• Oil price has topped $90 for the first time since 2014
• 2 FTSE 250 oil stocks could provide exposure to this trend
• Both companies are actively producing and exploring in many regions around the world

The West Texas Intermediate (WTI) and Brent crude oil benchmarks have both just broken the $90 barrier. This means that oil surpassed its previous, pre-Omicron high of $85. With tightening oil supplies, I think this could be a good destination for my investment funds. To gain exposure to the oil price, I like to invest in equities and have found two attractive stocks on the FTSE 250 index. Could they help to grow my portfolio? Let’s take a closer look.

Why has oil surpassed $90?

For the first time since 2014, the oil price has moved above $90. There are a number of reasons for this. Firstly, there are worries about supply. Only this week, the Organisation of the Petroleum Exporting Countries (OPEC+), agreed to maintain its monthly output increase of 400,000 barrels per day. In real terms, however, a number of OPEC+ members are struggling to meet this increase as they try to ramp up production.

Meanwhile, heightened tensions in Ukraine have deepened production fears. There is a possibility of war involving Russia and Western states, and this could have a severe impact on oil production capabilities in the region. The two FTSE 250 oil stocks could expose me to this oil dynamic.

Demand-wise, cold winter storms having been hitting much of the US. While this has increased demand for oil, there are also supply-side concerns. With frigid weather forecast to even hit Texas, there are worries that production in this area will be negatively impacted.

2 FTSE 250 oil stocks that could fly

Seeking to capitalise on this oil price rise, I’m turning to the FTSE 250 to find some oil stocks. The first company, Capricorn Energy (LSE: CNE), is focused on production in Egypt. It also has ongoing exploration activities in the North Sea, South America, and West Africa. 

Only last month, the company announced that production in Egypt had increased 8% between September and December 2021, beating expectations. Results from other drilling sites are expected in mid-2022. 

With a debt-to-equity ratio of 0.33, this is stronger than a FTSE 100 oil stock like BP, which has a figure of 1.43. That said, Capricorn Energy has seen its earnings slide over the five calendar years from 2016 to 2020.

The second FTSE 250 oil stock I like is Harbour Energy (LSE: HBR). This company operates in the UK, South America, and Asia. Berenberg recently upgraded the stock on account of its “significant free cash flow”, stating that it could have “a net cash balance sheet by 2024”. That said, it does have a not insignificant net debt pile of $2.6bn.

Producing around 175,000 barrels per day, Harbour Energy has an operating cost of only $15.6 per barrel. While some of the oil produced is hedged at $58 per barrel, the company will be benefiting from the higher oil prices globally. 

Oil prices are surging. These two FTSE 250 stocks will provide me with exposure to this trend. I will be buying both as the oil price tops $90, in the hope of further gains to come. 

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One is the firm’s new acquisition in Egypt, which chief executive Simon Thomson says will add “material gas-weighted production, low-cost, near-term growth and attractive exploration potential, in a region with strong demand trends.” Cairn should complete the deal in Q3.

At the same time, it proposes to divest its UK North Sea assets, which should conclude by Q4. What we’re seeing is a clear move away from high-cost production to lower-cost assets. Cairn says the move towards Egypt should, among other things, help with the company’s cash flow growth.

Speaking of cash, Cairn is edging closer to the resolution of its India taxation dispute, which has moved in its favour. It’s a legal issue, though, so I’ll remain cautious until the judges have put the final stamp on the papers. But the apparent resolution has helped boost the Cairn Energy share price since the start of August.

Shareholder return

The other key step is the proposed return to shareholders of up to $700m, pending the conclusion of the Indian issue. Cairn is already in a decent cash position, with $341m on the books at 30 June 2021. That’s with no debt drawn, and after paying January’s special dividend of $257m.

It reported cash outflow from capital expenditure of $25m during the first half. The company expects net capital expenditure for the full year to reach $125m. With the taxation dispute in India almost settled (fingers crossed), that looks to be well covered. The Cairn Energy share price opened 2.5% ahead of Monday’s close.

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Why has the Cairn Energy share price risen so fast?

India’s finance minister, Nirmala Sitharaman, introduced a taxation laws amendment bill on Thursday, which will effectively withdraw retrospective tax demands made by the Indian government to Cairn in 2014.

For context Cairn’s share price has been held back by this long-running dispute. It has cast a long shadow over the company and its share price. 

It’s expected that this development could mean a refund of around $1.7bn to the Scotland-based oil explorer. The oil and gas company was awarded $1.2 billion by an international tribunal in December.

