MENU

Forget Santos Ltd! Morgans is tipping a 250%+ gain for this oil and gas stock

It’s hard not to be tempted to jump onto Santos Ltd (ASX: STO) following a takeover bid for the energy stock but Morgans thinks there is another stock in the sector that will offer a much bigger pay-off.

This is despite Santos trading at a greater than 10% discount to the indicative offer price of $6.50 a share even after the stock rallied 16.2% to $5.89 on Tuesday.

But that’s nothing compared to Morgans’ forecast 255% increase in Sundance Energy Australia Ltd’s (ASX: SEA) share price!

The broker initiated coverage on the junior energy company with an “add” recommendation and 21 cents a share price target as it undertakes a game changing acquisition.

This compares to Sundance’s last traded price of 5.7 cents as the company closes off its retail entitlement offer as part of its $331.2 million capital raise.

That’s a supersize raising given its market cap of just over $70 million and Morgans’ price target accounts for the dilutionary impact from the mega capital raise.

But transformative acquisitions don’t come cheap and its purchase of 21,900 acres of land at Eagle Ford in the US could make it one of the largest oil producers on the ASX.

Interestingly, BHP Billiton Limited (ASX: BHP) is trying to get rid of its shale assets at Eagle Ford. I guess man’s methane is another man’s poison.

According to Morgans, Sundance will increase its net acres to 56,600, grow production from its current ~9,000 barrels of oil equivalent per day (boepd) to 21,500-22,500 boepd in 2019, and expand its proven reserves (called 1P) to 113 million barrels of oil equivalent (mmboe).

This gives Sundance a pro-forma enterprise value (EV) of around $600 million and that compares very favourably to its peer Beach Energy Ltd’s (ASX: BPT) EV of $3.14 billion even though Beach has similar 1P reserves and debt levels to Sundance.

What’s more, the capital raise should be sufficient to fund Sundance till it becomes free cash flow positive. This means the energy company is unlikely to need to raise more cash in the future to fund working capital requirements.

That’s a great position for any junior oil and gas company to be in. Let’s just hope the oil price stays at the top end of its trading range as a reasonably modest US$5 change in the price of crude will move Morgans’ valuation by a very significant circa 6 cents per share!

Looking for other emerging stocks with a big pay-off? The experts at the Motley Fool have uncovered a niche group that is well placed to deliver outsized returns over the medium to longer term.

Click on the link below to get your free report on what these stocks are and why they should be on your radar for 2018.

The Richest Man Alive Invests in This

The richest man in the world has just launched a $100 million investment fund and investors who don't take note could miss out on a massive opportunity.

And it isn't by sheer luck. He did it by looking to the future and investing in the big ideas of tomorrow.

This could be your chance to get in on the ground floor!

Click here to discover more!

Motley Fool contributor Brendon Lau owns shares of BHP Billiton Limited. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss a very important event! Chief Investment Advisor Scott Phillips and his team at Motley Fool Share Advisor are about to reveal their latest official stock recommendation. The premium “buy alert” will be unveiled to members and you can be among the first to act on the tip.

Don’t let this opportunity pass you by – this is your chance to get in early!

Simply enter your email now to find out how you can get instant access.

By clicking this button, you agree to our Terms of Service and Privacy Policy. We will use your email address only to keep you informed about updates to our website and about other products and services we think might interest you. You can unsubscribe from Take Stock at anytime. Please refer to our Financial Services Guide (FSG) for more information.