While the company has the potential to beat the FTSE 100 over the medium term, not all oil and gas shares have experienced capital growth in recent months. Reporting on Friday was a smaller stock that has endured a challenging period that has sent its valuation lower by 41% in the last year.

Uncertain outlook

The company in question is Victoria Oil & Gas (LSE: VOG). It released a second quarter operations update which showed that it remains confident of a resolution with ENEO Cameroon regarding the grid power supply issue. Due to the non-renewal of the grid power gas sale agreement at the end of December 2017, the company’s GDC subsidiary’s gas consumption levels from its participating interest in the Logbaba Project were at similar levels in the second quarter as in the first quarter of the year.

During Q2, Victoria was able to commission one new thermal customer and one new retail power customer. It has also seen increasing interest in the retail power solutions being offered by its GDC subsidiary as a result of current power shortages in Douala. However, due to the suspension of the ENEO supply, its volumes declined to 320m cubic feet per day, which is down from 1,192m cubic feet per day in the second quarter of 2017.

Looking ahead, further uncertainty could be on the horizon for the business. As a result, it remains a relatively risky stock which could display further volatility.

Improving outlook

The prospects for Premier Oil, though, appear to be increasingly positive. Its recent investor update showed that it is making progress with the planned ramp-up of production, it being on target to deliver on its full-year production target. This is set to boost its free cash flow in the second half of the year, which could lead to a further deleveraging of the business. This could create a more sustainable company that is better able to overcome potential volatility in the oil price.

As well as rising production and a higher oil price, Premier Oil has been able to keep costs down. It is anticipating operating costs for the current year of between $17 and $18 per barrel, which could provide it with additional cash to invest in its exploration prospects.

With the stock trading on a forward price-to-earnings (P/E) ratio of around 5.5, it seems to offer an impressive growth outlook. The stock market does not yet appear to have warmed to its growth potential. And with the prospect of oil prices at least being maintained due to falling supply from countries such as Iran, the outlook for the stock appears to be relatively bright. As such, it could keep outperforming the FTSE 100.

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Today I’m looking at two stocks whose performances have sometimes been disappointing but show promise. Should you buy, hold or sell?

Hunting for customers

Cameroon-focused gas producer Victoria Oil & Gas (LSE: VOG) received a big blow in January when the company’s largest customer, utility group ENEO, declined to renew its supply contract. The firm’s shares have fallen 32% since this news was announced.

Although a new deal may yet be signed, figures released by the firm today suggest that the outlook for the year ahead is now quite uncertain.

Gas sales to ENEO accounted for 53% of related revenue from the Logbaba project last year. With this source of revenue lost — temporarily at least — the group’s finances have been weakened.

Management has been forced to set more modest operational goals for this year. It’s now targeting daily production of 9 million standard cubic feet (mmscf/d) by the end of 2018 if the ENEO contract isn’t renewed.

To put this in context, average daily gas production in 2017 was 10.98mmscf/d, so this guidance represents a cut of at least 18%.

Weaker financial situation

The group’s financial situation has also weakened. Revenue fell from $32.8m to $23.9m last year. Despite raising $23m in a share placing in October, net debt was $14m at the end of 2017, compared to a net cash position of $1.8m at the end of 2016.

As a result of this worsening financial situation, “the company’s previously announced capital expenditure programme for 2018 will be deferred until further clarity is obtained on the ENEO situation”.

The board has maintained its ambitious production target of 100mscf/d by 2021. I’m not convinced that this is realistic. Indeed, if the ENEO contract isn’t renewed very soon, I think shareholders could face further losses.

One growth stock I would buy

Kurdistan-based oil group Genel Energy (LSE: GENL) is another company that hasn’t lived up to original hopes. But I think the company’s management has performed well in very difficult circumstances.

In contrast to Victoria Oil & Gas, Genel has consistently been able to generate cash from its assets. This means that it’s been able to fund capital expenditure and production growth, without having to raise cash from shareholders.

Indeed, the company recently reported free cash flow before interest payments of $140m for 2017. That equates to a price/free cash flow ratio of about 7 at the current share price. Some of this cash was used to help complete a refinancing deal which saw net debt fall to $138m at the end of 2017, from $241m a year earlier.

If this performance is sustained, then I believe Genel shares could be cheap at current levels. The group expected 2018 production to be close to the Q4 2017 level of 32,760 bopd.

