Today I’m looking for energy sector stocks that are still cheap enough to buy as the oil market recovery gets underway.
The first company under the microscope is Dubai-based rig builder Lamprell (LSE: LAM). Shares in this FTSE-listed group fell by about 9% this morning after Lamprell warned that 2017 would be a tough year, with little in the way of new projects. The company said that 2016 revenue would be about $700m, with 2017 sales falling to $400m-$500m.
For anyone who has been following the stock, today’s statement contained no real surprises. I’m not sure why the shares have fallen this far. One explanation may simply be that at more than 100p, the shares had run ahead of themselves recently. I think the current price of about 90p is probably fair, given the near-term outlook.
Here’s the real story
I believe Lamprell has two key attractions. The first is that it has a very strong balance sheet. Debt levels are low and today’s year-end trading update indicated that net cash should be ahead of “the previous year”. My reading of this is that net cash should be above the 2015 year-end level of $210m.
If that’s right, then the firm’s net cash now covers more than half of its market cap. Cash generation is expected to remain positive in 2017, as older projects are completed. The problem is that as things stand, there isn’t much new work to refill the group’s emptying yards.
Lamprell’s executive chairman John Kennedy said today that he expects market conditions to improve in 2017. However, the group’s customers have already fixed their spending plans for the year ahead, limiting near-term opportunities.
This fits with my view that it’s likely to be 2018 before trading improves at Lamprell. I don’t see this as a big concern. If the firm starts winning orders during the second half of this year, investors will soon stop worrying about 2017.
For me, Lamprell remains a buy at current levels. I continue to hold.
I’m less sure about this one
FTSE 250 oil producer Tullow Oil (LSE: TLW) deserves credit for having navigated its way through the oil market downturn without having to raise cash from shareholders.
But Tullow still has net debt of $4.8bn, an amount that’s very significant when compared to 2017 forecast revenue of $1.7bn and profits of $155m.
Until recently, investors were concerned that Tullow might not be able to raise the cash needed to fund new projects. A $900m farm-out deal to Total in Uganda has reduced that risk, but this will only deliver $200m of cash. The remaining $700m will be paid in kind, through Total funding some of Tullow’s costs on this project.
In my opinion, Tullow’s cash flow is likely to remain stretched by debt repayments over the next couple of years. Although I don’t expect the group to have any problems managing this, I don’t see much upside for shareholders.
Dividends payments seem unlikely until Tullow’s debt falls to a more reasonable level. Meanwhile, the group’s shares already trade on a 2017 P/E multiple of 24. That seems enough to me, so I won’t be buying at current levels.
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Roland Head owns shares of Lamprell. 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.