If you share my view that the oil market is starting to recover, then now could be a good time to take a fresh look at small-cap oil stocks.
However, many of these companies are still short of cash and heavily in debt. I'd steer clear of such firms for a little longer yet. The companies catching my eye at the moment have proven assets, net cash, and -- ideally -- profitable production.
I've found three stocks that seem to fit the bill and still look cheap. In this article, I'll take a closer look at each one. Are further gains likely?
Cash + free gas
Cameroon-focused Bowleven (LSE: BLVN) had net cash of $99m (£79m) at the end of October. This means that the group's £78m market cap is completely covered by surplus cash.
The market seems to be assigning no value to Bowleven's 20% stake in the Etinde gas field, which is thought to contain up to two trillion cubic feet of gas in place. Yet Bowleven's stake in Etinde should soon benefit from $40m of paid-for appraisal work by the field operator NewAge. Bowleven also stands to receive a $25m cash payment, if the field is developed.
With net cash and a book value of 88.9p per share, Bowleven shares should be worth more than 24p. But chief executive Kevin Hart says that he's assessing "new venture opportunities." There's a real risk that Bowleven's cash will be wasted on risky exploration projects, rather than returned to shareholders.
From Russia, with love
The Russian oil industry has survived the oil crash in much better shape many investors expected, thanks to low costs and the devaluation of the rouble.
Long-time producer Exillon Energy (LSE: EXI) has survived unscathed. The firm's latest accounts showed net cash of $103.6m at the end of June, equivalent to 45% of Exillon's £187m market cap.
Exillon trades on just 3.2 times trailing earnings. While broker coverage is thin, the latest forecast I've found suggests Exillon could report a net profit of $37.7m this year. That's equivalent to a forecast P/E of 6.2. The same forecasts also suggest that a dividend of up to 11 cents (8.9p) per share could be paid this year. If so, then Exillon has the potential to offer a yield of more than 7%.
Russia may remain a risky place to invest, but there's no doubt in my mind that Exillon could deliver further gains.
Small, but perfectly formed
The group's profits were hit during the first half of this year by a maintenance shutdown on its main asset, the Erskine field in the North Sea. However, with Erskine back in production since late August, management expects net cash to start rising again.
My calculations show that Serica trades on a trailing P/E of 10. Broker forecasts available through a private subscription service I use indicate that net profit in 2016 could rise to $8.8m. That's equivalent to a P/E of about 5.2 at current exchange rates.
There's no dividend, but I believe Serica shares are probably worth more than 14p.
Today's best buy?
These three shares provide a taste of what's on offer in the oil and gas market today. Further research would certainly be required before issuing a buy recommendation.
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Roland Head 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.