There are also opportunities for growth. The Bina Bawi field is estimated to have light oil resources of 37.1m barrels. This field is close to its existing export infrastructure, so could potentially be developed and placed on production quite quickly.

I’d give Genel Energy a speculative buy rating.

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However, in the long run a company with a bright financial and operational outlook could be worth buying regardless of its past share price performance. Could that be the situation for Versarien (LSE: VRS) after its sharp rise since the start of the year?

Upbeat outlook

The materials technology company appears to offer significant upside potential. Its performance in the first half of the year was relatively impressive, and it seems to be attracting the interest of various potential customers. This could lead to rising sales and an improved bottom line, while the company’s financial position has improved significantly following its fundraising last month. This should allow it to scale-up production in order to meet potentially higher demand over the medium term.

Looking ahead, the global market for graphene is expected to grow significantly in future years. This could provide the company with a tailwind as it competes with rivals to generate market share within what looks set to be a lucrative industry with a range of different applications.

Risk/reward

Of course, Versarien remains a lossmaking business even after its revenue increased by almost 170% in the first half of the current financial year. Therefore, it appears to have considerable risks as well as high reward potential. This could mean that its share price remains highly volatile, and paper losses may be on the cards for new investors. Still, with an impressive outlook and significant growth potential, it could be worth a closer look for long-term, less-risk-averse investors.

Further opportunity

Also making sharp gains since the start of the year have been shares in Victoria Oil & Gas (LSE: VOG). The natural gas supplier and domestic energy provider in Africa has delivered a share price rise of over 60% since the start of the year.

According to an update released on Friday, the company has been able to rectify the electrical problems which were encountered when well La-108 was successfully drilled to its planned target depth. The problems delayed further progress by around two weeks, but now that they have been solved the 4.5 inch liner has been run to the target depth and cemented in place.

Looking ahead, Victoria Oil & Gas is expected to move into profitability in the current year. This could boost investor sentiment – especially since it trades on a price-to-earnings (P/E) ratio of around 6. This suggests that even after its share price rise since the turn of the year, there could be further upside ahead. As such, now could be a good time to buy the stock for the long run.

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Victoria and BowLeven are working together to unlock value for investors. Earlier this year, Victoria signed a farmout agreement with EurOil Limited, a Bowleven subsidiary, to acquire on completion an 80% working interest in the 2,237  sq km Bomono licence, adjacent to Gaz du Cameroun’s Logbaba field. Gaz du Cameroun is a subsidiary of Victora. 

Today, the two companies announced that they had extended this farmout agreement once again until the end of the year as they work with all parties to generate the best results. 

Falling revenue 

Even though Victoria is heading in the right direction, the company’s results for the six months ending June, which were published today, show a contraction in revenue and profitability. As production increased by 11%, revenue fell to $15.4m, from last year’s $23.6m and earnings before interest, tax, depreciation and amortisation fell to $4.4m from last year’s $14.2m. 

Nonetheless, despite these uninspiring results, management is highly optimistic about the company’s outlook. Commenting on today’s figures, chairman Kevin Foo said “the challenge we now face is building our business into one which is four to five times our current size. I believe that this growth is achievable within five years.” He continued that “GDC is very well positioned, as the only onshore gas supplier in Cameroon, to meet this demand.“

The potential gains on offer here for investors are clear. If management can hit its target of growing the business five times within the next five years, investors could be set to see a return of 500%. The risk here is that the company does not meet this target and instead (like many other small-cap oil & gas companies before it) runs out of cash. 

In this case, investors would likely see a 100% loss. Risking 100% for a potential 500% return is, in my view, an attractive bet. 

Unlocking value 

Investors could also see healthy returns from BowLeven as the company works with Victoria and continues to develop its portfolio. The company’s interim results showed that the business had $90m in cash at the end of March, which is worth around 19.5p per share based on current exchange rates.

On top of this, the deal with Victoria should unlock around $6m to $7m in direct revenues and royalties, corresponding to around $4m in post-tax cash flow, according to City analysts. The net asset value of the firm, including these prospective cash flows, is estimated at 53p per share, that’s around 71% above the current share price. 

Putting it all together 

I believe that a combination of both Victoria and BowLeven in your portfolio could produce some highly impressive results. As Victoria grows, BowLeven will also benefit, and it looks as if the two companies are trading at a deep discount to their future potential today. 

