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How Much Further To Fall Is There For Lonmin Plc, Premier Oil PLC & SOCO International plc?

Shareholders in Lonmin (LSE: LMI), Premier Oil (LSE: PMO) and SOCO International (LSE: SIA) may be wondering how much worse things can get for their firms.

Each of these stocks has fallen by at least 60% over the last 12 months, but in my view, only one is a possible buy.

Premier Oil

The oil price crash has come at a particularly bad time for Premier, which is in the middle of developing two major North Sea projects, Catcher and Solan. As a result, net debt has doubled from $1bn to $2bn since 2012, while profits have fallen from +$252m in 2012 to -$210m in 2014.

Premier shares now trade at around 120p, which is about 45% less than the company’s net asset value per share. The only problem is that when Premier’s $2bn debt mountain is added in, this company doesn’t look cheap at all.

My view is that Premier’s $1.1bn of unused debt and its existing hedging contracts should be enough to see the firm through to when Solan and Catcher start to generate cash flow. This is expected in 2015 and 2017, respectively.

However, the firm’s ability to fund shareholder returns and the development of the Sea Lion field in the Falklands may depend on how soon the price of oil starts to rise. Premier could fall further yet.

Lonmin

Platinum miner Lonmin is facing every possible problem — at once. Platinum prices are low, Lonmin’s operations are losing money, and the firm needs to renew its debt facilities.

In Lonmin’s interim results for the six months to 31 March, the firm reported an operating cash outflow of $0.29 per share and a free cash outflow of $0.44 per share. Given that the price of platinum has fallen by about 15% since then, this situation may have worsened.

Lonmin hopes to cut costs by closing some of its highest-cost mine shafts and cutting spending in others. This may help, but Lonmin’s net debt rose to $282m during the first half of the year, leaving it with just $281m of unused debt. The firm is in the process of looking for refinancing, but this is likely to be costly and perhaps require a rights issue.

Lonmin is starting to look very risky for shareholders. There’s a real risk this one could fall much further, in my opinion.

SOCO International

SOCO may have whacked shareholders with a big loss, but the Vietnam-focused firm remains profitable. Interim results on Thursday showed a net profit of $5.9m for the first half of the year, with operating cash flow of $45.3m.

Despite paying a $51m dividend earlier this year, SOCO also has net cash of $96m. This means that SOCO can fund its planned capital expenditure for the year from operating cash flow and net cash, without needing to resort to debt.

Sensibly, SOCO has chosen to focus on maximising value from its existing assets. While this may not be very exciting, it should also ensure the firm’s survival in a tough market. After all, a firm with positive cash flow and no debt can’t go bust.

With a 2016 forecast P/E of about 12, I don’t think SOCO looks expensive. Indeed, at current levels, the firm’s shares could turn out to be a profitable buy.

The commodity market remains volatile and uncertain, however. Investors looking for near-term upside may do better looking elsewhere.

One possibility is this small-cap firm, which the Fool's top analysts have been watching closely in recent months.

They believe this company's bold move into a £4bn global market could result in significant profit growth over the next few years.

Indeed, our in-house experts reckon this stock could be undervalued by as much as 40%!

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