Two small-cap oil companies are still a buy

Oil prices have been reasonably steady this month. Brent crude is still above $60 a barrel and West Texas Intermediate is hugging the $50 mark. But some analysts are still bringing down forecasts for the next few years, which is having a serious knock-on effect on valuations for the exploration and production sector.

Jefferies pencils in an average Brent crude price of $50.25 a barrel for 2015, $67.50 for next year, then $77.25 in 2017, and $100 after that. That means core net asset value (NAV) falls by 61% on average for the four stocks it covers - Chariot Oil & Gas, Falkland Oil & Gas, IGas and Trinity Exploration & Production.

Target prices, however, tumble by 70% as the broker revises its risked upside assumptions, taking into account a reduced appetite for exploration in this environment.

Source: TradingView

Falkland Oil is downgraded from 'buy' to 'underperform' and the target price cut by 49% to 29p a share with core NAV of 18p. Jefferies now believes Trinity E&P is now worth just 16p, 92% less than the previous target of 190p.

Prospects for the other two are better. Jefferies thinks exploration pure-play Chariot is still a 'buy' despite slashing its price target by 69% from 48p to 15p with a core NAV of tuppence. It points out that the company, which has interests in Morocco, Namibia, Mauritania, and Brazil, is debt-free with cash of $53.5 million.

There's a possible near-term catalyst, too - Woodside has until the end of the second quarter to exercise an option to take a further 25% in the offshore Morocco Rabat Deep licence in return for a full cost carry on an exploration well. Jefferies' target is equal to the price investors paid in a $15 million share placing last July.

IGas is also backed by the broker, although at 40p a share rather than 135p previously. Core NAV is 10p. "The fall in oil price has moved focus away from IGas's position as an onshore UK shale gas pioneer and back onto its ~2,700b/d conventional onshore UK oil production, which must service the company's £109 million of debt (£80 million net debt inc. £29 million cash in our revised 10p/sh Core NAV)," says Jefferies, which values the onshore UK oil assets at 35p.

"We retain upside beyond Core as the company remains the strategic UK shale gas play and has drilling events funded by farm-ins of recent years with Total and GdF but industry progress to definitive UK shale gas frac + flow test events remains frustratingly slow."

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.