3 oil and gas stocks with potential

High risk, but potentially high returns

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Since the beginning of September 2011, the S&P / All Ordinaries Index (index: ^AXAO) (ASX: XAO) has risen by around 2%. That's not a great rise, and is below inflation. Great expectations from Australian oil and gas stocks have seen these three stocks post rises of 50% or more over the same time period. Here's what you need to know about them.

Buru Energy Limited (ASX: BRU) is up a massive 308% over the past year, and the second best performer in the All Ords index (behind Ainsworth Game Technology). That's despite the share price hardly moving over the last six months. The company is exploring for oil and gas in the Canning Superbasin (which consists of many smaller basins) of Western Australia. Buru holds around 14 million acres (57,000 sq km), and its recent discovery at its Ungani well was the first significant oil find in the basin since the 1980s. Executive director Eric Streitberg, who founded two previously successful oil companies before Buru, estimates the area around Ungani could contain 300 million barrels of oil reserves. Currently trading around $2.63, two separate brokers have $5.00 price targets on the stock.

Drillsearch Energy Ltd (ASX: DLS) has seen its share price rise by 182%. One of the world's largest oil and gas companies, BG Group has invested $22m into Drillsearch, which suggests the company may have some potential. Drillsearch has been producing oil and gas for a few years now, but production is expected to accelerate in the 2013 financial year.  In 2011, the company produced over 154,000 barrels of oil equivalent (boe). This increased to 390,000 in 2012 and the company is targeting 1.3 million boe, with 800,000 boe coming from oil in 2013. With operating costs of around $21 per boe, compared to an average realised oil price received of over $114 per boe in 2012, you can see one of the reasons why BG Group has made an investment in the company.

Red Fork Energy Limited's (ASX: RFE) share price has risen 51% over the past year. The company is focused on developing oil and gas projects predominantly in Oklahoma and Kansas USA. Billionaire George Soros once had a stake in the company – but closed his hedge fund last year, selling off investments and returned funds to investors. Red Fork produced 13,273 barrels of oil in the three months to June 2012, while also producing 129.8 million cubic feet of gas. This financial year, production should rise as the company doubles the number of oil rigs from 2 to 4, which should allow the company to focus on further exploration drilling, and increasing production.

The Foolish bottom line

Big gains can be made from exploration companies, but the risks are large. For those investors prepared to do their own research and despite the large price rises already, the above three might be worthy of further investigation.

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Motley Fool writer/analyst Mike King doesn't own shares in any companies mentioned. The Motley Fool's purpose is to help the world invest, better. Take Stock is The Motley Fool's free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Click here now to request your free subscription, whilst it's still available. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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