Although the coronavirus pandemic has put a big dent in oil demand, I expect demand to improve during the second half of 2020. I’ve identified three UK oil stocks which I think should perform well in this scenario.

A long-term winner?

If you’re looking for oil stocks to buy, you can’t ignore the FTSE 100‘s biggest company, Royal Dutch Shell (LSE: RDSB).

Shell hit the headlines last week by cutting its dividend for the first time in 75 years. This will reduce the stock’s dividend yield to around 3.8%. Although this is a disappointment for income investors, I think it’s a far-sighted decision that will prove to be correct.

At more normal oil prices, Shell is a formidable cash machine. Its oil business has low operating costs for fields that are already in production. The group also has a very large gas business and a sizeable ‘downstream’ division – that’s industry jargon for refineries which convert oil into petrol, diesel, and chemicals.

I see Shell as a potential winner as the coronavirus pandemic recedes. I’m also encouraged by the company’s plans to cut emissions over the coming years. I remain a buyer.

One North Sea oil stock I’d buy

North Sea firm Serica Energy (LSE: SQZ) has been around for 15 years. But in 2017 the firm acquired a number of oil and gas fields from BP. This deal transformed the company into a mid-tier producer with 2019 production of more than 30,000 barrels of oil equivalent (boe) per day.

More than 80% of Serica’s production is gas, which is piped to the UK for electricity generation. Operating costs are low, too, at just $12.60 per boe.

Serica’s low costs support strong cash generation, and net cash rose from £43m to £102m in 2019. The group plans to pay its first ever dividend in July, giving the stock a forecast yield of more than 3%.

Serica could still face challenges from coronavirus. In the future it could face significant decommissioning expenses. But the shares look reasonably priced to me. I’d be happy to buy at current levels.

I think this oil stock could double

The final company on my list produces oil for an operating cost of just $3 per barrel. Genel Energy (LSE: GENL) was one of the first companies to strike oil in the Kurdistan region of Iraq. It remains a leading producer in this region.

There are some potential problems for investors. Genel’s oil is sold to the Kurdistan government and payment is sometimes delayed. The political environment isn’t always stable. However, this business has a track record of operating successfully and maintaining a good relationship with the authorities. I can live with the political risks.

Genel’s net cash stood at more than $90m at the end of last year, supporting a generous dividend. Looking ahead, analysts currently expect the firm’s strong cash generation to support a 9% dividend yield in 2020.

This oil stock isn’t without risk, but if oil prices rise stabilise above $40, I think shareholders could see big gains. I’d be happy to take a small position in Genel.

With that in mind, here are two stocks that still appear to offer value and high dividend yields as well.

Ferrexppo

Ukrainian iron ore producer Ferrexpo (LSE: FXPO) is a company the market loves to hate. Even though it has a strong track record of growing profits and returning cash to investors, the stock has always traded at a discount valuation. Some of this discount is warranted.

The company is still majority-owned by its founders, which means minority shareholders don’t get much of a say in how the business is run. That said, as Ferrexpo’s managers have more skin in the game than almost anyone else, they’re highly incentivised to produce the best returns for all shareholders.

As well as the above, the company is also suffering from reduced demand for iron ore pellets. The sluggish global economy weighed on demand last year, resulting in production falling from 10.6m tonnes in 2018 to 10.5m for 2019. To make things worse, global steel demand could fall by a further 0.6% in 2020.

Despite all of the above, shares in Ferrexpo look too cheap. The stock is currently dealing at a price-to-earnings (P/E) ratio of just 2.6, which suggests the stock offers a wide margin of safety at current levels. Further, the shares currently support a dividend yield of 11.3%, and the distribution to investors covered 3.4 times by earnings per share.

Genel Energy

As well as Ferrexpo, oil and gas group Genel Energy (LSE: GENL) appears to offer value at current levels. Investors seem to be concerned about this company’s long-term prospects. During the past few years, it has struggled to adapt to the current oil price environment. Conflict in its primary production region of Kurdistan has also hampered growth. 

Revenues hit $520m in 2014, but then plunged to $191m in 2016 before staging a recovery. Current forecasts suggest the business will record sales of $350m for 2019, and $330m for 2020. This will help the company generate a net profit of $129m in 2019, or $0.47 per share.