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Further progress

Reporting on Wednesday was Victoria Oil & Gas (LSE: VOG), with the business updating investors on the two well drilling programme at the company’s Logbaba gas production site. So far, the company has been successful on La-107 in securing 35m of gas-bearing reservoir sands in the Upper Logbaba. It will continue drilling and completion work on La-107 through to production. The company will then drill and complete La-108.

The net sands encountered thus far of 135m in both wells shows there could be significant potential in the long run. This compares favourably to the 54m of net sands encountered in the primary production well, La-105. Due in part to its successful drilling programme, the company’s shares have risen in value by 31% in the last six months. However, further upside could be ahead.

A potential catalyst for the Victoria Oil & Gas share price could be its bottom line. It is expected to move into profit in the current year. Despite this, it trades on a forward price-to-earnings (P/E) ratio of just 10.2, which suggests it offers a wide margin of safety. Therefore, while a potentially risky and volatile share to own, it could deliver high capital gains in the coming years.

Improving performance

Also offering upside potential as a result of its bright future outlook is sector peer Soco International (LSE: SIA). As with Victoria Oil & Gas, it has recorded somewhat disappointing financial performance in recent years. For example, its pre-tax profit declined from $445m in 2012 to just $5m last year. This is a major reason why the company’s share price has moved 60% lower in the last five years.

Looking ahead, it could mount a successful recovery. The company is expected to report a rise in pre-tax profit to $22m in the current year, followed by further growth to $37m next year. While both of these figures are lower than they were in the past, they could represent relatively strong performance given the downbeat near-term prospects for the oil price.

In terms of how oil could perform in future, its outlook remains highly uncertain. Even though supply has been cut by OPEC, sluggish demand growth means that it could remain at depressed levels for the short term. In the long run though, the oil price is forecast to gradually rise, which could provide a tailwind for Soco International’s sales and profitability. This could help it to become a successful recovery stock.

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Today’s findings are the latest in what has been a string of good news for the company, which is currently conducting a drilling programme in the Weald Basin. 

Management reported this morning that a recently drilled core section showed mobile light oil seeping from multiple sections of KL4 calcareous shales and limestones throughout. Further, wet gas readings maintained high levels throughout the coring, almost identical to that seen at the Horse Hill-1 oil discovery, 27 km to the northeast from Broadford Bridge-1. According to the firm, this development, coupled with other findings at Horse Hill-1 means there’s a possibility that an oil reservoir 600 to 700 ft thick has been discovered. 

Another recent production test at Horse Hill yielded nearly 1,700 barrels of oil per day, marking it among the very best exploration well results ever in Britain’s onshore oil industry. 

High risk, high reward

Of course, as with all early-stage oil and gas development, there is much to be done before UK Oil & Gas can begin production from this prospect. And no matter how positive the well results might seem, there are still plenty of risks ahead. 

Still, recent updates from UK Oil & Gas show that the company is operating its current drilling programme on time and on budget, which gives me confidence in the company’s outlook. A lack of fiscal discipline is generally the reason why small businesses tend to fail. 

It’s clear that this company has tremendous potential, but as with all small-cap oil companies, there’s no guarantee the business will ever reach its full potential. 

Can’t keep up with demand 

Shares in Africa-focused business Victoria Oil & Gas (LSE: VOG) also ticked higher this morning, but have since given back most of their gains after the company announced that it had extended its gas supply agreement with ENEO Cameroon S.A. 

According to today’s press release, the extension will allow Victoria to “optimise all technical and financial elements of a long-term gas supply arrangement aimed at increasing the current contractual power supply of 50MW to beyond 100MW.” A fixed off-take price of $7.50/mmbtu has been agreed between parties. This agreement should help support Victoria’s rapid growth rate. The company believes there’s demand in Douala region in Cameroon for more than 150mmscf/d per day of gas, more than it can supply, so management is trying to agree on licenses with third parties. 

City analysts are expecting Victoria to report its first sustainable profit this year, with earnings per share of 4.6p expected. Analysts have pencilled-in a similar figure for 2018 although as management takes advantage of the huge untapped market for gas within Cameroon, I wouldn’t rule out positive earnings revisions. Nonetheless, like UK Oil and Gas, as a small-cap energy company, Victoria might not be suitable for all investors due to its size and relatively young age.

