If you’re looking for a growth play in the energy sector and have £1,000 to invest, then you may want to turn your attention towards mid-cap oil and gas producers such as Tullow Oil (LSE: TLW), besides big names like Shell and BP.
Generally, as pure-plays on upstream, mid-cap producers have a lot more to gain from a sustained upswing in oil prices. At the same time, many mid-cap companies in the sector continue to trade well below their historic highs and are valued at big discounts to the market.
Tullow Oil
Shares in Tullow Oil haven’t exactly been sparkling of late — they’re up just 5% since the start of the year, to 216p. The Africa-focused oil and gas explorer clearly has some way to go before it’s fully out of the woods, but early signs suggest that things are beginning to move up for the company.
Thanks to higher oil prices and increasing production, Tullow swung back into profit in the first half of 2018, after making a loss of $348m in the same period last year. Profit after tax in the six months to 30 June was $55m, while free cash flow nearly doubled to $401m.
Progress is also being seen with the ramp-up in production from its offshore Ghana TEN oilfields, with estimated reserves of 300m oil-equivalent barrels. In a recent operational update, the company said it expects to hit full output capacity of 80,000 barrels a day by 2020, up from 56,000 currently.
Exploration
With Tullow’s financials coming back into shape, we are once again seeing more investment into growing its reserves. Although exploration always requires a bit of a gamble, finding new oil has always been its key strength. Tullow has one of the best track records of discovering new reserves, so increased spending on exploration has the potential for significant upside.
On the other hand, however, plans to resume dividend payments aren’t a priority. Despite a big jump in free cash flow, net debt is still rather high, at $3.1bn, meaning Tullow is highly leveraged to the price of oil.
Eastern Mediterranean
Elsewhere, Energean Oil & Gas (LSE: ENOG) is another stock that deserves a closer look. The FTSE 250 company, which raised $460m from listing its shares on the London Stock Exchange in March, has big plans to develop its gas prospects in the eastern Mediterranean.
The eastern Med has become an increasingly active exploration and production region, following a series of high-impact discoveries in Egypt and Israel, attracting a hive of investments from Exxon Mobil, BP, Eni and Total. With the appearance of the oil majors in the area, infrastructure is being developed, opening up supply routes for independent producers such as Energean.
Significant upside
Energean, which has its main production base in Greece, intends to use the proceeds of its equity sale to develop two major gasfield discoveries offshore from Israel, Karish and Tanin. Together, they have potential reserves of up to 2.4trn cubic feet of gas and 32.8m barrels of light oil and condensate, representing significant upside potential for a firm that has just 50m oil-equivalent barrels of commercial reserves.
Of course, there are major risks involved too. On top of the usual cacophony of execution and commodity price uncertainty, investors will have to contend with political risks and rivalries that are typical of the region.