Based on these forecasts, the stock is trading at a P/E multiple of just 5.3. That’s around half of the market average, which suggests shares in Genel are undervalued at current levels.

Moreover, the stock currently bears a dividend yield of 5%. The distribution is covered more than three times by earnings per share. Therefore, it looks quite dependable for at least the next two years.

Looking at these figures, it seems as if now could be the time for investors to snap up a share in this recovering mid-cap oil business before the rest of the market wakes up to the value on offer.

However, fast-forward to today and the situation couldn’t be more different. Both companies have weathered the storm and are now starting to emerge from the cloud of uncertainty that has shadowed them for the past few years.

Profits rising

Gulf Keystone’s turnaround is particularly impressive. At the end of 2016, it looked as if it was heading for bankruptcy and only a colossal debt restructuring helped save the business, although it almost completely wiped out shareholders.

Now, after several years of hard work, the company has not only completely recovered, but it looks to be one of the most well-funded and profitable oil businesses trading in London today.

According to its full-year 2018 results, Gulf Keystone ended 2018 with a net cash balance of $191m, up $135m year-on-year. Profit from operations hit $78m and earnings per share came in at 26p. On this basis, shares in the company are trading at a P/E of around 10, that’s without adjusting for cash which currently makes up around 17% of the group’s £580m market capitalisation.

Management also declared a $25m dividend alongside Gulf Keystone’s 2018 results, which gives a yield of around 3.3% on the market-cap, according to my calculations. That’s quite an attractive return for a company that was facing bankruptcy only a few years ago.

Further to go

And I think this could be just the start of Gulf Keystone’s comeback. Based on its current production and expansion plans, the City believes the firm’s revenues will hit $409m in 2020, up from 2018’s $251m. Earnings per share are expected to more than double to $0.66, putting the stock on a 2020 P/E 5.

These numbers indicate that investors buying today could see an upside of 100% or more on their investment in Gulf Keystone over the next two years.

Undervalued

Genel’s comeback hasn’t been quite so impressive, but that shouldn’t detract from the fact that the stock appears to be undervalued by around 65%. At the time of writing, shares in this Kurdistan-focused oil producer are dealing at a forward P/E of just 5.3 (compared to the industry average of 8.7).

The business is also highly cash generative. After accumulating $241m of net debt by 2016, at the end of 2018, the group’s balance sheet had moved into a net cash position of $37m. Management is planning to use much of these resources to increase the company’s annual production, underpinning earnings growth over the next two years.

The drilling and exploration programme in 2019 has gotten off to a solid start with the business announcing today that the testing of its TT-20z well in the Taq Taq field (of which Genel has a 44% working interest) is complete. Production at the well has started at an initial rate of 2,000 barrels of oil per day. Production is also projected to increase over the coming weeks and months.

If the company continues to issue positive trading updates like these, I think it could only be a matter of time before the market rewards the stock with a higher valuation.

High energy

I’m also looking at a very different stock that has reported today, Kurdistan-based oil explorer Genel Energy (LSE: GENL). Now this should be a far riskier option, but in many respects it isn’t. As Roland Head points out, the company has almost no debt, which is very unusual for this type of operation, and highly comforting that fact is too.

It also generates material free cash flow, with today’s full-year 2018 results showing net cash flow of $164.2m, up 66% from $99.1m in 2018. Unrestricted cash balances stood at $334m on 31 December 2018, up from $162m one year earlier, while net cash of $37m marked a positive reversal from $135m the year before.

Genel’s Taq Taq, Peshkabir, and Tawke oil fields have estimated gross proven and probable (2P) reserves of 563m million barrels of oil (bbls). 

Cash flows

The £616m group expects to generate material free cash flow of over $100m in 2019, inclusive of investment in its Sarta and Qara Dagh operations, and investors should reap the rewards as the group “is initiating a material and sustainable dividend policy” and intends to pay a minimum dividend of $40m a year from 2020.

The market response was cool, with the stock down 1.33% at time of writing, as EBITDAX (an indicator of financial performance used for oil and mineral exploration companies that includes exploration expenses) profits fell by more than a third to $304m following a $424m write-down of its Miran PSC asset. That triggered an operating loss of $254.6m.

