It has been a volatile year for EnQuest’s shares. Investor sentiment has swung with oil prices, sending the stock surging to new 52-week highs, before quickly erasing gains. Between January and May, the stock jumped 50% before retreating.

A taste of things to come 

I think EnQuest’s recent outperformance is a sign of things to come. Over the past two years, the company has transformed itself into one of the North Sea’s most prominent and efficient oil producers. When the price of oil first began its dramatic descent in 2014, EnQuest was still waiting for the start-up of its flagship Kraken project. Production in 2014 averaged 27,895 barrels of oil equivalent per day (boepd).

Today, the company is an entirely different beast. Kraken is producing oil, and the firm recently completed the acquisition of a selection of assets, which included its outstanding interest in the Magnus oil field.

Total production averaged 54,268 boepd in the 10 months to end-October, and management is now predicting output to reach 63,000 boepd to 70,000 boepd during 2019.

Debt reduction 

Unfortunately, after surging during the first half of 2018, the price of oil has slumped by around $25/bbl over the past few months. This is bad news for EnQuest, but I don’t think it’s the end of the world for the company. According to its results for the six months to the end of June, the group’s average operating cost per barrel of oil produced was just $22.6, compared to the current oil price of around $62/bbl. Economies of scale that come with higher production volumes should help reduce the average production cost in 2019 as well. Management has hedged a significant portion of oil production for 2019, at around $70/bbl.

With production rising and costs falling, EnQuest is beginning to chip away at its massive debt load. I believe this debt is the reason why many investors are afraid to touch the company so, as it falls, investors should return, helping EnQuest continue to outperform the FTSE 100.

According to today’s trading update, group net debt had fallen to $1.77bn at the end of October, down from $1.97bn at the half-year point. According to the update, a further $65m of debt was paid off in November. 

While there’s still a long way to go before EnQuest is debt-free, the reduction is a huge step forward for the business, in my opinion. As the company generates more cash from operations, debt paydown should accelerate, helped by falling interest costs as obligations are paid off (total group financing costs amounted to $128m in the first half of 2018).

So overall, after several years of turbulence, I think EnQuest is now on the comeback trail. And as its outlook continues to improve, the stock is highly likely to continue to outperform the FTSE 100.

The post This company has smashed the FTSE 100. Here’s why I think its performance can continue appeared first on The Twelfth Magpie.

More reading

• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?
• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

Rupert Hargreaves owns no share 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.

When the price of a barrel rose to $86 in the first week of October, Premier Oil shares hit their highest value so far this year. And while oil has since been slowly sliding back down, the shares have similarly been giving up their gains.

With a barrel now having slipped back as low as $72, Premier Oil shares have dropped to their lowest price since May. And I reckon they’ll fall further if oil continues its decline, as the firm’s debt problem is far from solved and investors are likely to get scared again.

Rocky ride

The same can certainly not be said for Enquest (LSE: ENQ) shares, whose 2018 chart is one of the spikiest I’ve seen all year. In the past 12 months, the Enquest share price has rattled between the 20p and 40p levels, perking up and crashing back every few months. It’s a fine example of what investors in an unprofitable oil exploration companies often have to face — you need steely nerves.

Enquest has been facing debt problems too, but cost-cutting and a recent rights issue have helped steady the ship, and analysts are expecting the bottom line to turn to profit this year. There’s a modest 6.7p EPS on the cards for December 2018, followed by a hike to 14.4p for next year.

That would put the shares on a super low P/E, but that’s perhaps understandable if we look at the debt situation. At the halfway point this year, net debt had reduced, but still stood at nearly $2bn — more than three times the company’s market cap.

Super cheap?

At the time, Enquest said it “continues to prioritise maximising cash flow to facilitate the reduction of net debt,” and I really can’t disagree with that strategy. We’ve seen how debt came close to wiping out Premier Oil and Tullow Oil, and we could be quickly back into crisis times should oil prices fall much further.

But if we do see that hoped-for profit this year, coupled with positive forward guidance and some further erosion of the debt mountain, I could see Enquest shares set for a strong 2019.

