The world of small-cap oil and gas companies is a shady place, but some companies have brighter outlooks than others. Victoria Oil & Gas(LSE: VOG), as well as BowLeven(LSE: BLVN), look to me to be two such companies.
Victoria and BowLeven are working together to unlock value for investors. Earlier this year, Victoria signed a farmout agreement with EurOil Limited, a Bowleven subsidiary, to acquire on completion an 80% working interest in the 2,237 sq km Bomono licence, adjacent to Gaz du Cameroun's Logbaba field. Gaz du Cameroun is a subsidiary of Victora.
Today, the two companies announced that they had extended this farmout agreement once again until the end of the year as they work with all parties to generate the best results.
Even though Victoria is heading in the right direction, the company's results for the six months ending June, which were published today, show a contraction in revenue and profitability. As production increased by 11%, revenue fell to $15.4m, from last year's $23.6m and earnings before interest, tax, depreciation and amortisation fell to $4.4m from last year's $14.2m.
Nonetheless, despite these uninspiring results, management is highly optimistic about the company's outlook. Commenting on today's figures, chairman Kevin Foo said "the challenge we now face is building our business into one which is four to five times our current size. I believe that this growth is achievable within five years." He continued that "GDC is very well positioned, as the only onshore gas supplier in Cameroon, to meet this demand."
The potential gains on offer here for investors are clear. If management can hit its target of growing the business five times within the next five years, investors could be set to see a return of 500%. The risk here is that the company does not meet this target and instead (like many other small-cap oil & gas companies before it) runs out of cash.
In this case, investors would likely see a 100% loss. Risking 100% for a potential 500% return is, in my view, an attractive bet.
Investors could also see healthy returns from BowLeven as the company works with Victoria and continues to develop its portfolio. The company's interim results showed that the business had $90m in cash at the end of March, which is worth around 19.5p per share based on current exchange rates.
On top of this, the deal with Victoria should unlock around $6m to $7m in direct revenues and royalties, corresponding to around $4m in post-tax cash flow, according to City analysts. The net asset value of the firm, including these prospective cash flows, is estimated at 53p per share, that's around 71% above the current share price.
Putting it all together
I believe that a combination of both Victoria and BowLeven in your portfolio could produce some highly impressive results. As Victoria grows, BowLeven will also benefit, and it looks as if the two companies are trading at a deep discount to their future potential today.
Finding the best companies
Even though these two small-caps look as if they can produce enormous returns, if things don't go to plan, the shares could end up being worthless. That's why it's important to do your own due diligence.
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Rupert Hargreaves does not own any share 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.