So it’s the expectation of a final resolution to this problem that has sent the shares flying. An increase in the oil price probably has helped a little as well.

What could come next?

The recent rise is obviously very good news for current shareholders. But the dispute has meant that over the last five years the share price has fallen.

The big questions for me now are: is the future brighter and are the shares worth adding to my portfolio?

I think the answers to those questions are yes and no, respectively. Undoubtedly the future seems to be brighter for the oil explorer. The Cairn Energy share price could continue to do well in coming weeks if further progress is made. But I harbour a suspicion that there may be more twists and turns before the money lands in Cairn’s account, given what’s happened over the last seven years since this dispute started.

An improving outlook for the oil price also makes the future a little brighter as well for an oil explorer such as Cairn. A higher price for the commodity has helped Cairn’s peer, BP, to better than expected profits. BP also expects the oil price to do well over the next decade, which if correct, is good news for both companies. 

Why are the shares not a buy for me?

I’ll not be buying the shares because ultimately, I don’t want to be exposed long term to a fluctuating oil price. ESG concerns, I think, may put downward pressure on the Cairn Energy share price and that of other oil explorers.

Ultimately, there’s not much beyond the resolution of the dispute to get excited about from my perspective.

Free cash flow per share and returns on capital in 2020 were both negative, as was operating profit. If the oil price keeps improving, that might change. But if it worsens, Cairn could continue to be loss-making.

Arguably, the shares are still very cheap. Not surprising given all the challenges the oil explorer has faced. So it could be added speculatively, but I’d prefer to concentrate on green energy stocks, which I see as having far more share price growth and income potential.

The post Why has the Cairn Energy share price risen sharply? appeared first on The Motley Fool UK.

A bit of background history

Cairn Energy is a Scottish oil company engaged in exploration, development and production. It began investing heavily in the Indian Oil & Gas industry back in 1994. Around a decade later, it made one of the largest oil discoveries in the country. And reorganised its Indian division before listing it on key Asian stock exchange the BSE through an IPO in 2006.

Things were going fine until 2012. A new retrospective tax law was introduced by the Indian government. Under this, income from the sale of shares in a non-Indian business whose value is derived from assets located in India will be taxed under the Indian system.  Consequently, a few years later, in early 2015, Cairn Energy was slapped with a tax bill roughly equal to £1bn due to the sale of its shares during the Indian IPO nine years prior.

And to ensure the business paid, the government seized unsold shares along with dividends, as well as blocking any tax refunds until the bill was paid. Needless to say, this was terrible news. And the Cairn Energy share price plummeted.

What’s happening to the Cairn Energy share price now?

After years of appeal, Cairn Energy finally caught a break. In December 2020, the international arbitration court at the Hague instructed India to return approximately £1.2bn to the business, which covered most of the original bill with interest. This development caused the Cairn Energy share price to jump 30% on that day. Despite this ruling, India continued to delay repayment, resulting in the stock’s decline throughout 2021.

But yesterday, a new legislative bill was presented in the Indian parliament that would withdraw all retrospective tax claims on Cairn and refund all seized assets. It seems this five-year tax debacle is finally coming to an end. And with a sudden surge in capital being returned to the business, funding for new projects worldwide may soon become available. So, I’m not surprised to see the Cairn Energy share price explode on the news.

What now?

After the recent surge in Cairn Energy’s share price, is this a business worth investing in? The company did just announce a new oil discovery in Mexico that could contain between 150 and 200 million barrels of oil equivalent. But even with that in mind, I’m personally not tempted.

Despite being a well-established player within its sector, the firm has struggled to remain profitable. In fact, in the last five years, only two of them were in the black. Perhaps that will soon change. But I think there are far more exciting and profitable growth opportunities to be found elsewhere. So, I’m keeping this stock on my watchlist for now.

The post Here’s why the Cairn Energy share price exploded this week appeared first on The Motley Fool UK.

It seems to be down to an update on the company’s situation in India. The firm’s release simply notes “the introduction to the Indian parliament of the Taxation Laws (Amendment) Bill 2021, which proposes certain amendments to the retrospective taxation measures that were introduced by the Finance Act 2012.“

Those few words hide a major headache that Cairn shareholders have been suffering from for some time. Cairn, along with Vodafone and other companies, has been involved in a long-running tax dispute with the Indian government. After the introduction of the retrospective Finance Act 2012, Cairn was slapped with a 10,247 crore rupee tax bill. That’s almost $1.4bn (£993m) at current exchange rates.