But back to Premier, and (admittedly as a shareholder) I do see the share price fall in response to weakening oil prices as overdone. I’ve always felt Premier would be fine with prices of around $70 per barrel, and I still think that — I’d need to see significant further price falls before I’d start getting worried again.

A good year ahead?

I don’t want to downplay the debt situation at Premier, and at the end of the first half the figure still stood at $2.65bn, which is higher then Enquest’s. But Premier’s market cap is almost twice Enquest’s, and Premier’s debt is also coming down. We’re also looking at strong profit forecasts for this year and next too.

I can’t help but see the two sets of valuations as too pessimistic now, and I can see a solid 2019 ahead for both companies.

The post Could Enquest be set to smash the PMO share price in 2019? appeared first on The Twelfth Magpie.

More reading

• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?
• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

Alan Oscroft 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.

In my view, this resilience shows that BP remains an investor favourite, and could be a great addition to your portfolio if you’re looking for stocks to protect your money from market volatility.

Profits recovering 

Following years of cost-cutting, BP is now a leaner operation than ever before, which bodes well for investors. Indeed, shareholders are already reaping the benefits of the company’s leaner operating structure as the price of oil hovers near a multi-year high. 

Last year, the company became the first of the Big Oil group to re-introduce share buybacks. Most eliminated these efforts to return cash to investors when the price of oil started to decline in 2014.

I’m expecting BP to ramp-up its cash return plans over the next six months as the firm’s bottom line gets a boost from the rising price of oil. On top of the buybacks, investors are entitled to a market-beating 5.6% dividend yield. The shares are hardly expensive either, changing hands for just 11.6 times forward earnings.

With higher cash returns on the cards, I rate BP a ‘buy’ right now.

High risk, high reward 

If BP is one of the FTSE 100 most trusted dividend stocks, at the other end of the spectrum is small-cap oil producer Enquest (LSE: ENQ), which has endured a mixed record of growth.

For the past few years, the company has been struggling under a mountain of debt, built up when the price of oil was trading above $100 a barrel. Management has pulled out all of the stops to keep the business alive and, so far, these efforts seem to be paying off. The rising price of oil has helped, but cost reductions have done the bulk of the heavy lifting, putting Enquest back on a stable footing.

Management is now so confident that the company’s recovery is on-track that it’s started chasing growth again. The group recently exercised an option with BP to expand its ownership of the jointly-owned Magnus field and associated infrastructure and the Thistle and Deveron fields. This deal will give the firm an estimated additional 60m barrels of reserves for a total cost of £106m, funded by way of a rights issue.

As it continues its recovery, I view Enquest as a binary investment. The company will either make a full recovery or fail. I think the former is more likely, and the subsequent stock price recovery could produce tremendous gains for investors. For example, right now the stock is trading at a forward P/E of just 2.4 that’s compared to the sector average of 8.2.

These figures tell me that if Enquest can convince investors its recovery is the real deal, there could be an upside of 240% or more on offer here. The reward is certainly worth the extra risk in my view.

The post Is the BP share price a ‘buy’ right now? appeared first on The Twelfth Magpie.

More reading

• Back below 500p, is it time to consider BP shares again?
• Just how bad could it get for the BP share price?
• BP shares are falling. But is the oil market actually tighter than investors think?
• How much is needed in a Stocks and Shares ISA for £357 of weekly passive income?
• Oil prices are falling. So why am I still bullish on BP shares?

Rupert Hargreaves owns no share 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 want to explain why I’m concerned about the outlook for UKOG shareholders. I’ll also consider another oil stock which I believe could beat the market over the next few years.

These numbers worry me

UKOG recently published the results of short-term flow tests from its Portland oil discovery. The HH-1 well flowed 401 barrels of oil per day (bopd) over a six-hour period and 414 bopd over a two-hour period.

However, the company warned that these flow rates “are not the long-term sustainable flow rates that will be utilised to assess the Portland’s commercial viability”.

Those long-term tests are still ongoing. But to be honest, I don’t understand why UKOG published the results of the short-term ones. In my view, they suggest that longer-term flow rates are likely to disappoint shareholders.

Positive cash flow?

