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Why I’d avoid these 2 commodities stocks after today’s updates

Industrial beltbuilder Fenner (LSE: FENR) leapt on Thursday after unveiling its latest trading update. The stock was last 6% higher on the day and hitting levels not seen since July 2015.

Fenner said it expects results for the year to August 2016 to register at the top end of market expectations, the business having been “helped in part by the translation effect on overseas earnings arising from the depreciation of sterling in recent months.”

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The company — whose chief operations involve the manufacture of conveyor belts and seals for use in the mining and energy industries — has risen in recent months along with the wider commodity sector, as many market participants have predicted an imminent and sustained upturn in raw material values.

Investor confidence has also been buoyed by Fenner’s efforts to offset its uncertain revenues outlook through huge cost-cutting and streamlining measures. Just this week the company sold its US-based Xeridiem Medical Devices division for $10.5m to repair the balance sheet still further. Net debt clocked in at £150m as of August.

But I believe the hulking supply/demand balances hanging over commodity markets — and with it the uncertainty over the profitability of its main customers and consequent impact on operating budgets — means that Fenner is still in a sticky situation.

Indeed, the firm announced in April’s half-year update that “the difficult market conditions that have characterised the last four reporting periods continue.” And I believe a forward P/E rating of 20 times, well above the benchmark of 15 times that indicates reasonable value, fails to reflect Fenner’s high-risk profile.

Producer in peril?

Oil explorer Enquest’s (LSE: ENQ) share price hasn’t fared so well in Thursday business however, the stock last 4% lower after releasing a less-than-rosy half-year report.

Enquest advised that total production averaged 42,520 barrels of oil per day during January-June, up 43% from the corresponding 2015 period.

But technical issues at its Alma/Galia field have forced the business to cut its output target for the full year. Production of between 42,000 and 44,000 barrels per day is now expected in 2016, down from a previous estimate of between 44,000 barrels and 48,000 barrels.

Revenues slipped 12% year-on-year, to $391.3m, thanks to lower oil prices. Crude values averaged $62 per barrel in the first half versus $87 during the same period last year. But lower year-on-year costs helped Enquest print a 51% pre-tax profit rise, to $149.7m.

Investing in oil explorers is always perilous business, of course, but the prospect of a fresh dive in oil values makes Enquest a risk too far, in my opinion. Indeed, the City doesn’t expect Enquest to generate any earnings until 2018 at the earliest as black gold prices look set to toil.

And while the firm’s cost-reduction plan is still making great progress, a $1.68bn net debt pile as of June will leave the business in severe bother should oil prices fail to meaningfully recover.

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Royston Wild 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.

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