Should you buy this bargain oil minnow instead of Royal Dutch Shell plc?
Attention is turning to the energy sector again as the price of crude nudges $60 a barrel. So what is the best way to play it: should you start small or think big?
Small is beautiful but does that apply to the Great Eastern Energy Corporation Limited(LSE: GEEC)? The Indian coal bed methane company has just announced its results for the six months ended 30 September and markets have given it a warm reception, with the share price up 4% at time of writing. Trading at 37p, this £45.86m minnow is now close to its 52-week high, but tread carefully.
Small companies are particularly vulnerable to energy market sentiment, and Great Eastern Energy's share price has collapsed since peaking at 522p in May 2010. It still has its share of troubles, recently warning of lower revenue, EBITDA, and cash generation following continued operational issues at one of its largest customer's plants, which still remain unsolved. The adverse impact on revenue and pre-tax cash generation is US$4.24m and US$ 3.9m respectively.
However, total first-half 2018 revenues rose 23% to $16.63m, while EBITDA jumped 50% to $8.79m. CEO Prashant Modi was pleased with revenues and sales volume as the group pursues a further drilling programme and new opportunities, saying: "With the continued growth of the Indian economy and stable government policies, we expect the demand to grow even further."
Great Eastern Energy describes itself a fully integrated gas production, development and exploration company but it shrinks into insignificance against a £90bn behemoth like Royal Dutch Shell(LSE: RDSB). Shell has been through a rough time since the collapse in the oil price, but with the strength to maintain its proud record of never cutting its dividend since the war.
That record looks safe with every dollar that is added to the oil price, especially as cost-cutting and disposals press its 2016 break-even point to below $40 a barrel. It recently unveiled plans to invest $1bn in a retail-based expansion in Mexico, the world's fifth biggest gas consumer, while also looking to expand in other high growth markets such as India, China, Brazil and Indonesia.
City analysts are forecasting whopping 202% earnings per share growth in 2017, as the stock flies back to form, with a further 13% growth forecast for 2018. The share price is up 5% over the last month, and 15% over three months. You have missed your chance to buy Shell at a discount, it is now trading on a forward valuation of 17.6 times earnings. The other worry is that if the oil price recovery reverses, Shell's share price will duly slip.
Big is bountiful
However, it still looks a buy to me today, as the Saudi Arabian bid to cut production further drives oil prices to a two-year high and the US oil and gas rig count falls. The stock currently offers a forward yield 5.9%, with cover of 0.9. The sooner you buy, the sooner you lock into that income. You do not need to take the risk of investing in a minnow like the Great Eastern Energy Corporation to make big money from gas and oil. Shell should do it well enough.
Harvey Jones has no position in any of the shares mentioned. The Motley Fool UK has recommended Royal Dutch Shell B. 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.