The company hopes to generate positive cash flow in 2019. The key challenge it faces is to convert some of the group’s 13.2m barrels of discovered resources into commercial reserves. The drilling and testing operations required to attempt this are not expected to complete until the end of 2019.

In my view this is a risky situation. I’m not encouraged by the evidence so far and would prefer to invest in a company with proven reserves and production.

This stock could double

One possible choice in this sector is North Sea operator Enquest (LSE: ENQ). During the six months to 30 June, production rose by 46% to 53,990 barrels of oil equivalent per day (boepd). This increase was mainly due to the ramp up of production from the firm’s flagship Kraken field.

Higher oil prices and higher production lifted revenue for the first half by 86% to $548m. Operating profit for the period tripled to $105.2m.

The company also announced a deal to acquire a further 75% of the Magnus oil field from BP. Enquest’s debt-laden state means that this will have to be funded by shareholders, so today the firm launched a rights issue to raise $138m (£107m).

Good and bad news

The Magnus deal should add 60m barrels of reserves to Enquest’s assets, which the firm says will have a net present value of $500m. Expanding its ownership of Magnus should also deliver meaningful increases to production and cash flow.

However, the rights issue shares are being sold at 21p each, which is a 45% discount to yesterday’s closing price of 39p. Enquest’s share price is 13% lower at the time of writing, in response to this news.

The problem is the firm’s massive net debt, which was down $18m but was still at a hefty $1,973m at the end of June. To put this in context, analysts’ forecasts suggest that full-year profits for 2019 will be $239m.

I think shareholders face the risk that the company will be run only for the benefit of its lenders. But cash generated from operations rose by 132% to $318m during the first half. If this trend continues, debt could soon start to fall.

The stock currently trades on just 2.3 times forecast earnings for 2019. If debt starts to fall, I believe the shares could easily double from current levels.

The post Are you tempted by the UKOG share price? Here’s what I’d buy instead appeared first on The Twelfth Magpie.

More reading

• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?
• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

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, with the company’s share price having fallen by 4% in the last year, it now seems to offer a low valuation. This could mean that it has an attractive risk/reward ratio. Alongside another cheap stock that released news on Wednesday, it could be worth buying for the long term.

Low valuation

Offering a low valuation alongside Marks and Spencer is oil and gas production and development company Enquest (LSE: ENQ). It released news on Wednesday of a compensation settlement with Armada Kraken in relation to historic issues from the chartering of a floating production storage and offloading vessel (FPSO). A total of $15m will be paid to the charterers, which is to be fully settled by 17 December 2018.

Looking ahead, Enquest appears to offer an improving financial outlook. The company is expected to deliver a rise in earnings of 100% in the 2019 financial year. This puts it on a forward price-to-earnings (P/E) ratio of just 3, which suggests that it is dirt-cheap at the present time.

Certainly, the outlook for the oil and gas sector remains uncertain. And with the company being a relatively small operator compared to FTSE 100 oil and gas stocks, it may be somewhat risky. But with the potential for further rises in the oil price due in part to supply disruption, the prospects for the stock seem to be bright on such a low valuation.

Improving outlook

Marks and Spencer’s P/E ratio of 12 suggests that it may also have a wide margin of safety. Of course, consumer confidence is expected to remain weak in the near term, with spending likely to be under pressure during the Brexit process. But with wage growth now being ahead of inflation and expected to remain so over the coming months, the prospects for the retail sector could improve to some degree.

The latest strategy adopted by the retailer may also catalyse its financial performance. It is seeking to focus to a greater extent on the fundamentals of its business. This includes a refreshed online strategy which could help it to compete more effectively with online rivals. Alongside this, the company is also aiming to become more efficient, which may help it to deliver improving financial performance over the medium term.

With Marks and Spencer expected to return to positive bottom-line growth in the next financial year, its prospects may be better than the market is pricing in. As such, and while it has underperformed the FTSE 100 in recent months, a low valuation could help it to generate impressive total returns in the long run.

The post Think the Marks and Spencer share price will underperform the FTSE 100? Read this first appeared first on The Twelfth Magpie.