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However, there are some AIM businesses that look to have the hallmarks of potential successes. Two of these are BowLeven (LSE: BLVN) and Victoria Oil & Gas (LSE: VOG), which have both been working hard to unlock value for shareholders over the past five years.

Victoria in particular has really impressed. Year-to-date shares in the company are up 95% thanks to better than expected production and sales figures. And today the company announced that in order to further its growth, a subsidiary of the group has taken an 80% stake in Bowleven’s Bomono production sharing contract (PSC), with BowLeven keeping the remainder and continuing as operator.

Under the terms of the deal, gas from the field will be sold to Victoria minus a tolling fee for use of the pipeline. As well as the production, Victoria will also complete $6m of work required to connect Bomono to the local Cameroon gas network. BowLeven may have to step in to pick up part of the tab for this investment if Victoria’s sales of the gas do not cover initial capital investment costs. In exchange for the agreement Victoria is paying BowLeven £100,000 in shares plus a 3.5% royalty on gas sales capped at $20m.

An attractive deal

In several ways, this deal seems to benefit Victoria more than Bowleven, as while the company has been able to monetise its asset, the ultimate payoff depends on how successful Victoria’s management is at creating value for investors. What’s more, BowLeven could find itself on the hook for extra capital spending if Victoria’s pipeline connection comes in over budget. 

It seems the market has taken this view as well. As shares in Victoria have jumped by nearly 15% off the back of today’s news, shares in BowLeven have slumped by more than 5%.

Still, over the past two months, shares in the company have risen by nearly 40% thanks to the presence of an activist investor, which has taken aim at BowLeven’s management and is looking for changes. Specifically, the activist wants two seats on the board. As shares in BowLeven are up by 52% over the past 12 months, it looks as if the market is wholly behind the activist’s intentions to awake BowLeven’s management from its slumber. 

With around $100m of cash on the balance sheet, as well as value tied up in two large oil assets against a market cap of £103m, BowLeven’s upside could be significant if the activist succeeds in unlocking value.

Growing rapidly 

Meanwhile, Victoria is quickly becoming one of London’s most attractive growth stocks thanks to the size of the potential market available to the company within Africa. Victoria has already proven that the company has what it takes to build gas distribution and production business. Sales hit a record in January and the deal with BowLeven should only accelerate growth.

Overall, these two companies look have all the hallmarks of successful AIM businesses.

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As well as the commissioning of the new pipeline, three new customers started taking gas from the company in December, adding around 500,000 scf/d in production.

Transformational deal

The opening of the Bonaberi pipeline has transformed Victoria’s outlook. January 2017 was a record month for gas sales from Victoria’s Logbaba field, which is 60% owned by the group’s local subsidiary Gaz du Cameroun. Gas sales from Logbaba rose 4.5% to 654m mscf for the quarter, while there was a 24% increase in gas sales of 3.56m mscf for the year. GDC is the only supplier of natural gas to Douala, Cameroon’s rapidly growing second city and prices have been agreed with customers at prices from $9/mmbtu to $16/mmbtu. Prices are not subject to regulation. 

These deals have given Victoria a strong base from which to grow from. For example, at the end of the fourth quarter, Victoria reported revenue for the three months to 31 December of $4.6m, down slightly from the figure of $4.7m reported for the third quarter but more importantly, the company reported a net cash balance of $1.3m at the end of the period. Overall cash reserves rose by $1.7m during the quarter to $15.8m. 

For the year ending 31 December 2017, City analysts are expecting the group to report revenues of $28.5m, virtually unchanged year-on-year. However, I believe these forecasts are substantially underestimating Victoria’s potential. Indeed, if the company added three new customers at the end of last year, and recorded record gas production during January, it’s not unreasonable to suggest that revenues could be noticeably high this year than they were for 2016. 

Looking to expand 

As well as Victoria’s existing presence within Cameroon, the company is now starting to look to expand both inside and outside the African nation. In a recent interview, Victoria’s chairman Kevin Foo noted that the firm sees plenty of opportunities to grow within Cameroon but the business also sees opportunities outside the country. With net cash of $1.3m, $16m of undrawn credit facilities and an established presence in Western Africa, it looks as if the group is primed for growth. 

Risks ahead 

Victoria may look like it’s on the up and up, but like all early stage growth companies, investors need to approach the business with caution. Operating in a frontier market like Cameroon is always going to be risky, and the oil & gas business is hardly known for its predictability. 

