Vedanta (LSE: VED) is a terrible equity investment, and I ‘d rather buy EnQuest (LSE: ENQ) if wanted to take big risks. I also don’t think Gulf Keystone Petroleum (LSE: GKP) is cheap enough, in spite of recent developments.
Vedanta In Never Cheap Enough
Vedanta is down 8% so far this year, has lost 40% of its value in the last twelve months, and is down a whopping 80% since April 2010. This is a stock I’ve monitored for about a decade, and the right time to invest has never come.
I have an issue with corporate governance at Vedanta and I would never choose Vedanta, simply because its corporate structure is too complex. The way the company is managed provides very little clarity as to “who gets what” within the group, which comprises several operating subsidiaries.
It’s also not very easy to determine how its debt obligations are split among the different entities that are part of the group. That shows in its $10.7bn enterprise value (EV), as gauged by market cap plus net debt and minorities, which is more than five times its market value.
Net leverage has been problematic for years — you could make a fast buck buying on weakness, but your investment could be under water for a long time if the cycle doesn’t accelerate.
Gulf Keystone Petroleum: Emergency Funding
As far as GKP’s latest rights issue is concerned, I’d wait a while before jumping for joy.
“Emergency issuance” springs to mind here. The shares were up 8% on Monday, before the news of a cash call emerged, and shareholders may continue to decide to focus on sustainability, rather than dilution, although the stock was inevitably hammered on Tuesday.
The problem is that GKP is raising up to £30m. On the one hand, GKP doesn’t have to offer a steep discount to investors because it is looking to raise funds that amount to just about 10% of its market cap. On the other hand, I reckon that up to $200m of fresh equity would be needed to fix its finances and provide the company with financial flexibility for the long term.
Until earlier this month, the problem was a lack of funds and low oil prices, which hinder profitability and force management to think creatively about options. As new funds come in, what’s new here is that management is under pressure to deliver in the next couple of quarters.
“A group of investors led by former Tullow Oil chairman Patrick Plunkett said on Monday it had offered to help Gulf Keystone solve its funding problems but the firm had so far declined to engage in discussions,” Reuters reported on Monday.
Expect more news on this front. With Brent below $60 a barrel, the outlook remains challenging.
EnQuest Is Still Overpriced
EnQuest is not a business I dislike, but it’s not a stock I like very much at this price. In fact, I’d only place an opportunistic bet if it traded at about half its current value of 37p.
This may turn out to be a safer investment than others with a similar size (market cap $450m, EV $1.8bn) operating in the oil industry — and that’s mainly because this oil and gas producer recently negotiated a new deal with its bankers, amending some key terms of its core debt facilities.
Prompt access to fresh funding is vital in this market, and EnQuest has options. Based on its projected capital investment needs at about $600m a year — at roughly 60% the level it recorded in 2o14 — EnQuest should be able to continue to operate even in a low-oil environment at least until the end of 2016. That means that you may have plenty of time to exit the investment if things do not go according to plan.
The stock looks fully priced right now, however.
