The latest OPEC deal has generated considerable optimism regarding the outlook for crude with the cartel and its allies promising to shave 1.2 million barrels daily off their oil production starting in January 2019. This analyst believes that it will give prices a healthy boost and should see the international benchmark Brent soar to around US$70 per barrel. That would act as a powerful tailwind for smaller oil explorers and producers like Oryx Petroleum Corporation Ltd. (TSX:OCX), which has only lost 3% since the start of 2018 compared Brent being marked down by 8%.
Oryx has amassed an international diversified portfolio of hydrocarbon assets in Iraq, Republic of Congo, Senegal and Guinea Bissau. Those oil properties have been assessed to hold oil reserves of 122 million barrels with an after-tax net present value of US$704 million or around $1.85 per share, which is nine times greater than its current market value.
This indicates the tremendous potential upside available to investors, but also that the market believes that Oryx is an incredibly risky investment. That is undeniable when the uncertainty surrounding oil and the hazardous nature of the jurisdictions where its assets are located is contemplated. There’s a considerable amount of geopolitical risk associated with the countries in which Oryx’s assets are located, although each is focused on expanding their oil industry to stimulate economic growth and boost fiscal revenues.
Oryx reported some solid third quarter 2018 results. Its production compared to the equivalent period in 2017 more than doubled to 4,700 barrels daily. The company’s netback – a key measure of profitability – for the quarter more than doubled year over year to US$23.82 per barrel produced. That notable increase can be attributed to a combination of substantially higher oil and lower field production costs as well as expenses.
In fact, overall operational and production costs for the third quarter fell by around 17% year over year to US$22.82 per barrel.
Those improved operational results saw Oryx report a net loss for the quarter of US$5.2 million compared to US$5.9 million for the equivalent quarter in 2017.
A key advantage that Oryx possesses compared to its peers operating solely in North America is its ability to access Brent pricing.
Brent is trading at a significant premium to the North American benchmark West Texas Intermediate (WTI), which is almost US$9 per barrel. This gives Oryx a notable financial advantage over those peers and mitigates some of the risk associated with weaker oil, as the differential between Brent and WTI is expected to continue for the foreseeable future, with some analysts claiming that it could widen to US$11 per barrel or even higher.
Another significant hazard associated with investing in microcap energy stocks is their financial health, as they usually lack the resources to be able to weather a prolonged downturn in oil prices.
Nevertheless, Oryx has survived the current oil slump thus far and the latest OPEC deal appears destined to lift Brent to around US$70 a barrel, which will give its earnings a healthy lift.
While Oryx’s third quarter financial statement indicates that the driller is debt free, this is not the case. It has a contingent liability totalling US$74.2 million arising from its acquisition of OP Hawler Kurdistan Limited and an outstanding US$78.5 million loan giving it total debt of US$153 million. This is of some concern because it is more than 10 times Oryx’s trailing 12-months funds flow from operations, indicating that the company is highly vulnerable should oil prices plummet once again.
It should be noted however, that the driller’s contractual obligations over the next five years are US$39 million, which are manageable should Brent recover as significantly as analysts are anticipating. Oryx also finished the third quarter with cash and cash equivalents of US$17 million, which it expects will be sufficient to meet liabilities as well as fund exploration, appraisal and development activities to the end of 2019.
Oryx is a difficult stock to like in the current grueling operating environment because of the significant degree of risk attached to its operations and the uncertainty surrounding the outlook for crude. If Brent weakens further, there is every indication that Oryx will struggle to meet its financial obligations, but if oil rallies as substantially, as some analysts are predicting, its earnings will surge, giving its stock a solid lift.
For these reasons, this is not an investment for the faint of heart, as it’s a high-risk high reward play on oil rallying significantly over coming months.
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Fool contributor Matt Smith has no position in any stocks mentioned.