More reading

• FTSE 100 to surge to 11,668! 2 cheap stocks to buy before the rally

Peter Stephens 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.

Off the back of this rally, a lot of oil stocks have already recovered significantly from their 2016 lows. However, not all companies have recovered to the same degree. Here are three stocks that I believe could have further to go.

Uncertainty prevails 

Tullow Oil (LSE: TLW), Enquest (LSE: ENQ) and Rockhopper (LSE: RKH) all seem to have missed out on the wider oil sector rally over the past 12 months. It appears the reason why investors have been slow to return is due to the uncertainty hanging over these businesses.

Tullow and Enquest are both struggling under an enormous mountain of debt while Rockhopper’s future is dependent upon the development of the Sea Lion Field in the northern waters of the Falkland Islands.

Rising oil prices are already starting to lift the uncertainty for Tullow and Enquest.

Last year, Tullow returned to profit for the first time in three years, and for 2018 the producer is projecting free cash flow generation from operations of $650m — a significant figure. During the first half, the group churned out $300m of cash pushing net debt down to $3.1bn.

Compared to Tullow’s market value of £3bn ($3.8bn) this debt mountain is enough to scare away even the most risk-tolerant investors. Still, at the beginning of 2018, the group had net debt of $3.5bn, so the balance is rapidly moving in the right direction. Although a legal dispute with rig operator Seadrill has cost the company $250m, I expect to see a substantial reduction in net debt for the firm at the end of 2018.

Enquest is heading in the same direction. The firm is projecting production to hit between 50,000-58,000 boe per day in 2018, that’s up from 37,000 boe per day in 2017. 

Increased output at a higher oil price should enable the company to start chipping away at its near $2bn debt pile. Indeed, management is confident that higher output, coupled with low levels of capital spending will allow the group to do just that. 

Last year, City analysts predicted that Enquest could generate free cash flow of $700m a year at the higher output rate, which would be more than enough to reassure investors that the company can maintain its obligations to creditors. 

Project green light 

As Enquest and Tullow start to reduce debt, sentiment towards the two companies should improve as the level of risk reduces. I believe this should drive a re-rating in the shares pushing them significantly higher.

Meanwhile, the rising price of oil makes it more likely that Rockhopper’s Sea Lion project will get the green light from its development partner Premier Oil (Rockhopper currently owns 40%). Premier is also set to report a jump in cash flow this year, giving the group more capital to fund development projects.

If all goes to plan, Rockhopper’s management has stated that it believes Sea Lion could be sanctioned by the end of 2018, which would be a significant development for the company. Investors are bound to return when this colossal project gets the green light. After construction begins, it will only be a matter of time before the profits start flowing. 

The post 3 top oil stocks I’d buy today appeared first on The Twelfth Magpie.

More reading

• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?
• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

Rupert Hargreaves owns no share 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.

After several years of rough trading, it now looks as if Enquest is back on track. The company’s flagship Kraken development is online, and the producer is now guiding for oil production of 50,000 to 58,000 barrels of oil per day for 2018, up from last year’s figure of 37,405 bbl/d. 

Cash flow growth

According to Enquest’s full-year 2017 numbers, which were published today, this year the firm expects its production cost per barrel to fall to $24, compared to 2017’s figure of $26. Meanwhile, capital spending is set to drop 47% to $250m. The group has hedged 7.5m/bbls of oil at an average price of $62/bbl. 2017’s average realised oil price was $52.2/bbl. 

Put simply, during 2018 Enquest’s oil production is set to grow 55%, and the average cost of production will fall approximately 8%. All in all, this implies Enquest’s profitability should jump during 2018, and it should be able to start meaningfully reducing its debt. 

Net debt was just under $2bn at the end of 2017 or around 6.6 times EBITDA.

According to my calculations, if cash produced from operations jumps 55% during 2018, (in line with the higher level of production to $471m) Enquest could be on track to report free cash flow from operations of $221m this year. That’s enough to pay down 10% of the debt mountain (in the long term City analysts are forecasting a free cash flow of as much as $700m). These figures do not take into account higher oil prices, nor the lower average production cost of each barrel, so they are highly conservative estimates. 

