Ophir Energy (LSE: OPHR) has today released an operational update. Its shares have fallen by 2% in response to the release, which takes their fall for 2016 to 25%. However, progress made on its Kerendan field provides guidance as to whether now is the right time to buy Ophir ahead of energy sector peer Shell (LSE: RDSB).
In fact, Ophir has successfully completed commissioning at its Kerendan field. It has achieved first commercial gas production at the field and it will now provide Ophir with an additional source of cash flow. The current contracted gas price at Kerendan is $4.79 per MMBtu, escalating at 3% per annum. However, Ophir is in discussions regarding an upward adjustment to the contracted gas price.
Meanwhile, Ophir has been able to increase the water handling at its Bualuang asset. This will add materially to the cash generation of the asset and Ophir expects to ramp up production as the new system is brought onstream. As of 11 September, the field was producing at an instantaneous rate of 9700 bopd (barrels of oil per day), which is an increase of 1400 bopd compared to production in late August.
Looking ahead, Ophir is forecast to remain lossmaking in each of the next two years. While its asset base has the potential to deliver a black bottom line over the long run and has considerable appeal, the uncertain outlook for the energy sector means that buying a more stable stock could be a good idea. After all, the oil price is expected to remain low over the medium term and significant falls in its price level can’t be ruled out.
Go for consistency?
As such, buying a slice of Shell looks to be a sound move. It offers growth potential, but remains well-diversified and relatively consistent. Key to its growth outlook is the integration of the recently acquired BG assets. They’re expected to deliver major synergies and could transform Shell’s free cash flow over the coming years.
This increased free cash flow could allow Shell to pay a much higher dividend in the long run – even if the oil price fails to recover to $100-plus. It yields 7.2% at the present time and while dividend growth in the near term may be somewhat low, such a high yield plus the scope for rapidly increasing free cash flow means that Shell offers a stunning income outlook.
Shell’s income appeal could produce capital gains, since investors may become increasingly yield hungry if UK interest rates stay at 0.25% or below. This means that as well as being a well-diversified and highly profitable business, Shell also offers capital gain potential. Furthermore, its risk/reward profile is superior to that of Ophir and should the oil price fail to rise (or even fall), Shell’s size, scale and diversity could prove to be a major plus. Therefore, buying Shell over Ophir could prove to be a wise move.
