Comparative review

Oil stocks are among the most maligned in the market. Falling oil prices, sluggish economic growth and fears of cost escalation have all contributed to the underperformance of the sector. There is little doubt that oil and gas producers face important challenges – the supply response from shale gas among them – but opportunities in the sector still exist. We're going to run through local energy stocks and highlight the companies worth paying attention to.

Beach Energy makes a strong claim to join the watch list. It has an impressive resource base in the Cooper Basin and a strong balance sheet with no net debt. With drilling suggesting a large volume of shale gas exists on its permits, Beach is also a likely takeover target. There is, however, one major concern. Unless gas prices double, or Beach is able to reach agreements to sell its resources at twice today's price, none of that potential will be realised. Beach is a worthy idea for gas price bulls but the outcome is a binary one. If prices rise a long way, shareholders will be rewarded. If gas prices fall, stay as they are, or only rise by a moderate amount, unconventional production will falter and the conventional business (i.e., non-shale assets) aren't as strong. We're acting conservatively by recommending you AVOID for now.

Aurora Oil and Gas and Linc Energy are two stocks that have found favour in recent years. Aurora has been an astounding success story by developing shale oil and gas in the US. Yet a closer inspection of its project provokes fear rather than excitement. Aurora generates no free cashflow. It requires new injections of capital to maintain output and, with ambitious expansion plans, will be devouring capital with no end in sight. Despite being a market darling, it earns a sharp rejection. AVOID.

Linc Energy has unconventional ambitions too, in coal gasification, coal seam gas and shale oil. This business provokes concern. Although it has successfully sold some assets, to generate an income will require immense capital and its focus on new fangled production techniques is untested. AVOID.

Cooper Basin businesses Senex Energy and Drillsearch are more appealing. With well located resources that will possibly be called upon to supply Queensland coal seam gas projects, this pair make likely takeover targets. Alas, takeover premiums are already embedded in their share price. The market is right to attach a premium to these businesses but conservative investors are loathed to pay it. These two are worth watching for a cheaper entry but, for now, we recommend you AVOID.

We've been watching the achievements of Buru Energy with interest. In just two years Buru has grown to become one of the biggest energy stocks on the market and yet it barely produces anything. That doesn't necessarily make it expensive. Buru controls the enormous Canning Basin in north-western Australia and is uncovering vast oil and gas fields. The discoveries are capturing industry interest and the immense capital needed to develop energy assets in this remote location will probably be funded from futures sales of project equity. Buru has a long way to go before cash inflows are able to fund expenditures but control of an entirely new petroleum province is a rare thing. We're interested. HOLD.

Horizon Energy is another oil and gas producer worth watching. A sale of rich gas fields in Papua New Guinea could be worth as much as the market's valuation of the entire business today. In addition to those assets, it also has production assets in China and elsewhere that are lucrative. A small business it may be but Horizon makes an interesting asset play. For now, HOLD.

Dart Energy, Molopo, Neon, Texon and Nexus are all interesting tales and experienced investors may wish to follow them on their own but each has small resources, large capital commitments or is reliant of exploration success. They all entail enormous risk. Nexus is the most appealing of the quartet but it is also the riskiest. Its major asset, a stake in the large Crux oil and gas field, could be worth multiples of its market value but only if the company can access development funds. Already heavily indebted, that is in doubt. All three are, somewhat reluctantly, relegated to AVOID.