The last year has been a hugely disappointing one for investors in oil and gas explorer and producer IGAS Energy(LSE: IGAS). The company's share price has declined by 55% during the period, which is a significant underperformance compared to many of its sector peers. In fact, recent months have generally been positive for the oil and gas industry, with the oil price surging to a four-year high.
Looking forward, could further falls be ahead for the company? Or does it offer significant turnaround potential following its operational update released on Friday?
The company's performance in the 2017 financial year was generally encouraging. Its net production averaged 2,335 boepd (barrels of oil equivalent per day) for the year. Operating costs for the year were around $28.50 per barrel of oil. It expects to deliver net production of between 2,300 and 2,400 boepd in 2018.
During 2017, the company's 2P (proved plus probable) reserves replacement was over 100%. Its cash balance at the end of the year was £15.8m, while it had net debt of £6.1m. This shows that it appears to have sufficient financial resources to implement its current strategy. And with the price of oil having risen significantly, it is generating free cash flow in its conventional business. This could mean it is better placed to deliver on potential additional projects with attractive prospects.
Looking ahead, the current year could be an eventful one for IGAS Energy. Its drilling programme is set to continue, with there being the potential for positive news flow on this front. Furthermore, with the supply surplus of oil not expected to return in 2018, the prospects for the wider oil and gas industry appear to be improving. As such, the company's stock price could enjoy a relatively prosperous 12 months.
High growth potential
Also offering upside potential within the oil and gas sector is Nostrum(LSE: NOG). The Kazakhstan-focused explorer and producer has also experienced a challenging period, with its bottom line moving into the red in 2016. However, it is expected to return to profit in the 2017 financial year. Following an expected £1m pre-tax profit in 2017, its profit is forecast to rise to as much as £94m in 2019. This could prompt a significant improvement in investor sentiment.
Since the stock currently trades on a forward price-to-earnings (P/E) ratio of just 6.2, it appears to offer a wide margin of safety. This suggests that there could be a high level of capital return potential on offer, and may mean that the stock is able to post a recovery following its 35% share price decline over the last year.
Certainly, if the oil price experiences a disappointing period then this could cause Nostrum's forecasts to be downgraded. But with such a wide margin of safety, the company appears to have an attractive risk/reward ratio for the long term.
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Peter Stephens has no position in any 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.