for Hurricane’s 2P reserves. If we assume that the firm’s best estimate recoverable resources of 523m barrels might be worth half this much, we get a potential value of $2.9bn, or around 185p per share.

There’s also the potential for a further upgrade to resources later this year. Today’s CPR only applies to the Lancaster field itself. But Hurricane’s recent drilling results appear to suggest that Lancaster is joined to another of the firm’s fields, Halifax. These could form the basis of a Greater Lancaster Area development. Resource figures for this and the remainder of Hurricane’s portfolio are expected later this year.

Although I’m only estimating the potential value of Hurricane’s resources, it seems plausible to me that in time — probably over several years — the firm’s stock could be worth upwards of 200p.

This slow burner could double

Offshore Africa specialist Ophir Energy (LSE: OPHR) made a name for itself with a series of big gas discoveries, totalling trillions of cubic feet.

The problem is that these giant gas fields can’t be developed on a small scale. It’s all or nothing. Each development is likely to cost billions. For example, the firm’s Fortuna FLNG Project is expected to cost $2bn to reach first gas. Final sign-off on this project is expected later this year, but no gas will be pumped until 2020.

The market for further big LNG projects is uncertain. Supplies have increased over the last couple of years and investor appetite has cooled. Ophir faces a big challenge in finding development partners or buyers for its remaining gas fields.

In the meantime, the group’s shares trade at a 50% discount to their net asset value. For long-sighted investors, this could prove to be a value opportunity. But it’s worth remembering that the potential returns and timescales involved are highly uncertain. In my view, Ophir remains fairly speculative and is only attractive as a small part of a long-term portfolio.

The post Why Hurricane Energy plc stock could be worth more than 200p appeared first on The Motley Fool UK.

More reading

• £50 put into Nvidia stock at the start of 2015 is now worth…
• How these 2 shares in a Stocks and Shares ISA could deliver life-changing passive income
• Here’s why the Diageo share price is up 12% in a month!
• What on earth’s going on with UK shares today?
• How am I targeting an annual passive income of £14,754 from just a £20,000 holding in this FTSE financial giant?

Roland Head 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.

Improving performance

Reporting on Thursday was oil and gas company Ophir Energy (LSE: OPHR). It has sought to change its strategy in 2016, with it focusing its activities around net asset value per share. This means that its aim is much simpler than in the past, with the company aiming to find or develop hydrocarbons at the lowest cost. It then seeks to monetise them promptly, which maximises the margin realised for its shareholders.

The company appears to have the financial means to deliver improving financial performance. It has net cash on its balance sheet of $160m and was able to achieve a further 35% reduction in G&A costs in 2016. This shows that it is becoming a more efficient business which could develop its asset base at a relatively fast pace.

In terms of that asset base, it remains relatively diversified. This reduces the company’s overall risk, which means its shares could be deserving of a higher valuation in future. And with 2017 set to deliver significant milestones such as a green light for its Fortuna prospect as well as the potential to monetise its Asian assets, the company’s outlook appears to be positive.

Future potential

While Ophir has significant future growth potential, it is expected to remain lossmaking over the next two years. At a time when the outlook for the oil and gas industry is uncertain, its shares may offer a higher risk profile than sector peers such as Shell. Certainly, if supply cuts are renewed by OPEC then the oil price could move higher and boost sector-wide profitability. But since there is no guarantee of a rising price for black gold or for gas, it may be prudent for investors to stick to safer companies such as Shell.

While it may not have the growth potential of Ophir, the integration of BG is expected to deliver rapid improvements to Shell’s cash flow. This could result in higher shareholder payouts as well as improved investor sentiment. Furthermore, it is cutting costs, reducing capex and making disposals. All of these measures could improve efficiency and profitability in future years.

Therefore, while Ophir has the potential to grow its asset base in order to become a larger oil and gas stock such as Shell, at the present time it seems logical to invest in the real thing. Therefore, Shell continues to offer a more enticing risk/reward ratio than Ophir.

The post Is this oil-and-gas stock the next Royal Dutch Shell plc? appeared first on The Motley Fool UK.

More reading

• £50 put into Nvidia stock at the start of 2015 is now worth…
• How these 2 shares in a Stocks and Shares ISA could deliver life-changing passive income
• Here’s why the Diageo share price is up 12% in a month!
• What on earth’s going on with UK shares today?
• How am I targeting an annual passive income of £14,754 from just a £20,000 holding in this FTSE financial giant?

Peter Stephens owns shares of Royal Dutch Shell B. The Motley Fool UK has recommended Royal Dutch Shell B. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.