Xcite Energy (LSE: XEL) released its second-quarter trading update earlier this week — there wasn’t much in it, to be honest. So I have looked for value elsewhere in the oil and gas world.
I Won’t Buy Xcite & Ophir
Fossil fuel explorer Xcite Energy is certainly a riskier bet than, say, $1bn market cap Ophir Energy (LSE: OPHR) — yet neither stock is an obvious buy for me. Xcite, whose market cap is less than £100m, is down 20% this year, but the drop in its cash pile is more revealing than its subdued stock performance.
It reported cash of $34.4m as at 30 June 2015, down from $50m at the end of December and down from $70m at the end of June. That’s priced in a price-to-book value (P/BV) at about 0.35x, which is pretty low, the bulls may well argue!
Management believes it is making progress “despite the industry environment remaining challenging with the oil price recently falling below $50 per barrel, development budgets remaining under pressure, projects deferred and an increasing number of North Sea assets being put up for sale as oil companies seek to realign their portfolios”. But what does that mean for shareholders?
The bears could point out that Xcite is burning about $8m of cash each quarter, while its debt load determines high interest costs. If I were keen to buy a value stock in the oil space, I’d certainly need more evidence to invest in XEL, and my approach would be similar with regard to Ophir, whose P/BV is about 0.5x.
Ophir boasts a much stronger cash position than Xcite: it announced earlier this month to have increased its full-year guidance for production as well as much lower capital expenditure. Management is incredibly bullish about the outlook for shareholders on the back of efficiency measures and access to cash reserves, which could even allow Ophir to pursue acquisitions.
An upbeat view on Ophir’s prospects makes sense if you compare Ophir to a stretched oil player such as Ithaca Energy (LSE: IAE), for instance, but Ophir shares have fallen almost 40% this year — and they are down for good reasons, including the loss of a key shareholder such as Kulczyk Entities, which sold 56.6m shares at 140p apiece for about £79m earlier this year.
As it turned out, that was a great trade, and one executed at 60% premium to Ophir’s current market value!
LGO & Petrofac Are More Attractive Than Ithaca
I’d certainly avoid Ithaca, whose assets base is less important than its financing needs. Its stock is down 40% this year; plunging revenues and rising leverage is exactly what I’d expect from a company whose market cap is less than $150m, but whose enterprise value, which includes net debt, is about $1bn.
I’d rather choose LGO Energy (LSE: LGO) if I were to take any risk in the sector. Its shares trade at 1.3p, having lost 65% of value this year. That said, the outlook for its Goudron field in Trinidad isn’t too bad following its recent production tests.
In other news, LGO recently said that it was aware of the “misleading allegation made by Trinity Exploration & Production in its recent Q2 2015 (…) concerning the Sale and Purchase Agreement signed in 2014 with respect to the Tabaquite Block,” and “refute in its entirety Trinity’s claim that LGO is in breach of the SPA“.
Finally, one of my favourite oil picks: Petrofac (LSE: PFC)!
Its interim results for the six months ended 30 June were released today, and showed a 25% growth rate in revenues.
Its earnings growth profile were less appealing, but as the group said, “net profit (is) significantly weighted to 2H 2015,” and success in “new orders (…) with around US$6bn of order intake secured in the year to date in our core markets” combine with a healthy pipeline of bidding opportunities — all of which should guarantee a steep growth rate in revenues this year.
Petrofac remains an enticing yield play and it expects significant savings from cost efficiency measures, which renders its relative valuation of 14.5x 2105 earnings more appealing.
