Selective speculators can beat a market that is expected to grow at least 10% thanks to higher oil prices and resurgent confidence.
Exploration and production shares, on average, are set for some 10% upside to their current levels, the investment bank said, whilst certain opportunities are seen to have much more potential.
The upbeat view is based on a US$75 per barrel Brent crude price (current price: US$86).
Strong oil prices equate to free cash flow, with Berenberg seeing the average yield at around 13% and across the sector leverage is seen at around 2%.
It adds up to Berenberg’s view that there’s confidence that the worst of the sector’s recent balance sheet challenges are in the past.
“Six of the 11 companies we cover pay or will soon initiate a dividend with an average yield of circa 5%,” analyst James Carmichael said in a note.
“Stock selection remains key, but we believe there are opportunities for good returns to be made in the E&P space.”
Beyond the improving economics, Berenberg anticipates an uptick in mergers and acquisitions this year.
“Several companies in our coverage are expected to try and grow through acquisition in the near term,” Carmichael added.
On the operations and explorations front, the analyst highlighted small-cap firms Chariot Ltd (AIM:CHAR, OTC:OIGLF) and Eco (Atlantic) Oil & Gas Ltd (AIM:ECO, TSX-V:EOG) for the former’s project offshore Morocco, and the latter’s assets in Guyana and South Africa.
Chariot shares are up around 55% in the past month, driven up during the drill programme for the Anchois-2 well offshore Morocco which beat expectations when results were released last week.
Anchois-2 well was drilled to a total depth of 2,512 metres and encountered significant gas accumulations in its appraisal target plus three additional exploration targets, spanning some 250 metres of gross pay.
It opens up a field development opportunity and is described as being transformational for Chariot.
Looking to Eco, Berenberg sees a company that has also been transformed in recent weeks, through its acquisition of acreage in South Africa.
The deal added a well-drilling opportunity in South Africa’s Orange basin, the Gazania-1 well, which is slated for the second half of 2022.
“The well will test two targets (Gazania and Namaqualand) with combined resource potential of c350mmboe, in water depths of less than 200 metres,” the Berenberg analyst noted.
“Encouragingly the well is updip of an existing light oil discovery (AJ-1) made in 1988.”
Berenberg’s ‘top picks’ were meanwhile singled out as Europe and Mediterranean firms Kistos PLC (AIM:KIST) and Energean PLC (LSE:ENOG), each with ‘buy’ ratings – with targets set at 530p (current: 495p) and 1,030p (917p) respectively.
Elsewhere, the bank upgraded its view on north Iraq oiler Gulf Keystone Petroleum Limited (LSE:GKP) to ‘buy’ from ‘hold’ with a target of 280p (210p).
Read More: Broker sees rich pickings in oil and gas sector