Oil and gas companies can be speculative in nature because sometimes exploration drilling may produce nothing. It is better to wait until a company has achieved stable and growing production. In addition, it should make enough revenue to cover a reasonable part of its development capex, so that it isn't taking on more debt or diluting its share registry with frequent capital raisings.
Here are two companies that are expanding production and developing the financial strength to carry out their business.
Drillsearch Energy Limited (ASX: DLS) projects FY2014 oil and gas production will be a record 3.0-3.3 million barrels of oil equivalent (mmboe). Production in the first four months of FY2014 has surpassed the total production of FY2013.
Focusing its business on producing in the Cooper Basin in SA and Queensland, it is working with larger energy producers like Beach Energy Limited (ASX: BPT) and Santos Limited (ASX: STO) in several areas to explore and produce more. Earlier this month it signed an agreement to have Queensland Gas Company (QGC) farm in to one of the company's exploration areas to assist with establishing wells and financing exploration programs.
AWE Limited (ASX: AWE) produces oil and gas in WA, SA, the Bass Basin and the Eagle Ford shale gas region located in Texas, USA. In FY2013, about five mmboe were produced and its goal is to double that figure within 3-5 years.
Already H1 FY2014 production was three mmboe and net profit was $81.7 million, well up from the $13.2 million in the previous corresponding period. Most of that net profit came from the sale of a 50% interest in its Northwest Natuna PSC (production sharing contract) to Santos, which will take over operations. Underlying net profit for the period was $10.8 million.
Long-term debt was brought to zero and its cash position is about $77.8 million. Its price-earnings ratio is 44, but its current $1.42 share price is less than its book value per share and net tangible assets per share of $1.70.
Foolish takeaway
Both companies have the opportunity to supply the LNG export industry. If gas prices rise in the near future as recent news reports indicate, then higher selling prices will work to their advantage alongside increased production.
