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Ok, cut out the emails and stop pestering me. This report went out on onefreesharetip.com on Friday and it seems that stacks of punters could not be bothered to register (it costs nothing) and have now decided to plague me to send it to them. Okay, just to give my email in-box a break, here you all are. But this is the last time I shall be republishing a onefreesharetip.com tip or special report. If you want to make sure you get the next special report ( 8 explosive small cap stocks to buy now by ex t1ps senior writer Steve Moore – due out next Thursday) plus a free share tip every working day just go and sign up. It is free and you can do it HERE
Now, as I head off to watch recordings of the last two episides of Dallas ( I just cannot escape oil) here is that report:
Everyone should have some oil exposure in their portfolio. Long run supply demand patterns are impossible to predict but in the short to medium term there is always the risk of a Black Swan event that disrupts supply and sends the price of oil spiking sharply higher. I suppose that the odds on favourite for a 2013 Black Swan (if that is not a contradiction in terms) is Israel attacking Iran. The second obvious Black Swan event would be civil unrest in a major oil producing state. Might Saudi Arabia, for instance, have its own “Arab Spring?”
If oil spikes higher oil stocks, especially those with production, will – thanks to operational gearing see windfall net income gains and their shares will move sharply higher. But non oil stocks, facing sharply increased fuel bills and so reduced margins will head the other way. And it is for this reason that everyone should have some oil exposure within a balanced portfolio as a hedge.
Having said that, you cannot bank on a Black Swan ( by definition) and so you should not own stocks that are either failing to generate cash from their current production and at current prices or which are simply high risk exploration punts. You can buy either if you wish but they would not count as quality plays within such a balanced portfolio. Sadly the London market is littered with such opportunities to throw your money away on oil stocks. The quality of some recent listings is very poor indeed.
And so while it is clear that we all need some oil exposure there are, conversely, some stocks which are clear shorts on the sector. There are rather a lot in fact. If you are looking for three stocks to short ( which are liquid enough to short I offer up a couple of ideas below:
Ruspetro (LSE:RPO) – cannot generate free cashflow to fund growth, heavily in debt, discredited management – see HERE
Borders & Southern (LSE:BOR) – exploration risk is not discounted in share price – par for the Falkland’s course – see HERE
Beneath that there is a whole range of penny dreadful no hopers which are probably impossible to short but I would not touch on the long tack with a bargepole. Operationally flawed, financially weak and often run by total scumbags I am afraid the oil sector does attract more than its fair share of JR Ewing’s. Par for the course in this murky part of the pond is this little horror story.
But you want 8 stocks to buy? I start with Petroceltic (LSE:PCI) at 7.36p which is – I believe – even at current oil prices worth 18p. Most brokers value it at 12-14p. The market capitalisation today is £174 million.
In 2012 Petroceltic’s focus was on corporate activity – it bought up rival Melrose Energy. That has given it a solid platform of rising production and cash generation which on its own makes the shares look cheap at current oil prices. But as a bonus it has a diverse exploration portfolio. Exploration is – of course – high risk but with such a wide spread in prospective areas there will be success this year.
Having said that, this Irish firm started the year with a duster in Egypt. The market over-reacted and that is your buying opportunity. The well in Egypt cost $4 million but Petroceltic can afford to blow $4 million on a dry exploration well because it is already a significant producer.
On 7th January it stated that 2012 output ( from fields in Egypt and Bulgaria) was in line with prior guidance at 28,500 boepd and that 2013 guidance is unchanged at 25-27,000 boepd of which 85% is gas and the rest liquids. On that sort of output the firm generates enough cash to speculate $4 million on a dry well at least once a week.
Net debt at the end of 2012 was $210 million but that is being paid down aggressively from cashflows notwithstanding the company’s aggressive exploration and development programme. The headroom on this facility is $300 million.
And the other six oil stocks to buy? I have a little list… and it is:
Caza Oil & Gas ( a flutter but a very attractive indeed risk reward flutter) – details HERE
Tullow Oil – a bedrock FTSE 100 stock with big exploration upside – details HERE
Premier Oil – solid FTSE 250 producer with big exploration upside – detailed comment HERE
Northern Petroleum – asset backed play with value investors trying to force a value unlock – details HERE
Madagascar Oil – a heavy oil play – details HERE
BP – a natural bedrock with yield – detailed comment HERE
Back to Petroceltic. CEO Brian O’Cathain, confirmed that the company’s plans to “commence our high potential exploration drilling programmes in the Black Sea and Kurdistan Region of Iraq later this year are on track. The total exploration budget for 2013 ( also covering other wells in Egypt and wells in Algeria) is $64 million. That puts the $4 million blown on this duster into context.
On the basis of the $74 million exploration budget ( which will deliver other dusters but also some successes) and an $86 million development programme (which will all be funded from operational cashflows) output from 2014 onwards should climb sharply. By 2015 ( at the latest) Petroceltic will be producing 40,000 boepd which should translate into operational cashflows of at least $350 million.
The current share price of 7.48p plus debt gives an EV of just over $500 million and so on that basis the shares look materially undervalued. I still stand by my view than an EV/cashflow multiple of 3 is about right and that implies a 19p share price. Most brokers value the shares at 11-12p. Either way the shares look pretty cheap offering a 50% + return on the most bearish of assessments.
Sam Bottell spent two years working with Oilbarrel.com and Minesite.com and is now a freelance writer specialising in resource stocks. You can see a selection of his recent articles HERE
Sam will be appearing at the UKInvestor Show on April 13 where a number of resources experts such as Amanda Van Dyke, the chair of Women in Mining and a partner at Dundee Securities and gold guru Dominic Frisbey are among the 25 top speakers. More than 25 resource companies will also be presenting. For more details of the UK’s only serious investor show go HERE
