SOCO (LSE: SIA) is a stronger business than Ithaca Energy (LSE: IAE) and Xcite Energy (LSE: XEL), but is not exactly my favourite oil investment.
Elsewhere in the oil and gas world, IGAS Energy (LSE: IGAS) is troubled, and that is reflected in its stock price — but it may be worth a bet right now, if you have a very long-term view.
SOCO: Is It Time To Take Profit?
It doesn’t take an investment guru to understand that SOCO could offer short-term upside, but its risk/reward profile concerns me.
In the last month alone, the stock has appreciated 30%, based on little evidence that operational hurdles have been sorted out. If anything, management has benefited from a more upbeat outlook for oil prices. Operational issues at some of its smaller rivals have also played a part.
For me, SOCO is still overpriced and I wouldn’t buy into the rally — based on trading multiples and the fair value of its assets, downside could be 25% to 136.5p from 182p, where the shares currently trade.
Ithaca & Xcite Energy: Be Careful!
Ithaca and Xcite Energy are in the same boat, really — although the former is a bigger entity. Their financials are similarly weak, and uncertainty weighs on their growth prospects.
It could reasonably be argued that both companies need strategic partners to keep operating as a going concern, under base- and bear-case scenarios.
Yet Ithaca has risen 83% in the last four weeks of trading — but that’s stuff for opportunistic investors rather than for value hunters. Its debt load remains highly problematic, and it’s very hard to accurately model cash flows into 2016 and beyond.
Its shares are trading on volatile news about a series of tests that the company recently undertook, rather than on hard facts about an improved capital structure — as such, for me this remains one stock to avoid.
“The results of the Ekofisk well further de-risk forecast cash flows from the Stella field,” its chief executive recently said, adding that management is are also encouraged that there is further “upside potential” for reserves development in the Ekofisk formation.
Its three-month performance is -20%.
If I were to place a highly speculative trade, I’d rather snap up Xcite, which remains a “high-risk/uncertain return” kind of investment, but one that in the last month has only mildly benefited from a brighter outlook for oil prices. Its stock is up 5% in the last four weeks of trading, but has lost 20% of value year to date. There’s very little visibility on revenues and cash flows — both of which stand at zero right now — and its balance sheet is weak.
It could be taken over, of course… talking of which, let’s move on to IGAS!
IGAS: An Opportunistic, Long-Term Trade?
IGAS is a problematic investment case.
Although I am tempted to suggest that its stock may have bottomed out (the shares are up 10% essentially on no specific news at the time of writing) it still looks expensive, based on the fair value of IGAS’s assets, its debt load and its forward valuation.
While there remains a possibility that IGAS will end up being acquired, the company will more likely ask for new funds to shareholders before any fresh offer emerges — and that could be necessary to cover economic losses that should run in the region of £15m to £20m in the next couple of years.
Surely, Ineos will come to the rescue if needed, as it recently did, in my view — but dilution remains a distinct risk for shareholders into 2017.