Despite that, Genel has the balance sheet strength to invest in growth and maximise shareholder value. It’s less risky than many small oil explorers, yet trades at just 4.8 times forecast earnings.

Centrica struggles

How do you approach a top FTSE 100 stock like Centrica, which now offers a massive forecast yield of 8.6%? With extreme caution, is the only answer to that one. Especially since cover is now a wafer thin 0.9.

Volatile commodity prices have hit Centrica’s oil and gas production business while it faces tough competition from rival energy suppliers that peeled off a massive 742,000 customers from British Gas in 2018.

However, group operating profits still rose 12% to £1.39bn, thanks to growth in UK Home services, North America Home services and Connected Home.

Weather dependent

It isn’t easy to be bullish about Centrica as the malaise drags on, while Rupert Hargreaves anticipates another year of underperformance in 2019, amid worrying rumours of a rights issue. The default cap on home energy tariffs will also hit profits. February’s warm weather won’t have helped either.

Asset sales have kept down net debt, which isn’t a major worry, so maybe the dividend could survive. Earnings per share are forecast to drop yet again in 2019, by 12%, although there is light at the end of the tunnel with a 19% rise anticipated for 2020. Centrica is a long, long shot but if you’re patient it might just pay off.

Will things turn around for Bitcoin? I’m not sure. I think it’s worth remembering that Bitcoin is not backed by any assets and isn’t widely accepted as a currency.

When it comes to my own savings, I prefer investments with real asset backing, such as property and oil. Today I want to look at two special situations which I think could deliver attractive profits.

Debt is falling steadily

North Sea-focused oil producer Enquest (LSE: ENQ) went into the 2016 oil crash with far too much debt. But the company has weathered the storm, refinanced and now seems to be performing well.

Group production rose by 48% to 55,447 barrels of oil equivalent per day (boepd) in 2018, while net debt fell by $217m to $1,774m. Production is expected to rise by a further 20% to between 63,000 boepd and 70,000 boepd in 2019, paving the way for further debt repayments.

The acquisition of the Magnus field from BP last year has added approximately 60m barrels of proven and probable reserves, increasing Enquest’s total reserve base by around 30%. The deal was approved by the company’s lenders, which suggests that they believe it will improve Enquest’s ability to repay its loans.

Despite this positive outlook, the firm’s high debt load means its shares currently trade on just 4.1 times 2018 forecast earnings.

The investment opportunity here is that as the group repays its debt, the value of its stock will rise proportionately. I see this as high risk and high reward. If things go well, I think the Enquest share price could double from current levels.

A different type of opportunity

If you’re still not keen on investing in companies with a lot of debt, then Kurdistan-focused Genel Energy (LSE: GENL) offers a different type of opportunity. Financial risk is pretty low here, in my view. The company has almost no debt. My sums indicate that it generated free cash flow of about 59p per share during the 12 months to 30 June 2018.

This outstanding cash generation is possible because the company’s oil fields are extremely cheap to operate. I estimate operating costs of about $2.50 per barrel — among the lowest in the industry.

At under 200p, the Genel share price is equivalent to less than four times the group’s trailing free cash flow. That’s very cheap.

Buy, sell or hold?

One risk for shareholders is that the company’s operations in the Kurdistan Region of Iraq will be disrupted by political events or further conflict.

A second risk is that the company will not find a way to return any of its cash to shareholders. This is a common problem with resources companies — in my opinion they are often one-hit wonders. After a notable success, they spend cash on new exploration that fails to deliver any worthwhile results.

In fairness, Genel’s management indicated in January that it might consider “returning capital to shareholders at the appropriate time”.

For now, this stock looks good value to me, trading on 7.5 times 2019 forecast earnings.

As with Enquest, this special situation stock isn’t without risk. But I strongly believe that Genel and Enquest are both likely to deliver greater returns than Bitcoin over the coming years.

However, could this therefore be the perfect time to buy the company? Or does a FTSE 250 share which reported upbeat news on Thursday offer stronger recovery potential?