And based on these estimates, shares in the company are trading at a price-to-free cash flow ratio of 2.3, making Enquest one of the cheapest stocks around today. If the firm can get debt under control, then I don’t believe it will be long before the shares attract a higher multiple. 

Production surge

Another small-cap oily I’m positive on the outlook for is Faroe Petroleum (LSE: FPM). Faroe’s portfolio consists of approximately 60 exploration, appraisal, development and production licenses in the North Sea, and it is unique among early-stage oil companies as it’s actually producing oil.

According to the firm’s final figures for the year to the end of December, the company produced an average of 14,349 bbl/d in 2017, down 18% on the year due to the suspension of production from two key assets, the Njord and Hyme wells. 

Still, 2018 could be a transformational year for the company as management has earmarked £80m for the development of key assets as it pushes towards its target of more than doubling production to 35,000 bbl/d. With unrestricted gross cash of £149m at year-end, Faroe has plenty of capacity to pursue this goal. 

If everything goes to plan, and the company can continue to produce oil while unlocking value from its portfolio of assets, City analysts estimate Faroe could earn 3.4p per share in 2018, giving a forward P/E of 31. This multiple might look expensive, but in my view, it does not take into account any potential upside from higher production or a successful drilling programme. With this being the case, I believe shares in Faroe could leap higher if performance in 2018 turns out better than expected. 

The post 2 top value stocks I’d buy in April appeared first on The Twelfth Magpie.

More reading

• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?
• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

Rupert Hargreaves owns no share 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.

While the rise in the oil price has caused investor sentiment to pick up, the valuations on offer across the sector do not yet appear to factor-in the prospects of a rising oil price. As such, now could be a good time to buy the following two oil and gas companies ahead of what may prove to be a more profitable period than expected.

Rising share price

Gaining 11% on Monday was oil producer Enquest (LSE: ENQ). Investors responded positively to its operations update, with the company averaging 37,405 barrels of oil equivalent per day (boepd) in 2017. This was in line with previous guidance, with Kraken first oil delivered in the second quarter of the year. There was also a successful completion of the acquisitions of interests in Magnus and the Sullom Voe Oil Terminal during 2017.

Looking ahead to 2018, Enquest expects average production to grow by between 33% and 55% versus the prior year. This seems to have boosted investor sentiment, and this trend could continue in the near term.

Encouragingly, the company’s cash capital expenditure is expected to be materially lower in 2018 than in 2017. It is due to be around $250m and when combined with higher production, this could lead to stronger cash flow for the business. With the company expected to post a rise in earnings of 73% in the next financial year, it has a price-to-earnings (P/E) ratio of just 2.6 using 2019’s forecasts. This suggests that it could offer high potential rewards for the long run.

Impressive outlook

Also offering upbeat capital growth potential in the oil and gas sector is Cairn Energy (LSE: CNE). It has ambitious production plans over the next few years which could transform the financial performance of the business.

For example, it is expected to deliver profitability in the current year after a number of years of development and investment in its asset base. This in itself could help to improve investor sentiment, while a forecast rise in earnings of 49% next year could lead to stronger share price performance.

Despite its upbeat financial outlook, Cairn Energy trades on a price-to-earnings growth (PEG) ratio of just 0.4. This suggests there is a wide margin of safety on offer at the present time, and could mean that it has a favourable risk/reward ratio.

Certainly, there is scope for volatility and even a fall in the oil price. However, with the prospects of continued demand growth and further restrictions on global supply, the prospects for the oil price seem to be more positive now than they have been in a number of years.

The post 2 growth stocks I’d buy and hold for the long run appeared first on The Twelfth Magpie.

More reading

• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?
• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

Peter Stephens 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 outlook

Updating the market on Tuesday was oil and gas company President Energy (LSE: PPC). The company reported that it has already banked the proceeds from its first delivery of oil from the Puesto Flores Field. The acquisition of the asset, together with the neighbouring Estancia Vieja Field, was announced just a month ago and the proceeds received of $1.5m represent the revenue from the first shipment of oil under the company’s own steam.