So, if you want to take a bite out of Victoria’s growth, it’s best to invest with a long term view and don’t bet the house. If the company becomes an African BP, the potential upside could be many multiples of the current price. This scenario is unlikely but not impossible that’s why a small speculative position may be the best way to play Victoria’s growth, at least until it’s a more established operator in Africa. 

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Increased production

The company in question is Victoria Oil & Gas (LSE: VOG), which is a Cameroon energy utility stock. The final quarter of 2016 saw its average gas production increase 7% to 7.64m standard cubic feet per day (mmscf/d) when compared to the same quarter of the previous year. It also saw a rise in gross sales for its key Logbaba asset of 4.5% for the quarter, which takes its increase to 24% for the full year.

The company’s drilling programme is also progressing relatively well. Furthermore, a new pipeline to Bonaberi also came on-stream and three new customers began consuming gas as a result of the extension in the fourth quarter of the year. The company has a net cash position of $1.3m, while the New Year has started well and it managed to hit a record production level in January.

Outlook

Clearly, the oil & gas industry is in the midst of a major turnaround at the present time. Prices for the two commodities could rise over the coming months as supply and demand may begin to move back into equilibrium. Therefore, there’s plenty of opportunity for profitability across the industry to rise. For example, sector peer Tullow Oil (LSE: TLW) is forecast to return to profitability this year before recording a rise in its bottom line of an impressive 74% in 2018. This is largely due to increased production, although a brighter outlook for the oil & gas sector could also be a contributing factor.

This rate of growth puts the company’s shares on a forward price-to-earnings (P/E) ratio of just 13.7. Given its potential for further growth, this seems to be a very fair price to pay. In contrast to this, while Victoria Oil & Gas is expected to increase its bottom line by 88% in the current year, since it trades on a forward P/E ratio of 100, this growth seems to have already been priced-in by the market.

So, while Victoria Oil & Gas is performing relatively well as a business, it seems to be somewhat unattractive as an investment. That’s especially the case when it’s possible to buy a larger, fast-growing stock such as Tullow Oil for a fraction of the price. Therefore, on a relative basis, there may be stronger performers in 2017 than Victoria.

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First update

Time Out (LSE: TMO) released its first trading update today after its initial public offering in June. The company raised £90m to pay down debt and invest in growing its e-commerce and digital advertising operations. Today’s update was encouraging: year-on-year group revenue was up 16% and digital revenue grew by 33%. The company has started life well on the London market and the share price is flat since admission to it. An encouraging element has been the relentless buying of shares by institutions. Invesco added to its initial stake and now holds over 11.5% of the shares in issue. Britain’s most loved fund manager has also been buying and Neil Woodford owns over 15% of the company through his Woodford Investment fund. This to me is a seal of approval for the stock and should give investors confidence. 

Growing production

Cameroon-focused Victoria Oil & Gas (LSE: VOG) updated the market today on its operations in the second quarter of this year. The numbers look quite encouraging, production is up to 13.04 mmscf/d which led to revenue for the quarter of $12.5m. Importantly the next two phases of pipeline should be commissioned by the end of 2016 and it will be able to feed an additional 12 customers who have already signed gas sales agreements. 

CEO Ahmet Dik said: “We now look forward to expanding our supply capability to the next level to meet the on-going strong demand for gas we are experiencing in Douala.” Things are beginning to look better for the company after many years of slow movement. I look forward to the next set of results but I’ll be sitting on the sidelines until then. 

Currency boost

Croda International (LSE: CRDA) also released interim results today. At constant currencies, sales were up 2.1% and adjusted profit before tax up 6.3% to £144.6m. These numbers are impressive and to add to this, currency movements have boosted profits significantly. In fact, the pre-tax figure was boosted by £4m, which is a nice surprise for shareholders. Croda’s management has reacted to this by increasing the dividend by 5.6% even after investing over £50m into capital investments in the last six months.

But while these results are good, there were references to “subdued demand in the first half of 2016,” which is slightly worrying. It places much more emphasis on cutting costs and if demand for Croda’s products is subdued for a year or two, then the share price may fall.  

Steve Foots, Croda’s CEO, said: “The group is on track to deliver our expectations for the full year, in constant currency terms, while Sterling weakness will benefit our reported results.” And that should be encouraging for shareholders because further Sterling weakness will boost revenue and profits beyond expectations.

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