Low valuation

The company in question is transport business Go-Ahead (LSE: GOG). It released a trading update for the period from 1 July to 28 November 2018, with it on track to meet expectations for the full year. It has recorded growth in passenger volumes, as well as revenues for the regional bus division. Its London bus operations have continued to generate strong Quality Incentive Contract income through the delivery of good service performance.

In rail, the company has seen a significant improvement in the operational performance of GTR, while Southeastern has continued to perform relatively well. In fact, it has consistently been the best-performing large train franchise in the UK. A new rail contract in Norway and the start of bus operations in Dublin have helped to boost the company’s international performance.

Following a share price fall of 18% since April, Go-Ahead has a price-to-earnings (P/E) ratio of around 9.7. This suggests that the stock could offer a margin of safety and may be able to deliver a successful turnaround over the long run.

Uncertain future

As mentioned, the oil price has experienced a significant decline in the last couple of months. After rising from $30 per barrel at the start of 2016 to reach $86 per barrel at the start of October 2018, it has experienced a hugely disappointing period that has seen it sink to $58 per barrel. Investors appear to have been expecting a sharp reduction in supply which is unlikely to now appear after the US granted waivers to sanctions for eight countries which import oil from Iran.

As such, the fall in the oil price could realistically continue in the coming months, since the waiver lasts for six months. This could put Genel’s share price under even more pressure, and may mean that investors experience continued paper losses.

Clearly, in such a situation it is hugely challenging to find the bottom of the company’s share price fall. At the present time, Genel has a P/E ratio of around 5. This suggests that it offers a margin of safety. Looking ahead, there is scope for declining levels of profitability over the next couple of years, since the company’s financial prospects are dependent upon the oil price. But with what seems to be a low valuation, it could be of interest for less risk-averse investors.

As such, valuations could be relatively low, while the performance of some industries could still be impressive. With that in mind, I feel oil producer Genel Energy (LSE: GENL) could offer growth potential alongside another energy company which released an update on Monday.

Future potential

The company in question is energy storage and clean fuel business ITM Power (LSE: ITM). It released a trading update to coincide with its AGM, with the company’s trading in the current year having started well. It expects another year of significant financial progress, with underlying project delivery being on track and its financial position being strong. It has £16.9m of cash, while it has a total pipeline of £34.3m. This represents an increase in the size of its pipeline of £3.7m since August, with the non-contracted tender opportunity pipeline being £200m.

The company’s planned move to its new factory is progressing well. It is expected to sign terms in the first quarter of 2019. The new factory should to run in parallel to the existing one until the lease runs out in 2021. During that time it is expected to provide sufficient capacity to support its ambitious sales growth plan. As a result, the stock could offer an improving outlook. While still loss-making and potentially risky, its long-term growth potential could improve as consumers continue to demand cleaner forms of energy.

Value for money

As mentioned, share prices have fallen in recent months. Although Genel Energy is down by 25% since May, its shares are still up by 90% over the last year. The outlook for the oil and gas sector may be relatively uncertain, with the prospect of a slowing world economy unlikely to have a positive impact on demand. But with geopolitical risks in countries such as Saudi Arabia and Iran, there could be a commensurate decline in supply over the medium term. As such, the outlook for the industry may be volatile, but also positive over the next few years.

Although Genel Energy’s shares have risen significantly in the last year, they continue to offer good value for money. The company trades on a price-to-earnings (P/E) ratio of around 6. And with its operational performance having the potential to improve, I feel it could offer further capital growth prospects over the medium term.

Certainly, the company’s shares could record further losses if fears surrounding the global economy persist. The oil price has a track record of being volatile, which could lead to a wider margin of safety being applied to its shares. But with a low rating and the prospect of supply disruption in the wider industry, the company’s shares could perform well versus the FTSE 100.

Looking ahead, the company’s valuation suggests that it could offer further capital growth prospects. With the oil price having the potential to move higher, it could deliver a rising bottom line. However, it’s not the only growth stock that could be worth buying. Reporting on Thursday was another mid-cap share that may deliver a rising valuation.

