Oil prices have risen this morning in the wake of the Paris attacks. Markets are pricing in an increased change of supply disruption.
Shares in both Rockhopper Exploration (LSE: RKH) and Tullow Oil (LSE: TLW) have enjoyed a 5% bounce, although strangely Ithaca Energy (LSE: IAE) has not, despite releasing a solid set of Q3 results.
These three stocks have fallen by between 47% and 60% over the last year. If the oil market does start to stabilise in 2016, as many analysts expect it to, then now could be a good time to buy.
Ithaca Energy
Shares in North Sea firm Ithaca are now nearly 60% above their 52-week low of 26p, but I think this company remains one of the better choices for an oil recovery play.
Ithaca generated adjusted earnings of $98m and cash flow from on-going operations of $217m during the first nine months of the year. This compares well with last year, when cash flow for the first nine months of the year was $128m.
Ithaca is benefiting from a strong hedging strategy. The firm’s operating costs per barrel of oil equivalent (boe) have also fallen sharply to $33 this year, down by 40% from last year. Ithaca expects costs to fall to $25/boe when production starts from its Stella field in Q2 2016.
It’s worth remembering that Ithaca’s recent $66m placing was carried out at 53p per share — 29% above the current share price. This means that private investors can currently buy into Ithaca for much less than the placing price.
Stella is likely to be the key to Ithaca’s success, in my view. If everything goes to plan from now on and there are no further cost overruns or delays, Ithaca could be a smart buy.
Rockhopper Exploration
Exploration firms operating in the Falklands have had a poor run of luck recently. This makes Rockhopper’s decision to diversify by buying Mediterranean Oil & Gas last year look wise.
Rockhopper said today that gas production has started at the Civita field, in the Abruzzo region of Italy. Combined with production from the firm’s offshore Guendalina gas field, Rockhopper now has gas production of around 700 boe per day, which is expected to provide revenue of around $9m in 2016.
Although this won’t make anyone rich, it should cover many of the firm’s overheads and help preserve Rockhopper’s $160m cash balance.
As the only Falkland explorer with a potentially commercial oil discovery, Rockhopper could be worth a closer look, in my opinion.
Tullow Oil
Tullow scored some brownie points with investors recently when the firm’s lenders recently agreed to leave Tullow’s lending facility, which is based on the value of its reserves, unchanged.
Many other companies have seen their reserve-based lending facilities reduced in the light of lower oil prices. Tullow’s success in avoiding this fate suggests the company’s lenders are confident that the firm’s TEN project will be successful and generate significant enough new cash flow to repay its debt.
I agree with this view. At less than 200p per share, I wonder if Tullow is a buy. My only concern is that repaying Tullow’s $4.2bn net debt will place a lot of pressure on the firm’s profits over the next few years, and may limit shareholder returns.