Why I’d shun the Versarien share price and buy Hurricane Energy

Investors hoping for a big payday may have more luck with Hurricane Energy plc (LON:HUR) than Versarien plc (LON:VRS), says Roland Head.

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Shares in material engineering specialist Versarien (LSE: VRS) have doubled since April. At the time of writing, they’re worth 642% more than they were one year ago.

Today I want to take a closer look at Versarien and another hot growth stock, North Sea oil driller Hurricane Energy (LSE: HUR). Both are trading close to record highs. But do they still deserve a buy rating?

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High hopes for graphene

Like most investors, I don’t have the technical knowledge needed to reach an expert verdict on Nanene, Versarien’s graphene-based material.

It sounds impressive, but the company hasn’t yet made any money from it. Although the Cheltenham firm is working on a number of R&D projects, it admitted in July that these collaborations “have yet to produce revenues of any material amount”.

However, I do know something about the firm’s financial situation and its valuation, both of which are key considerations for equity investors.

Is the price right?

Versarien is made up of a mix of mature and early stage businesses. Last year, the group generated total sales of £9m, with a pre-tax loss of £1.6m. According to results for the year to 31 March, the group had net assets of £8m at that time.

Given this performance, the £180m market cap looks very high to me. Paying 20 times sales and 22 times net asset value for a lossmaking company isn’t my idea of a good investment.

Even if growth is explosive, I think it would take several years to justify the current share price. In my view, this business is seriously overvalued. I’d take profits and sell.

Like a Hurricane

I don’t generally invest in oil explorers which don’t also have substantial production revenues. But I might make an exception for Hurricane Energy.

This North Sea firm specialises in extracting oil from naturally fractured basement reservoirs — a type of rock formation. It’s less than a year away from starting production at its Lancaster field.

Planned production of 17,000 barrels of oil per day should provide some useful cash flow. But what’s really exciting is that this development is expected to provide the evidence needed to support large-scale development of the company’s Rona Ridge assets.

A triple bagger?

Hurricane only has 62.1m barrels of proven and probable (2P) commercial reserves at the moment. But the group has almost 2.6bn barrels of so-called 2C resources. These represent oil resources that have been discovered, but aren’t yet ready for commercial production.

The Lancaster Early Production System is intended to provide some of the information that’s needed to convert these resources into commercial reserves. Founder Dr Robert Trice expects a much larger partner to get involved in the business when this happens. For shareholders, the result could be a tidy takeover offer.

For example, an offer valuing 1bn barrels of oil at $4 per barrel would be worth about £3.1bn, or 157p per share. That’s three times today’s 50p share price.

Buy and forget

There’s no guarantee of success. But Dr Trice has delivered exactly what he promised so far. He’s also maintained 100% ownership of Hurricane’s oil fields, to preserve the potential upside for shareholders.

In my view, this stock could deliver impressive profits for investors. I’d view this as a stock to buy today and tuck away for a few years.

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Roland Head 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.

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 considered, so you should consider taking independent financial advice.

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