In this article I’ll explain what’s driving today’s gains, and whether this news males any of these companies a buy.
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Falkland Oil and Gas
Shares in Falkland Oil and Gas have risen by 23% to 26p today.
The company hasn’t issued an update to the stock market since 25 August. However, the results of the company’s Humpback exploration well in the South Falklands Basin are expected any day now.
Falkland Oil has a 52.5% interest in Humpback, which is targeting net prospective resources of 268m barrels of oil.
I suspect today’s surge could indicate an early move by traders betting that the firm has made its third oil discovery of the year.
While the earlier Isobel Deep and Zebedee discoveries lie close to the earlier Sea Lion discovery, a big find at Humpback could open up a whole new oil play in the region.
I’m not sure I’d buy after today’s surge, but the shares could be worth watching for further news and a better buying opportunity.
Carpet manufacturer Victoria has surged 12% higher today, after announcing a major acquisition.
The £65m deal will see AIM-listed Victoria take control of Interfloor Group, a leading UK manufacturer of carpet underlay.
To fund the transaction, Victoria has also announced the placing of 3,617,891 new shares in the company. This will raise a total of £44.5m, but it will create significant dilution, increasing Victoria’s share count by around 25%.
The good news is that today’s acquisition should generate more than enough additional profit to offset this dilution. Today’s announcement says that Interfloor generated earnings before interest, tax, depreciation and amortisation (EBITDA) of £10m last year. Victoria says that this will provide a material earnings uplift.
I’d now expect broker forecasts for 2015 and 2016 earnings to rise significantly, perhaps by 10%. However, at today’s share price, even a 10% earnings hike would still leave Victoria shares on a 2016 forecast P/E of 21.
With a yield of less than 1%, that’s not cheap enough to tempt me.
Shares in temporary power firm APR Energy gained 10% on Friday morning, after the firm said it had managed to remove all of its equipment from Libya.
Good news, but the firm has already said that the Libya demobilization was “more expensive than anticipated”. That’s a problem, as APR can’t afford to overspend on anything at the moment.
In August’s interim results, the firm warned investors of “an expected covenant breach at the end of the third quarter”.
If APR breaches the terms of its loans, then the firm’s lenders may be able to force APR to raise some cash. This could mean a forced sale of assets, costly new loans or a heavily discounted rights issue. All of these would be likely to destroy APR’s share price.
To avoid this risk, APR needs to refinance its loans before 30 September. However, I suspect the firm’s lenders will wait until after then, to strengthen their negotiating position.
APR shares have recently risen from a low of around 60p to today’s price of 117p. In my opinion, now could be a good time to sell.