Shares in oil and gas exploration company Lekoil (LSE: LEK) have soared by as much as 20% after positive news flow regarding its oil production. In fact, the Nigerian and west Africa-focused business has today announced the commencement of oil production from the Otakikpo Marginal Field in oil mining lease 11, which is located in the Niger Delta.
The first oil flowed from the asset on Friday and, significantly, the flow rate exceeded expectations, with it peaking at a rate of over 5,700 barrels of oil per day (bopd). This is extremely encouraging and, as a result, the company’s share price has risen by over 20% and could continue to benefit from improving investor sentiment over the short to medium term. Additionally, the well produced from only the first of four planned production strings and, as such, the original estimate of 6,000 bopd from all four strings looks set to be easily surpassed.
Clearly, the company has strong long-term potential but, as is the case for all of its sector peers, sentiment towards oil companies remains somewhat downbeat. And, looking ahead, it seems likely that the oil price will fail to deliver a significant rise over the short to medium term, which means that buying stocks with a margin of safety appears to be crucial.
Fortunately, Lekoil trades at a substantial discount to its net asset value, with it having a price to book (P/B) ratio of just 0.85. This indicates that there is considerable upside potential even though its shares have already risen significantly today. And, with the company being forecast to deliver a pretax profit of £55m in the next financial year (having made a loss last year), its forward price to earnings (P/E) ratio of 3 indicates that it offers a significant margin of safety at the present time.
Of course, since Lekoil is a relatively small company at the start of its production phase, pairing it up with larger and more stable businesses could be a prudent move. As such, buying a slice of Nostrum (LSE: NOG) alongside it appears to be a sound strategy, since Nostrum is expected to significantly improve its financial performance in 2016 following what is set to be a challenging current year.
In fact, Nostrum’s bottom line is expected to rise by around 156% next year and this puts it on a price to earnings growth (PEG) ratio of just 0.1, which indicates considerable upside. And, with Nostrum yielding 3.5% in the current year, it is a relatively strong income play, too. Furthermore, with Nostrum’s share price having risen by 18% in the last year, the market seems to be starting to factor in improved financial performance, making now a good time to buy.
Meanwhile, Ophir Energy (LSE: OPHR) continues to struggle to maintain a black bottom line. In fact, it is expected to slip into loss-making territory in the current year and, as a result, its share price could come under pressure in the short run as the market absorbs what is due to be a disappointing year.
However, with Ophir Energy trading on a P/B ratio of just 0.55, the market already appears to be pricing in further pain. This means that the margin of safety on offer is relatively appealing and, while its short term financial performance may be set to disappoint, Ophir appears to offer good long term value for money – especially if the price of oil does move upwards in 2016 and beyond.
Despite this, Lekoil and Nostrum seem to be more logical buys at the present time, with the latter perhaps being the most desirable due to its greater stability, size and track record of profitability.