Should you sell Premier Oil plc to buy this 'falling knife' energy stock?
There has been nothing jolly about China-focused explorer Green Dragon Gas(LSE: GDG) lately, its share price has gone into a steady decline since briefly peaking at 630p in April 2014. Today, it trades at 61p but investors finally have something to smile about, with the stock up almost 3% on publication of its results for the six months to 30 June. Can it roar again?
Push the gas
It's not easy being Green, even when you own a huge acreage of exploration property in China, which the London-listed upstart secured after winning a battle with state-owned giants in 2014. The upstream group specialises in chemical-free extraction of coal-bed methane and last year its wells generated 12bn cubic feet of gas, even if only a fifth were connected to the national gas pipe network.
Green Dragon Gas could generate up to 50bn cubic feet a year which it can sell comfortably above production costs thanks to Chinese government incentives for domestic producers, plus an extra premium for coal-bed methane extraction. Today's financial highlights show a drop in first-half revenues from $14.6m to $12.9m but markets chose to focus on the positive, a 161% jump in net profits to $1.8m.
Well, well, well
The group has net assets of $654m, up from $639m, while gas volumes rose 8% year-on-year. Founder Randeep S Grewal hailed positive results, with profit margins exceeding 50% and negligible capital expenditure. He says the group continues to focus on developing the infrastructure of the 1,339 equity wells in its flagship GSS Block, as well as carrying out a "disciplined cost reduction programme".
Grewal also anticipates an increase in gas sales volumes from its collaborative relationship with Chinese partners CNPC & CNOOC, with new wells being drilled and connected to the gas infrastructure. Naturally, this is a risky play, despite a "conservative balance sheet" with net gearing of 22% and net equity of US$654m. It has a number of upcoming bond maturities, including $88m due for repayment in November 2017, which it is currently looking to refinance, and a $50m convertible loan note due for repayment in December 2020. The falling knife is flying upwards today, but as ever, mind your fingers.
With Brent crude nudging $58 a barrel, it is time to look at explorers like Premier Oil(LSE: PMO) once again. With the share price rising 33% in the last three months, loyal investors are already benefitting from the upswing in prices and sentiment.
The UK oil and gas firm, which also has interests in Indonesia, Vietnam, the Falkland Islands and Pakistan, was boosted by last month's first-half results showing a record 821,000 barrel of oil equivalents per day (boepd), up more than a third year-on-year. It also boosted margins by cutting operating costs from $16.50 to $14.70 per barrel, putting it in a solid position even if the oil recovery stalls.
Premier is making progress with its Catcher and Tolmount projects, has enjoyed what CEO Tony Durrant called "a world-class exploration success in Mexico," and is boosting cash flow from disposals. It has completed its refinancing and now hopes higher production and wider margins will shrink its hefty $2.73bn debt pile. Things are looking up, but as ever, the oil price will decide all.
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Harvey Jones 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.