As Ithaca Energy Inc. Falls, Should You Dump It & Snap Up BP plc?

If are looking for value stocks in the oil world, at 450p a share BP (LSE: BP) is a much better choice than Ithaca (LSE: IAE), whose stock was hammered in early trade today. Here’s why. 

Ithaca: Statement Of Claim

Today’s news — “Ithaca notes that it has received a statement of claim from a law firm that advertises itself as undertaking investor lawsuits” — is hard to digest. 

The statement of claim relates “to purported misrepresentation of information regarding the past schedule for completion of the “FPF-1” floating production facility modification works being completed by Petrofac,” Ithaca said, adding that it vigorously refutes any such allegations and strongly denies any suggested wrongdoing.

Deleveraging Plan 

The shares are still in negative territory at the time of writing, although they have bounced back from their lows — we’ll see how it goes, although this is an issue management could have done without. 

Ithaca recently reported 1Q15 production at “12,489 barrels of oil equivalent per day, in line with guidance,” but it’s vital that it surprises the market with positive news in order to gain trust from investors after a year at the end of which it decided to cut capital expenditure by 60%, while shareholders saw the value of their holdings plunge by 62%.

While this North Sea-focused oil and gas producer said earlier this month that it is fully funded and is “moving into the deleveraging phase in the second half of 2015,” its $99.9m first-quarter operating cash flow included $59.7m from the “acceleration of oil price hedging gains“, which was expected but doesn’t strike me as being particularly good news. 

To be sure, with total debt funding capacity of $950m in place, and with a “fully drawn weighted average cost of debt of under 5%,” the short-term outlook is safe — but Ithaca must deliver, and swiftly. Its Greater Stella Area assets represent a big commitment for a company whose enterprise value is more than four times the value of its equity. As such, keep an on the quality of its core cash flows. 

BP: A Value Play

This is a completely different risk profile, of course. 

I am a big fan of BP, and I think that at its current level of 450p a share, BP should be added to any diversified portfolio, with the aim of recording a +33% performance over the next 12 months, excluding dividends.

In fact, its strong assets base and forward trading multiples — at 13x and 10x based on BP’s net earnings for 2016 and 2017, respectively — point to even greater upside over the medium term, one of the reasons being that BP seems to be very serious about its dividend policy, regardless of macroeconomic forces that play against its management team. Its forward yield at 5.7% is solid, and one element to consider is that its operating and net income margins are expected to grow at a faster pace into 2018 than they did in the past few years. 

Finally, investors haven’t been particularly impressed with the $70bn offer for BG by Shell, which seems to be too high, and may continue to favour BP over its rivals. Its shares have risen 22% since their one-year trough in mid-December: the rally is not over, in my view. 

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