This is my top oil stock pick for 2020, and I’m buying

An oil stock with production ramping up, strong cash flow, rising dividends, and a low share valuation? What more could I want?

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.

Full year results from Gulf Keystone Petroleum (LSE: GKP) are due on 26 March, and on Tuesday, the oil producer gave us a 2019 operational update.

Gulf Keystone, which operates in the Kurdistan Region of Iraq, came close to going bust in its early days. The company shipped oil via the Kurdistan regional government, but the government wasn’t paying and the cash almost ran out. But since a regular payment schedule was set up, cash has been coming in pretty much monthly, just a few months in arrears.

The latest payment, announced on 8 January, was for $21.7m gross ($17m net to Gulf) for oil sales in August. The result of the payment programme is something unusual — a smaller oil firm with surplus cash. There was, in fact, net cash of $192m on the books at 20 January.

Awash with cash

Gulf is returning some of that cash to shareholders via a share buyback, which it also confirmed on Tuesday. It will immediately commence the final $10m of the planned $25m purchase announced on 10 December. Total share buybacks amount to $35m to date.

In addition, Gulf paid out a total of $50m in dividend cash in 2019. Investors in struggling oilies, particularly those shouldering big debt burdens, must look enviously on the firm.

That the company is buying back shares rather than paying special dividends suggests it thinks its shares are undervalued. I agree. But first, how did the year go?

Gulf met its 2019 production guidance with an average of 32,883 barrels of oil per day (bopd), and is currently pumping approximately 40,000 bopd. The firm has also commenced oil exports via pipeline from its Shaikan project, which should improve its output capabilities in 2020.

Why I’ll buy

Healthy production levels and strong cash generation are enough in themselves to make me interested in buying Gulf Keystone shares. Financial fundamentals help too, with analysts rating the shares at a P/E of 12.8. That’s not amazingly cheap, but then I look at how it will drop if current forecasts turn out accurate.

It’s all down to development plans for the Shaikan field, and Gulf has been working on expanding annual production significantly. The firm aims to raise its production by between 30% and 45% in 2020, targeting 43,000 to 48,000 bopd.

There’s some de-bottlenecking and work on facility expansion needed, but it says that’s on schedule.

Looking to the longer term, it is aiming at production of 55,000 bopd, which it says it should achieve by the third quarter of 2020.

As a result of the expected rise in earnings per share, City experts are putting Gulf shares on a forward P/E of 6.5 in 2020, dropping as low as 3.9 for 2021. Meanwhile, dividend yield predictions suggest 5.2% for 2020 and 6.5% a year later.

Risk

The only real risk I see is for Northern Iraq to turn catastrophic again, and that’s not a trivial risk.

But against that, we’re looking at an oil company paying dividends on a par with Shell, but without the debt problems of Premier Oil or Tullow Oil, and on a cheap growth valuation. And with proven reserves and strongly rising production, unlike UK Oil & Gas.

Am I going to buy? Unless something goes drastically wrong in the next month or so, I certainly am.

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.

Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

artificial intelligence investing algorithms
Investing Articles

Could buying this stock with a $7bn market cap be like investing in Nvidia in 2010?

Where might the next Nvidia-type stock be lurking in today's market? Our writer takes a look at one candidate with…

Read more »

Investing Articles

Is GSK a bargain now the share price is near 1,333p?

Biopharma company GSK looks like a decent stock to consider for the long term, so is today's lower share price…

Read more »

Snowing on Jubilee Gardens in London at dusk
Investing Articles

Could December be a great month to buy UK shares?

Christopher Ruane sees some possible reasons to look for shares to buy in December -- but he'll be using the…

Read more »

Young mixed-race couple sat on the beach looking out over the sea
Investing Articles

Sticking to FTSE shares, I’d still aim for a £1,000 monthly passive income like this!

By investing in blue-chip FTSE shares with proven business models, our writer hopes he can build sizeable passive income streams…

Read more »

Growth Shares

BT shares? I think there are much better UK stocks for the long term

Over the long term, many UK stocks have performed much better than BT. Here’s a look at two companies that…

Read more »

British Pennies on a Pound Note
Investing Articles

After a 540% rise, could this penny share keep going?

This penny share has seen mixed fortunes in recent years. Our writer looks ahead to some potentially exciting developments in…

Read more »

Silhouette of a bull standing on top of a landscape with the sun setting behind it
Investing Articles

Is the S&P 500 going to 10,000 by 2030? This expert thinks so

One stock market strategist sees animal spirits taking hold and driving the S&P 500 index even higher by the end…

Read more »

Investing Articles

I’m expecting my Phoenix Group shares to give me a total return of 25% in 2025!

Phoenix Group shares have had a difficult few months but that doesn't worry Harvey Jones. He loves their 10%+ yield…

Read more »