This oil and gas play could be the most under the radar value pick of 2023

There is little doubt that energy security has become one of the big issues in recent times. Oil prices rose last year to near record heights on the realisation that there might not be enough production to meet needs. Gas prices soared thanks to geopolitical pressures.

Years of underinvestment has meant that when the world was ready to turn the taps on, it quickly found that there simply wasn’t enough in the pipes.

Europe’s over-reliance on Russia gas has also returned to haunt it, though the relatively mild winter has allowed the European Union to avert a crisis on that front … for now.

These pressures have also been reflected in Australia, with gas prices on the east coast soaring dangerously close to $30 per gigajoule, prompting the Australian government to introduce its $12/GJ price cap which has drawn much fury from the gas sector.

Oil and gas companies in strong position

Regardless of how such a price cap might impact on the performance of gas companies, the need to ensure energy security remains strong.

This could in turn translate into positive times ahead for energy companies as investors cotton on to the record profits generated by companies such as Woodside and Santos with savvy players looking to pick up a slice of the pie without breaking the bank.

Stockhead has taken the time to pick through small cap energy plays and highlight some companies with oil and/or gas production and positive cash flows that might be of interest.

Horizon Oil (ASX:HZN)

While many junior oil and gas companies are still looking to get production going, Horizon has been producing oil from its operations in China and New Zealand for several years now.

The company might not have generated the buzz that some of its peers have enjoyed due to not being the operator on the oilfields in China’s Beibu Gulf and the Maari and Manaia oilfields in the Taranaki Basin, New Zealand, but it has nonetheless enjoyed solid production rates.

How solid? In its September 2022 quarterly report, the company recorded oil production volumes of 414,155 barrels of oil, a 18.9% increase over the previous quarter.

Sales volumes also increased by 16% to 411,410 barrels while revenue climbed 4.7% to US$42m ($66m at that time) to generate net operating cash flow of US$33.95m.

Let’s take a moment to consider that cash flow – about $48.57m at current exchange rates – which is telling when compared with the company’s current market capitalisation of about $220.2m.

Additionally, the company reported underlying profit after tax of US$24.3m ($34.78m) for the 2022 financial year, or just about 2c a share, which works out to a rough Price-to-Earnings (P/E) ratio without any fancy considerations of about 7x at the current share price of about 14c.

This compares with the average P/E ratio of the Australian market of 17.1x according to Simply Wall St (at the point of writing) with lower ratios generally considered to be more attractive.

While P/E ratios are not the only measure of the company’s value, they do provide a good picture of their value that when combined with solid financials and the potential for further growth make Horizon look pretty attractive.

It doesn’t take into account that production could be somewhat higher this financial year thanks to the recent completion of the WZ12-8E Phase 2 development which increased gross field production by 4,466 barrels per day to 19,803bpd on 9 January 2023 from 24 October 2022 prior to the drilling of the Phase 2 wells.

And while there is no guarantee that it will continue doing so, Horizon also made a capital return of 1.35c per shares and a dividend of 1.65c per share – totalling $48m – to shareholders on 20 October 2022, which just adds more lustre.

New Zealand Oil & Gas (ASX:NZO)

Like Horizon, New Zealand Oil & Gas is an established oil and gas producer with operations in New Zealand, Indonesia and Australia.

During the September 2022 quarter, the company reported revenue of NZ$21m ($19.36m), down NZ$6.7m from the previous quarter, though this was due to the timing of oil lifting receipts.

It recorded a net profit after tax of NZ$25.7m in FY2022, a 159% increase over the previous year due to high oil and gas prices, and equal to about 10.58c per share.

With the company’s shares currently commanding 37.5c, that works out to a P/E ratio of just 3.54x.

New Zealand Oil & Gas is not content to rest on its laurels either, with plans to boost gas production from its Mereenie Field in the Northern Territory, plans to drill more production wells that could potentially double production at Cue Energy’s Mahato field as well as final investment decisions for a new well at Kupe in New Zealand and the Paus Biru gas well in Indonesia.

Byron Energy (ASX:BYE)

US focused Byron Energy reported a net profit after tax of US$22.2m ($31.74m) in FY2022, well up from the US$5.85m it made the previous year due to higher oil and gas prices as well as increased oil production that was partly offset by a decline in gas production.

With shares currently at 11.5c and earnings per share calculated at 2.94c, this works out to a rough behind the envelope P/E calculation of 3.9x.

The company has plans to drill a further three wells with an option for a fourth well at its operations in the Gulf of Mexico once the Enterprise Offshore Drilling 264 jack-up drilling rig is available to the company – currently expected in March.

It is currently permitting additional wells to allow for flexibility based on continuing geophysical and geological reviews and commodity prices and has received an approved Development Operations Coordination Document (DOCD) for a surface location with a future platform and pipelines on its Golden Trout prospect (SM70).

Byron has already submitted a well permit for the first well on SM70 and will soon file permits for two wells from the SM58 G Platform.