The news has been greeted positively by investors, with its share price rising by 7%. This takes the gain over the last year to 40%, and more growth could lie ahead.

The business is focused on improving profitability and generating positive cash flow. In fact, next year it is forecast to move from a loss-making position to a profitable one. This has the potential to catalyse investor sentiment yet further – especially since the stock trades on a forward price-to-earnings (P/E) ratio of under 20.

Given the company’s growth potential in the long run, its valuation could move higher over the medium term. This means that while there are a number of energy stocks which could be worth buying right now, President Energy’s risk/reward ratio appears to be relatively favourable.

Upbeat potential

Also offering what seems to be an attractive risk/reward ratio within the energy sector is Enquest (LSE: ENQ). The UK- and Malaysia-focused oil and gas company is expected to improve on what may prove to be a tough 2017.

It’s due to move into the red this year, but then move back into the black in 2018. This improved outlook, however, does not seem to have been factored in by the market, since the stock trades on a forward P/E of 8.9. This suggests that the company’s share price could make a recovery after falling by 12% in the last year.

Of course, the outlook for the oil price is hugely uncertain. It could make a significant impact on Enquest’s earnings outlook and, having recently reached a two-year high, its prospects now appear to be rather encouraging.

Clearly, though, volatility is unlikely to disappear anytime soon and oil and gas companies could see their share prices move wildly in either direction in the short run. As such, with Enquest (and President Energy) being relatively small players, risk averse investors may prefer a stock with more size and scale. But based on their risk/reward ratios, they both appear to be worth buying for the long term.

The post Time to get greedy with these 2 dirt-cheap small-caps? appeared first on The Twelfth Magpie.

More reading

• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?
• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

Peter Stephens 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.

This is all good news for the price of Brent oil, which has stabilised in the high $50s during the past few weeks. This year, the price of Brent has averaged around $53 a barrel, up from last year’s mid-$40s. 

Shares in Africa-focused oil explorer Tullow Oil (LSE: TLW) have reacted positively to this development. Over the past three months, the shares have gained 21% as investors have returned to the company following more than four years of selling. 

However, while Tullow’s outlook is improving, there’s another company I believe is a better bet on oil prices. 

High returns 

In my view, Tullow’s biggest problem is debt. Earlier this year, the company raised $750m in a rights issue and cut its debt from $4.8bn to $3.8bn. Of this total, management is currently in the process of negotiating a $2.5bn debt refinancing that should be confirmed during the final quarter of this year.

Along with this restructuring, Tullow is preparing to resume drilling in Ghana after the resolution of a maritime border dispute with Ivory Coast. Now that this dispute is cleared up, the firm is expecting to resume drilling at its Ten development around the end of this year, where the opening of additional wells will allow it to increase production by 60% to around 80,000 barrels a day. When these additional barrels come on stream, the firm should be able to begin paying down debt with cash flows from operations. 

Still, even the most optimistic forecasts for Tullow’s debt reduction look insignificant compared to those of smaller peer Enquest (LSE: ENQ).

Cash cow 

Production at the Kraken field in the East Shetland basin could net Enquest as much as $700m a year in free cash flow even at current oil prices, according to City analysts. 

The project will drive down its breakeven cost for producing oil in the UK to between $21 and $25 a barrel, giving margins of 100% or more with oil at $50. The company expects to hit its production target of 50,000 barrels a day (the level at which analysts are predicting free cash flows of $700m) during the first half of 2018.

When production hits the projected level, I believe that the company’s debt, which rose slightly to $1.92bn at the end of June compared with $1.91bn at the end of April, should fall quickly. Management is also planning to sell part of the Kraken field to speed up debt reduction. 

Deeply undervalued 

As well as Enquest’s brighter balance sheet outlook, the shares also look cheaper compared to City earnings projections for the company. At the time of writing, the shares are trading at a forward P/E of 5.9, compared to Tullow’s 20.5. With this being the case, I believe that shares in the company could double, or even triple from current levels as the oil environment continues to improve. 

The post One bargain oil growth stock I’d buy ahead of Tullow Oil plc appeared first on The Twelfth Magpie.

More reading

• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?
• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?