Lawsuit and damages

A subsequent hearing at the Court of Arbitration in The Hague awarded Cairn damages of more than $1.2bn. And last month, French courts froze 20 properties belonging to the Indian government to force a partial guarantee on the amount owed.

Now, it seems, India is backing down and is scrapping the retrospective tax legislation. The settlement includes refunding disputed payments to companies, on certain conditions. Those would appear to be the cessation of legislation and an agreement not to file any claims for damages.

India is proposing to pay only the principles involved and no interest, though it still sounds like a significant win for Cairn. But the big question for me as an investor is, should I buy now? Well, the immediate leap in the Cairn Energy share price hides a less impressive longer-term picture.

Cairn Energy share price history

From a 52-week peak at 283.6p in December, Cairn shares are now down nearly 45%. And that’s after the Thursday afternoon spike. And over five years, we’re looking at a 30% fall. By comparison, the FTSE 250 is up 35% over the same period.

Cairn’s 2020 results revealed an operating loss, due to the collapsing oil price during the pandemic. Cairn achieved an average price of $42.56 per barrel in the year, way down on 2019. Still, Brent Crude stands at $70, as I write. If that can be maintained over the next year, Cairn’s 2021 profits could get a welcome boost. But I suspect oil prices could remain volatile for some time. Just over a week ago, the same Brent Crude was over $76.

No debt struggles

Cairn Energy is unlike a number of other oil explorers in that it had cash on its books at the end of last year. So it’s not struggling with huge debts, and that makes me perk up a bit. I see potential for Cairn for the future, perhaps better than riskier exploration companies.

But I see the same kind of risks too. And the seemingly perpetual swinging between annual profit and loss is enough to keep me away. The long-term erratic Cairn Energy share price also discourages me.

So no. The world of oil exploration is one I’ll keep away from, even if Cairn might be one of the better prospects.

The post Why did the Cairn Energy share price jump 25% on Thursday afternoon? appeared first on The Motley Fool UK.

Cairn Energy announced today that revenues slumped 26% year-on-year in 2020 to $324.5m. This was due to the collapse in oil prices which accompanied the Covid-19 outbreak and the subsequent economic downturn. Cairn realised an average price of $42.56 a barrel last year versus the $65.70 it achieved back in 2019.

Meanwhile, production costs rose 12% between 2020 and the previous year to $75.9m. This added to Cairn Energy’s woes and, as a consequence, the company swung to a pre-tax loss of $117.5m. This compares with the profit of $119.2m the oilie reported back in 2019.

Production drops too

On the production front, Cairn Energy said that its net average was 21,350 barrels of oil equivalent per day in 2020. This was in line with guidance, but down from the 23,739 barrels which it reported in 2019.

The fossil fuel giant said production at its Kraken asset in the North Sea “remained strong throughout the year.” Production here averaged around 37,500 barrels of oil equivalent a day, up from approximately 35,600 barrels in 2019. But output at its offshore Catcher field was less impressive. Operational problems in the fourth quarter meant production here averaged around 51,200 barrels per day in 2020. This was down from around 67,200 a day the previous year.

Big changes at Cairn Energy

Tuesday’s been a busy day over at Cairn Energy. On top of those full-year results, the oil company announced big changes to its asset portfolio.

First off, Cairn announced its intention to sell its interests in Kraken and Catcher to Waldorf Production Limited for $460m. An additional contingent will be payable depending upon oil prices between now and 2025 too.

Cairn Energy said that “the divestment of these assets, as they fall into natural decline, will further strengthen our ability to pursue Cairn’s strategic goals.”

The company also announced it plans to acquire “a portfolio of upstream oil and gas production, development and exploration interests” from Royal Dutch Shell with fellow fossil fuel explorer Cheiron.

The assets — which are located in Egypt’s Western Desert region — will initially cost a combined $646m. An additional $280m will be payable on certain requirements being met. Cairn and Cheiron will be liable for a 50/50 split on these amounts.

Cairn Energy said that the portfolio “offers low cost production, near-term development and exploration potential, provides immediate operating cashflow contribution and adjusts our overall hydrocarbon split towards gas.”

The company estimates that the assets will add between 33,000 and 38,000 barrels of oil equivalent a day to group production in 2021. Approximately two-thirds of this total is comprised of natural gas.

The post Cairn Energy’s share price falls on full-year results, asset sales and acquisition news appeared first on The Motley Fool UK.

Oil and gas stocks can be highly volatile. As they tend to have fixed production costs, they’re leveraged plays on the commodity.

