Why Are Renold plc, Gulf Keystone Petroleum Limited & IGAS Energy PLC Under Pressure?

Renold plc (LON: RNO) is a stronger investment proposition than Gulf Keystone Petroleum Limited (LON: GKP) & IGAS Energy PLC (LON: IGAS), argues this Fool.

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The shares of Renold (LSE: RNO) have lost about 10% of value this week. My advice? If you are invested, you may well decide to stay put. I do not hold the same feelings towards Gulf Keystone Petroleum (LSE: GKP) and IGAS Energy (LSE: IGAS), in spite of recent weakness in their valuations. 

Consider that the combined equity value of these three companies amounts to just about £600m, but their combined valuation including net debt amounts to £1bn. Most of that £400m of aggregate net debt is owned by GKP, which is my least favourite pick.

IGAS’s balance sheet isn’t great, either — but Renold’s financial position is sound. 

On A Roll 

Renold has been under pressure this week on the back of a trading statement that confirmed guidance for its operating profit — quite simply, investors want more. 

Of course, the drop in its share price could be a sporadic event, particularly if you believe that its management team has what it takes to deliver on its promises, but a scenario according to which the shares of Renold could sky-rocket to 150p in less than a year would imply a forward multiple of 30x, based on 2015 projections for its net earnings — such a valuation needs a higher growth rate than the one that Renold has delivered so far.

Its stock, currently valued at around 80p, traded at 27p only a couple of years ago. It has been flying high based on expectations that management will continue to deliver a nice mix of growth and yield over the medium term, and there are signs that value investors are right to have faith in the business — a supplier to the industrial sector, where valuations are not prohibitive, Renold is well managed and could also attract interest from suitors. 

Following its rally — the shares are up 35% since the turn of the year– I’d not buy the stock until further updates, but I’d hold onto it if I were invested. Elsewhere, IGAS and Gulf Keystone Petroleum are more problematic, based on a series of risks. 

Gauging Risk

The shares of IGAS and GKP are not cheap enough to deserve my attention, although I am more bullish on IGAS than on the oil explorer. 

High debts are a problem that could bring lots of bearish comments regarding both companies, regardless of their operational performances — that’s called headline risk. At this stage of maturity, all sort of rumours could either sink or boost both companies’ stock prices in a flash. 

Furthermore, both may need to raise more equity if their end markets do not improve quickly or their projects do not succeed — hence, dilution risk is something else you may have to consider before investing in them now. 

Finally, regulatory risk could push back IGAS’s plans — IGAS strives to make an impact in the UK’s fracking industry, whose prospects are uncertain — while counterparty risk remains a serious threat to GKP’s viability. GKP has faced an uphill struggle to collect its credits this year. 

IGAS stock is down 17% over the last month of trade, and currently trades at 25p. By comparison, the shares of GKP have fallen 16% to 33.6p since their one-month high on 26 June — lower oil prices are only partly to blame for its  poor performance. 

Frankly, there are cheaper options in the marketplace. 

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Alessandro Pasetti has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

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