Improving outlook

The company in question is gaming business 888 Holdings (LSE: 888). It released half-year results which showed a rise in revenue of 1% to $273.2m, with adjusted profit before tax increasing by 13% to $42.5m. Its performance in the Casino and Sport segments was strong, with it recording impressive performance in continental Europe. In the UK, it has started to see positive trends since the end of the period, while in the US it continues to have a bright long-term growth outlook.

The repeal by US lawmakers of sports betting rules means that there could be a sizeable growth opportunity for 888. It already has established partnerships and a strong presence in the country. This could allow it to capitalise on the changing nature of the gaming industry that could lead to rising profitability in the long run.

With the company continuing to pump cash into innovation so it can improve customer satisfaction, it seems to have a solid growth strategy. Its bottom line is expected to rise by 6% next year, but improved performance could be ahead in the coming years. As such, now could be a good time to buy it.

Rising profitability

The outlook for Genel Energy may also be set to improve. Although the oil price has already risen in recent months, the prospects for further gains seem to be high. Demand growth is expected to remain consistent over the medium term, with a growing world economy helping to keep momentum at similar levels to 2018 through the course of 2019. And with the potential for political risk across various OPEC members, the prospect of lower supply growth seems to be increasing.

This could lead to improving profitability for Genel Energy and its peers. The company has production costs that are among the lowest in the industry, while a reduction in geopolitical risk in the Kurdistan region of northern Iraq in the last couple of years has meant that its financial prospects appear to be improving.

With the stock trading on a price-to-earnings growth (PEG) ratio of just 1.1, it seems to offer a wide margin of safety. While potentially volatile due to the uncertainty of the region in which it operates and the possible changes in the oil price, it seems to offer a favourable investment outlook and could deliver further share price growth.

I think this could be an opportunity for smart investors. Let me explain why.

The trend is your friend

When Tullow’s 2014 results were published in February 2015, the shares were worth around 340p. That’s about 25% more than they’re worth today, after adjusting for the new shares created in last year’s rights issue.

To understand the potential opportunity here, I think we need to compare some figures from the firm’s 2014 results with the equivalent numbers from today’s 2018 half-year results:

Although net debt is roughly the same today as it was in 2014, it’s moving in opposite directions.

Tullow has now largely finished the big projects it was working on when the oil price crashed in 2015. Free cash flow is rising strongly, and the firm has reduced net debt by nearly $800m over the last 12 months.

The figures in this table tell me that conditions in the oil market are now favouring companies such as Tullow, which have cut costs and boosted production with new long-life oil fields.

Now could be the right time

Today’s half-year results show that Tullow sold oil at an average price of $67.50 per barrel during the first half of the year, up from $57.30 per barrel during the same period last year. Revenue rose by 15% to $905m and free cash flow doubled from $205m to $401m.

Although I think a price target of 500p may be slightly ambitious, as debt continues to fall, the firm’s equity value should increase. I expect to see the shares trading between 350p and 400p over the medium term.

At around 220p, the shares currently trade on just 9 times 2018 forecast earnings. I believe this could be a low-risk buy with the potential for decent gains.

Are you looking for excitement?

Tullow’s operations in Africa aren’t without political risk. But Genel Energy (LSE: GENL) operates in much riskier Kurdistan, the autonomous region to the north of Iraq. Despite the conflict that’s spread through much of this region over the last few years, Genel has kept the oil flowing and continued to receive payment for it.

As a result, this seemingly risky stock has become an unlikely cash cow. The firm’s 2017 results showed that its net debt fell from $241m to $135m last year. Free cash flow rose to $100m, thanks to cash operating costs which I estimate at less than $2.50 per barrel.

Although Genel shares have risen by 140% this year, low costs and a strong cash performance means they still look affordable to me. Trading on 9.3 times forecast earnings, this stock isn’t without risk. But if the oil market remains stable, I think shareholders could see further gains.

Roland Head: Dixons Carphone

Dixons Carphone (LSE: DC) shares slumped on 29 May after new boss Alex Baldock cut profit guidance for 2018/19. But I feel the market may have over-reacted to this news.

The group’s performance during the year ended 28 April was pretty solid, with like-for-like revenue up 4% and profits in line with forecasts.

