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Should You Go For IGAS Energy PLC… Or Severn Trent Plc And Centrica PLC Right Now?

If you think that IGAS Energy (LSE: IGAS) offers plenty of value at this price, I’d wager it’s because you haven’t done your homework. I’d rather consider Servern Trent (LSE: SVT), which is not a stock I love but whose management is taking action and is implementing the right strategy for shareholders. Centrica (LSE: CNA) is a completely different matter, although its recent surge has captured the imagination of the bulls, who are betting on a stellar performance in 2015. I’m not convinced, though…

IGAS: Not The Safest Choice Of All!

There’s been lots of talk surrounding IGAS in the last few weeks. The shares were up 15% to 31.5p on Wednesday, and have risen by 30% from the lows they registered on Monday. The stock has lost about 80% of value from its 52-week high. Why, though? And, equally important, is it time to jump on the bandwagon?

The viability of fracking in the UK is being questioned, true. At a time when regulatory concerns are mounting, however, I doubt the government will withdraw support to the UK’s shale oil and gas industry, killing the business plan of IGAS and those of a few other players in the industry. In truth, the biggest problem for IGAS — whose balance sheet is clearly stretched — in that funding is needed for project development and drilling costs, while cash flows are hard to predict.

It issued a $165m senior secured bond with tenure of five years in March 2013, with a fixed interest rate of 10% and semi-annual amortisation of 2.5% of the initial loan amount. That’s expensive stuff, of course. 

Banks aren’t really willing to embrace such risk, leaving the game in the hands of bond investors or bigger companies that have options, and cash to spend, which means they can negotiate a large stake in IGAS for a small cash injection. It’s unlikely that IGAS shareholders will have much to gain if the company doesn’t diversify its funding options, one way or another. 

Severn Trent & Centrica: Getting Better, But…

You may well wonder why I have included Severn Trent and Centrica in this article. Investors are concerned with IGAS’s cash flow prospects and its funding needs, so I have taken aim at two bigger and more solid companies operating in a more stable industry. Both of which, however, have had their fair share of problems with regard to cash flows and working capital management in the past — and both have high debt levels. 

The recent dividend cut at Severn Trent was lower than expected, and it looks like the company is on a relatively stable growth pattern. I have been surprised by the way Severn Trent has managed its finances in recent times and clearly that shows in its cash flow profile, which has become stronger, and supports its dividend policy. Centrica, meanwhile, has been on its way up in recent weeks, with the share having registered a 10% rise in the last four weeks of trading. Frankly, the dividend is appealing but is by no means safe, and I wouldn’t buy the stock solely based on its yield prospects. 

In December, Centrica said it sold its 50% non-operated interest in the 90MW Barrow Offshore Wind Farm, located in the East Irish Sea, for a total cash consideration of £50m. The stake had been acquired by the operator, DONG Energy, which owns the remaining 50% of the asset. 

“The sale is in line with Centrica’s strategy to release capital from its UK operational wind portfolio for value,” Centrica said at the time. I would be tempted to consider the stock, but only if Centrica executes a larger disposal strategy. In short, I believe it has yet to prove it can deliver long-term value to its shareholders.

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