The Bull Case For Soco International plc & Falcon Oil And Gas Limited

Soco International plc (LON: SIA) and Falcon Oil And Gas Limited (LON: FALC) could make you rich, but only gamblers need apply, says Harvey Jones

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

The bears are out in force in the oil sector, but there is also a bullish case to be made for many stocks. If the oil price recovers, the share prices of Soco International (LSE: SIA) and Falcon Oil And Gas (LSE: FALC) could lead the stampede.

Soco Could Go

Vietnam-focused Soco has endured a tricky year, its share price falling 50% in that time. Last time I checked it out, in November, it had just published a disappointing production update showing that its H5 well producing just 9,000 barrels of oil equivalent per day (boepd), against initial hopes of as much as 12,000. That knocked 16% off its share price, although it was hardly panic stations, with solid forecast revenues of around £140m for 2016 and pre-tax profits holding steady at around £38m. 

A new trading and operations update has delivered more positive news, with a year-end cash balance of $104m with no debt, despite a generous $51m dividend splurge last June, and capex totalling $82m. Net production (including its TGT field) averaged 12,000 boepd realised at an average price of $54 a barrel, bringing in $215m of revenues. Better still, cash operating costs were under $10 per barrel.

Story Time

Chief executive Ed Story had a good tale to tell, with “low cost production, no debt and our disciplined approach to capital allocation”, which he claimed puts Soco is in a good position to weather a prolonged industry downturn. Markets broadly welcomed the news, with its share price up nearly 7% in the last week, although today’s 136p it is still well below the stock’s 52-week high of 134p.

Management is talking of being “frugal”, which is sensible right now, and the next dividend payout is unlikely to be as generous as the last one, but forecast earnings per share growth of 54% this year looks promising, and Soco’s low production costs give it a cushion in case oil falls further.

Falcon May Fly

Falcon Oil & Gas is down 26% over six months but in November I said it was more promising than most oil explorers and it still looks that way today. I was encouraged by its drilling success in the Beetaloo Basin, Australia, with positive early results from its nine-well programme indicating favourable shale properties and excellent gas shows. Falcon is also debt-free, with $9.8m in cash. Experienced partners Origin and Sasol supply much-needed expertise in unconventional shale and gas to liquids

High-quality assets and a fully funded drilling programme do not guarantee success in today’s world, especially with analysts warning that natural gas is next to collapse. Falcon management is also being frugal, with expenses falling by 41% in the nine months to September 30, at US$1.8m. Broker FinnCap just named it a buy with a target price of 23p, which suggests a potential upside of 460% on today’s 5p.

Both Soco and Falcon look tempting for those for those who are bullish on the oil price recovery, especially since both seem equipped to survive if the price stays lower for longer. There is a strong bull case to be made, but only for speculative investors.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Harvey Jones has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

6 stocks that Fools have been buying!

Our Foolish freelancers are putting their money where their mouths are and buying these stocks in recent weeks.

Read more »

Google office headquarters
Investing Articles

1 reason I like buying S&P 500 shares – and 1 reason I don’t

Will this investor try to improve his potential returns by focusing more on S&P 500 shares instead of British ones?…

Read more »

Young woman holding up three fingers
Investing Articles

3 SIPP mistakes to avoid

Our writer explains a trio of potentially costly errors he tries to avoid making when investing his SIPP, on an…

Read more »

Smiling white woman holding iPhone with Airpods in ear
Investing Articles

Here’s how (and why) I’d start buying shares with £25 a week

Our writer uses his investment experience and current approach to explain how he would start buying shares on a limited…

Read more »

Aerial shot showing an aircraft shadow flying over an idyllic beach
Investing Articles

Here’s my 5-step approach to earning passive income of £500 a month

Christopher Ruane explains the handful of steps he uses to target hundreds of pounds in passive income each month.

Read more »

Investing Articles

2 UK shares I’ve been buying this week

From a value perspective, UK shares look attractive. But two in particular have been attracting Stephen Wright’s attention over the…

Read more »

Investing Articles

A lifelong second income for just £10 a week? Here’s how!

With a simple, structured approach to buying blue-chip dividend shares at attractive prices, our writer's building a second income for…

Read more »

Investing Articles

Here’s how I’d use a £20k Stocks and Shares ISA to help build generational wealth

Discover how our writer would aim to turn a £20k Stocks and Shares ISA into a sizeable nest egg by…

Read more »