Although earnings will be lower this year, cash generation is expected to remain strong and the dividend will be held at 11.25p per share. I estimate that the shares now trade on a forecast P/E of 9, with a dividend yield of nearly 6%. That seems too cheap to me, for a market-leading business.

Roland Head owns shares of Dixons Carphone.

G A Chester: Centamin

Shares of FTSE 250 gold miner Centamin (LSE: CEY) fell heavily near the end of May after the Egypt-focused operator lowered production guidance for 2018. It also said costs will be higher than previously anticipated.

However, to me this looks very much a temporary setback for the miner’s low-cost, long-life asset. I expect production to head higher again in 2019.

The company, which has $425m cash on its balance sheet and no debt, is trading on a current-year forecast P/E of 14, with a prospective dividend yield of 4.5%. This looks highly attractive to my eye and I rate the stock a top buy for June.

G A Chester has no position in Centamin.

Kevin Godbold: Imperial Brands

Investors sold down the stock of smoking-focused, fast-moving consumer goods company Imperial Brands (LSE: IMB) over the last couple of years along with other firms operating defensive businesses. Valuations had become too rich and I reckon we’ve seen investors rotate out of expensive-looking defensives and into cheaper-looking cyclical companies.

But since the end of March, Imperial Brands’ share price has turned up. I see the firm as a decent long-term hold and today’s lower valuation and fat dividend yield attracts me. I think it could do well during June and beyond.

Kevin Godbold does not own shares in Imperial Brands.

Rupert Hargreaves: Genel Energy 

Between January 2014 and January 2017, shares in Genel Energy (LSE: GENL) lost 93% of their value as the company suffered, with the rest of the oil industry, from the oil price slump. 

However, year-to-date shares in the oil minnow have surged 151% as higher oil prices have lifted investor sentiment. And it looks as if insiders are also expecting a big year for the firm. Emma Gudgeon, the wife of non-executive director Martin Gudgeon, recently forked out £230,000 on the group’s shares. 

The City is expecting the company to post earnings per share of $0.40 this year, giving a forward P/E of 9.6. So it looks to me as if this stock can push higher. 

Rupert does not own shares in Genel Energy. 

Royston Wild: Gooch & Housego

I reckon the release of half-year numbers on Tuesday, June 5th could provide a fresh catalyst for Gooch & Housego’s (LSE: GHH) share price to rise.

In April’s trading update the photonic component and system manufacturer advised that overall market conditions remain “positive” and that “there continue to be exceptional levels of demand for critical components used in microelectronic manufacturing.” The company’s order book jumped to a record £84.7m as of March, and fresh news on the trading landscape in next month’s release could see investors pile in again.

City analysts expect Gooch & Housego to report a 14% earnings rise in the year to September 2018. I reckon a subsequent forward P/E ratio of 24.4 times is a decent valuation given the chances of strong profits growth continuing long into the future.

Royston Wild does not own shares in Gooch & Housego.

Edward Sheldon: ITV

My top stock for June is ITV (LSE: ITV). The FTSE 100 company currently trades on a low forward P/E ratio of just 10.7 and offers a very attractive prospective yield of 5%. I believe these metrics are unjustified.

A recent Q1 update was positive, with total external revenue increasing 5%, and revenue from the content side of the business, ITV Studios, rising 11%. With an exciting schedule for the rest of the year, which includes the World Cup and Love Island, I think the company can generate a solid performance in 2018.

The shares bounced higher after the Q1 update, but I think there could be more gains to come for patient investors.

Edward Sheldon owns shares in ITV.  

Paul Summers: Howden Joinery

Recent momentum in the share price of FTSE 250 kitchen supplier Howden Joinery (LSE: HWDN) could continue in advance of interim results in July.

Last month’s trading update was encouraging with the company revealing a 14.8% rise in UK revenue in the 16 weeks to 21 April. Although comparatives with the previous year will get tougher going forward, plans to add “around 30” new depots and 19 product ranges in 2018 suggest a positive outlook on the part of management.

Even if the shares don’t fly, Howden Joinery remains a quality company that justifies its 16 times forecast earnings valuation. Returns on capital employed are consistently high and there’s a healthy amount of cash on the balance sheet.

Paul Summers has no position in Howden Joinery.