One double-bagger growth stock I’d buy before IGas Energy plc

Roland Head looks takes a fresh look at IGas Energy plc (LON:IGAS) ahead of its 2018 drilling programme.

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Shares of shale gas hopeful IGas Energy (LSE: IGAS) have risen by 84% from a low of 49p in just over four months.

It’s a strong comeback for a company that was forced into a painful refinancing in 2017. IGas now has backing from both chemicals giant INEOS and from oil and gas investor Kerogen Capital, which owns 28% of the group’s shares after pumping £29m into last year’s refinancing.

Although this AIM-listed firm is a relatively small investment for both INEOS and Kerogen, both are credible investors with industry knowledge. Their support suggests to me that they see considerable upside potential in the firm’s assets.

An action-packed year

INEOS support means that IGas now has a carried work programme worth up to £183m. The company is hoping to drill two new shale wells this year, and further data is expected from a number of rivals also hoping to drill or frack UK shale wells.

Rising oil prices have also helped the group’s portfolio of conventional oil and gas wells. These are now producing around 2,500 barrels of oil equivalent per day, at a cost of about $25 per barrel. Group revenue is expected to rise by about 10% to £36m this year, and broker forecasts suggest a net profit of about £3m.

The speculative opportunity for shareholders lies in the shale exploration programme. In my opinion, success could easily result in rapid gains. But if early results from shale wells are disappointing, then I’d suspect the shares may decline.

In my opinion this situation remains highly speculative. I’d only be prepared to consider this stock for a small part of my portfolio.

One share I’d buy today

A stock I’d be happy to own in much larger amounts is Porvair (LSE: PRV), a specialist maker of industrial filters. This £243m firm has risen by more than 850% since the financial crisis, and has gained 85% over the last two years.

Today’s full-year results suggest to me that the group’s growth potential remains strong. Pre-tax profit rose by 16% to £11.7m last year, while sales were 6% higher at £116.4m. Earnings per share climbed 14% to 19.5p.

Although Porvair spent £11.4m on acquisitions and capital expenditure last year, the group still ended the year with net cash of £9.8m. That’s just £3.8m less than the £13.6m reported at the end of 2016, highlighting the group’s strong cash generation.

Quality at a reasonable price?

Porvair shares are up 3% at the time of writing, reflecting chief executive Ben Stocks’ view that the group has started 2018 with “a healthy order position and is trading well”.

The firm’s growth strategy is based on the principle that it will only sell products which require specialist skills to make, and which must be replaced regularly.

This approach appears to provide a high level of repeat business and attractive pricing power, due to limited competition. The Kings Lynn-based firm’s operating margins have now been stable at about 10% for the last five years.

Although Porvair stock may look pricey on 28 times forecast earnings, I believe this is a quality growth business that’s worth owning. I’d be happy to buy at current levels, with a view to averaging down during any future periods of weakness.

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.

Roland Head no position in any of the shares mentioned. The Motley Fool UK owns shares of Porvair. 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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