International E&Ps To Back In A High Volatility Market

• Stock selection is critical when investing in international E&Ps
• Many E&Ps will likely be at the mercy of commodity price swings in the short-term
• E&Ps that have solid balance sheets will likely be able to take advantage of major opportunities during the downturn

According to a new report by BMO Capital Markets, more than any other time in recent history, now is the time for oil & gas E&P investors to be extremely selective. Analyst David Round discusses some of BMO’s top international E&P plays in a volatile, unpredictable market.

Long-term play
Round warns that, in the short-term, the share prices of most international E&Ps will be closely tied to movements in commodity prices. However, in the medium-term, he believes that the cream of the international E&P space will rise to the top and demonstrate significant outperformance. Well-positioned names will likely have opportunity to acquire assets and take advantage of other favorable opportunities in a distressed market.

Confidence and discipline required
Round believes that investors will need to have confidence in the long-term direction of crude prices before they return to international E&P stocks. In addition, the sector will need to demonstrate more capital spending discipline than it has in the past.

“More than any other time in recent history, the current industry backdrop means investors need to be extremely selective when investing in the sector,” Pound cautions.

Top picks
BMO likes Faroe Petroleum as a top pick because of its strong balance sheet, which puts the company in a position to take advantage of opportunities that may arise during the downturn.

In addition, BMO likes Lekoil Ltd, which Pound calls “one of the best value stocks in our coverage.”

Finally, BMO names Ophir Energy Plc OPHRY as a top pick due to its lower cost base and attractive valuation.

Disclosure: the author holds no position in the stocks mentioned.