According to Tullow Oil‘s (LSE: TLW) full-year 2018 results presentation, a $5 move in the price of oil either way would have detracted or added $125m from free cash flow. That year the group generated $411m in free cash flow from operations. As such, a drop of just $16.44 would have wiped out group cash flow. In the first half of this year, the oil price dropped by around $50 in four months. 

These are only rough figures, but I believe they clearly illustrate the risks of investing in this sector. Companies can make or lose fortunes overnight.

Still, I’m comfortable with the level of risk involved in investing with these businesses. That’s why I’ve been looking for the best stocks to buy right now as the price of oil recovers.

The best oil stocks to buy right now

Tullow Oil is one of the firms on my list. This company is a very high-risk investment. It’s currently involved in renegotiating the terms of its debt with lenders. If management fails, the group could collapse. However, if the business succeeds, the share price could rally as Tullow gains breathing space.

At the end of November, the company projected it could generate as much as $7bn in cash from operations over the next decade. Its current market capitalisation is £431m. I think this shows just how much potential the business has. That’s why I’d buy it for my portfolio. 

Green energy 

Royal Dutch Shell is another group that features on my list of the best oil stocks to buy now. The company, which is one of the world’s largest oil producers, recently unveiled a plan to invest billions of dollars in renewable energy over the next 30 years.

Of course, the company isn’t without its risks. It has a lot of debt, and the low oil price also meant the business had to write off billions of dollars of assets last year. Nevertheless, despite these challenges, I’m optimistic about the groups future. That’s why I’d buy it today. 

Large payout 

Finally, I think one of the best oil stocks to buy right now is Cairn Energy (LSE: CNE). There’s been a cloud hanging over this company for the past few years after India seized a 10% stake in its subsidiary there.

The company has been fighting the government for compensation, and a court recently ruled in its favour, awarding the business $1.2bn  (£870m) in damages. The sum hasn’t been paid yet, but it could be a huge positive for the £900m market-cap firm.

Of course, there’s a high chance India may not pay. In that case, Carin’s future is more uncertain. That’s the most significant risk facing the business right now. But this is a high-risk, high-reward bet on an enormous payoff to the company.

Still, I’m comfortable with this level of risk. That’s why I’d buy Cairn today. 

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The $1.4bn dispute stems from Cairn’s flotation of its Indian subsidiary as long ago as 2007, over the government’s application of new 2012 taxation legislation retrospectively.

Cairn had hoped for a settlement of the disagreement by the end of the current year, but it now seems it’s going to drag on until at least summer 2020.

In the other bad news, the Alom-1 well on Block 9 offshore Mexico was aimed at possible hydrocarbons in stacked Pleistocene targets, but there’s nothing there and it will be plugged and abandoned. What’s particularly disappointing about this well, drilled to 2,056 metres below sea level, is that it’s the first in Cairn’s Mexico programme.

A tough fortnight

And it’s the second dry well in as many weeks, after a similar failure in the North Sea, reported on 17 October. The company’s Chimera well, aimed at Paleocene Heimdal Sandstones within the Lista Formation, was found to be dry after drilling to a depth of 1,830 metres, again leading to abandonment.

The share price dipped more than 15% in Monday morning trading, but is Cairn heading for genuine trouble? It’s not in a particularly precarious position at the moment, expected to deliver modest profits this year and next. But there’s a world glut of oil and the price is showing increasing weakness, so any further drilling failures could start to pile on some pressure. And that tax dispute concerns a serious amount of money.

I think smaller oil explorers could be in for a risky few years, which is why I’m staying away.

Skin of its teeth

Meanwhile, with its share price hovering around 3p and its market-cap at £215m, Sirius Minerals (LSE: SXX) is still holding on. The share price crunch has, however, knocked the company out of the FTSE 250 and into the FTSE Small Cap index, and that’s something shareholders like me were certainly never expecting.

We knew Sirius wasn’t going to be producing any polyhalite potash until at least the second half of 2021 and wouldn’t be up to its planned production rate of 10m tonnes per year until at least 2024. But I, for one, always thought the asset was so good that someone really would want to put up the cash to get it into a productive state.

I still think that’s the case, but there’s an increasing likelihood existing shareholders aren’t going to see a penny of any profits. The company, which has already laid off 300 workers to try to preserve cash, has around £180m of cash that should be enough to keep the lights on until some time in early 2020. But it’s notable that Sirius is currently valued at only £35m more than its cash holdings.

White knight?

Who might come on board as the new strategic partner the firm is now seeking is anybody’s guess at the moment, although CEO Chris Fraser has denied claims the firm intends to go private.

I confess I’m hanging on to my shares mainly through emotional attachment. But if I didn’t have them, I certainly wouldn’t be buying any now.

