There is one sector of the market where I have been focusing quite a lot of my attention recently. This is the oil and gas sector. Considering the recent rally in crude oil and gas prices, I think the outlook for the industry is brighter than it has been for some years.
However, I am also aware it is a precarious sector to invest in, considering its cyclical nature. That is why I would buy a £5k basket of penny stocks to take advantage of the opportunity.
This strategy may not be suitable for all investors. Penny stocks and oil stocks can both be risky in their own right. Even the most seasoned investors may want to avoid both of these risks combined.
Nevertheless, I believe that by embracing diversification and concentrating on a sector that is currently experiencing significant tailwinds, I can improve my odds of success.
Penny stocks to buy
The most speculative company in this article is the North Sea firm Independent Oil & Gas. The corporation is not generating any revenue yet, but it is only a matter of time before its wells and infrastructure start building returns for investors.
It is first targeting gas from its Blythe well in the fourth quarter, which should give the market something to go on in 2022. Further wells are also in development, which should help underpin growth. I would buy the company for this growth potential.
Elsewhere in the North Sea, I would also buy Enquest. After several years of grappling with disruption, high operating costs, and elevated debt levels, high oil prices are helping the group reduce liabilities.
While the company is always going to be exposed to the challenges of operating in the North Sea, if it can use the current environment to reduce debt substantially, Enquest’s long-term outlook will become brighter.
International oil and gas
Pharos Energy, previously SOCO International, is an international operator with a presence in Vietnam in Egypt. It too is benefiting from what management calls good break-even oil prices in Vietnam. It has also recently signed an agreement in Egypt that should improve cash generation. Following these developments, the company qualifies for my portfolio of penny stocks.
I would also buy Tullow Oil for similar reasons as Enquest. The group is pulling itself out of a debt spiral thanks to rising oil prices. The developments could help place the enterprise on a far more sustainable footing for the foreseeable future.
All of the companies outlined above are exposed to oil prices. If these decline, these firms could end up incurring significant losses. Environmental regulations and rising costs could also be a challenge.
Growth funding
Finally, I would buy energy infrastructure company Lamprell. At the end of October, this organisation raised £22m to take advantage of “significant opportunities” in the energy markets.
Management wants to capitalise on the growing demand for green energy and rising demand for equipment in the oil markets. With this cash in the bank, I am excited about what the future holds for the business, although this is a competitive market. The group’s growth is by no means guaranteed.
Acquiring the stock will also help me diversify away from oil producers in my £5,000 portfolio of penny stocks.
Rupert Hargreaves has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
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