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In August, the company failed to seal the deal. It blamed market conditions and promised another attempt in September. But the Sirius share price has fallen by 30% since the start of August, as the market prices in the risk that the firm could run out of cash at the end of September.

Failure to raise $500m from bond investors will mean that the $2.5bn bank facility agreed with lender JP Morgan may be withdrawn. This would leave Sirius $3bn short of the total needed to complete the build of the Woodsmith mine in North Yorkshire.

All or nothing?

For shareholders, this could be very bad news indeed. Although the mine might find a new owner or financial backer, I would expect shareholders to be wiped out in such a scenario.

Borrowing money to build the mine is proving more difficult than expected for two reasons. Firstly, Sirius has no revenue or cash flow. Secondly, the firm’s Polyhalite fertiliser has not previously been sold as a mass-market product, so market appetite and future pricing is uncertain.

In my opinion, Sirius shares are little more than a gamble at the moment. If the company gets the cash, things could proceed as hoped. But if financing problems continue, the shares could be worth nothing.

I don’t see this as an attractive investment. I think there are much better opportunities elsewhere in the natural resources sector, including my next pick.

North Sea gusher

The Cairn Energy (LSE: CNE) share price is up by 6% at the time of writing, after management at the FTSE 250 oil and gas firm increased production forecasts for the year.

Production rose by 15% to 23,700 barrels of oil equivalent per day (boepd) during the first six months of 2019. This generated revenue of $257m and a net cash inflow, after production costs, of $177m.

Today’s results also mark a welcome return to profitability for the group, after five years of investment during which the firm has burned through more than $1bn of cash.

Cairn’s production gains come from its North Sea assets, the Catcher and Kraken fields. Catcher is said to be performing well and earlier difficulties at Kraken now appear to be resolved. These fields, which are operated by the firm’s partners, are generating valuable cash flow.

Could you get rich with CNE?

Investors’ biggest hope for long-term riches from CNE is probably the SNE field, which lies off the cost of Senegal. Cairn has a 40% interest in this project, which was the world’s largest oil discovery in 2014. SNE is expected to produce 100,000 bopd, with first oil targeted for 2022.

Is this the right time to buy Cairn? In the short term, I think the shares look fully priced, on 22 times 2020 forecast earnings.

However, if SNE is a success, then I believe the CNE share price could offer long-term value.

The post Forget Sirius Minerals! I’d buy this FTSE 250 riser instead appeared first on The Motley Fool UK.

However, the share performance of exploration company 88 Energy (LSE: 88E) has not been particularly impressive. Its valuation is flat on where it was 12 months’ ago, with investors seemingly unsure about the prospects for the business following disappointing flow-test results.

With the company reporting an update on Friday, could it be worth buying alongside another oil and gas company which seems to have an impressive long-term outlook?

Operations update

88 Energy announced that it has increased its footprint on Alaska’s North Slope through an agreement with Arctic Slope Regional Corporation. This will see the company lease the hydrocarbon rights across 28,453 acres contiguous with the Western Fairway area of the current Project Icewine acreage.

Alongside this, the company has also entered into an agreement with Great Bear Petroleum to acquire a 69.1% working interest in 24,269 acres adjacent to, and north of, the Central Play Fairway at Project Icewine. Together, the two acquisitions increase the company’s lease position by 45,239 net acres to 371,478 net acres across its three main project areas on the Central North Slope of Alaska.

Clearly, the company has experienced a challenging recent period. Although Project Icewine seems to have significant long-term development potential, it’s proving to be somewhat difficult to turn its prospective resources into commercial reserves. Therefore, it may only be of real interest to less-risk-averse investors at the present time.

Improving financial outlook

As mentioned, the rising oil price looks set to boost the financial prospects for a number of companies across the oil and gas sector. One example is Cairn Energy (LSE: CNE), which is expected to report a rise in earnings of almost 200% in the next financial year. This puts it on a price-to-earnings growth (PEG) ratio of just 0.1, which suggests there could be upside potential ahead, even after its share price rise of 18% in the last year.

The company may be facing regulatory risk due to an ongoing dispute with the Indian authorities. But with its production expected to rise, and it having further development potential in other assets, its medium-term outlook appears to be relatively positive.

With the potential for the oil price to move higher over the coming years, Cairn Energy could be an appealing stock to buy at the present time. While volatility may be high, its valuation suggests that a wide margin of safety is on offer. And with what appears to be a strong asset base and solid balance sheet, its financial prospects could provide a significant catalyst for its stock price over the coming years.

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