Cooking with gas

Empyrean is pursuing what it describes as “three cornerstone assets with transformational potential,” the Block 29/11 offshore field in China, Duyung PSC offshore Indonesia, and a multi-project participating interest in the Sacramento Basin, California. 

At the start of November it had the distinction of being a 12-bagger over 12 months, fuelled by positive seismic data at its China prospect, better-than-expected reservoir quality in Indonesia, and several zones of high gas flows in Dempsey, Sacramento. However, it has slipped due to profit-taking and a disappointing release on 15 November showing that the lowest zone in Sacramento is “sub-commercial” at current gas prices. However, significant gas flows suggests shallower zones could offer more encouraging results.

Empyrean strikes back

Oil investors must be constantly braced for potential setbacks like this one. Dempsey still offers a potential 1trn cubic feet, which local surface infrastructure could quickly bring to market. Recent slippage might even be your opportunity to buy into this £60m AIM-listed explorer.

Oil prices are rising, Empyrean has an experienced industry team behind it, and also boasts a net cash position. It is definitely one to monitor to see whether the share price fails lower as short-term investors drift away. There could be a cheaper buying opportunity ahead, if you are feeling brave, but there are also other exciting prospects out there.

Infectious bacteria

Motif Bio went off like a bullet following publication of its half-yearly report on 29 September, its share price leaping 50% in a week to peak at 45p by 6 October. This was down to positive top-line results from REVIVE-1, a global Phase 3 clinical trial of its investigational drug candidate iclaprim in patients with acute bacterial skin and skin structure infections. However, the AIM-listed stock has also since trailed away and today languishes at around 31p.

This £82m company is a clinical-stage biopharmaceutical specialist that develops novel antibiotics to treat patients with serious infections caused by multi-drug resistant bacteria. You can see the opportunities, and of course, the threats. As with Empyrean, future revenues, profits and stock market performance will be driven by news flow, so brace yourselves.

Pipeline progress

Recent news, such as announcing positive topline results for its REVIVE-2 treatment, presenting new pre-clinical data on iclaprim and securing up to US$20m in debt financing in mid-November have not prevented the downwards drift. However, this is a small company aiming at a big juicy target, and if its treatments come through the pipeline, you can expect its share price to spiral. Or you might prefer this pharmaceutical opportunity.

Both these companies are trading at roughly half their 52-week highs to make them an exciting opportunity for those happy to embrace volatility rather than run away from it.

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From a share price of 1.65p a year ago, the shares have gained more than 800%. However, since mid-September, its rally has lost a lot of its momentum and the shares are currently trading at less than half of its 52-week high of 31.25p. Does this means it has hit a roadblock, or is this just a short-term setback?

Disappointing well results

Certainly, there’s a great deal of uncertainty about the growth prospects of the AIM-listed oil and gas explorer’s assets. The company has made significant discoveries over the past few years, but there’s still no clear indication of the potential scale of the recoverable resource.

As such, it’s not surprising to see some profit-taking after such a rapid ascent in its share price — especially as concerns grow on the lengthy wait for the important drill test results from its Dempsey well in the Sacramento Basin, California.

Things were only made worse by Empyrean’s disappointing well test results last week, which found gas at its lowest zone of the Dempsey 1-15 well flowing at rates that were “sub-commercial”, meaning those reserves may not be economically recoverable at the current gas prices.

Promising potential

But in spite of the recent disappointment, Empyrean could still offer promising growth potential should its Dempsey well project come good. As the company said in its statement on 18 November, “analysis of this zone, and its full potential, remain at an early stage.” What’s more, the tests are being conducted in the order from the lowest up, and not in priority of interpreted significance, meaning some disappointing results were likely before sufficient commercial flow for production would be found.

Initial estimates put the project’s potential recoverable reserves at between 116 and 352bn cubic feet of gas. But should all the stacked reservoirs be full of gas, the cumulative unrisked recoverable resource within the Dempsey prospect could rise to more than 1trn cubic feet. And that’s even before we consider Empyrean’s other interests outside of California, including in China and Indonesia.

An alternative play

Shares in Kurdistan-focused oil producer Genel Energy (LSE: GENL) haven’t done nearly as well. They have recovered substantially since reaching a new agreement with the Kurdistan Regional Government (KRG) over the company’s historic receivables relating to unpaid entitlements for past oil exports. But political uncertainties in the region continue to overhang the market.

Recent regular payments from the KRG have given Genel’s cash flow a big boost in recent quarters, but the sustainability of such payments in the future remains in question as tensions between Erbil and Baghdad continue to be high after the Kurdistan independence referendum.

Genel is also struggling to prove its worth to shareholders after it sharply downgraded its reserve estimates in the Taq Taq field, one of its two Kurdish mainstays. Still, I reckon investors should not overlook its potentially game-changing gas prospects in the Kurdish region. There’s almost 1,500 MMboe of 2C reserves in its Miran and Bina Bawi gas fields and it is currently in talks with farm-out partners to help fund its development.

Valuations are undemanding too, with the shares trading at 7.3 times expected underlying earnings in 2018.

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Elsewhere, the company has reached an agreement to export gas from its Tuna field in Indonesia to Vietnam and continues to engage with Mexico’s Pemex with regard to its discovery at the Zama prospect, with a “likely 4 well appraisal programme” due to start late next year. A Head of Terms agreement has also been signed for an FPSO lease extension on the firm’s Huntington oil field in the North Sea, extending the life of the latter.

Having said this, the most important details of today’s statement arguably related to the progress Premier is making at getting its finances in order. 

Positively, operating costs of c$16/bbl remained in line with previous guidance and below budget. Premier is also continuing to slash its development, exploration and abandonment expenditure. At between $300m-£310m, this is now expected to be as much as $25m lower than that previously estimated in July, making today the third time in 2017 that the company has revised this figure. Aside from this, the $200m disposal of the Wytch Farm field is “ongoing” with more news expected to be issued to shareholders “imminently“.

While remaining a high-risk investment, things appear to be slowly turning around at Premier. Whether prospective investors will regard today’s price as a suitable entry point really depends on how much faith they have in Chief Executive Tony Durrant and his belief that recent progress and a more favourable oil price will help to “accelerate debt reduction” over the next year. With $2.8bn of debt still on its balance sheet, that can’t come soon enough.

Volatility ahead?

A few weeks ago, holders of £78m cap exploration firm Empyrean Energy (LSE: EME) could be forgiven for feeling rather smug. The shares soared to almost 28p in September on the back of encouraging updates relating to the company’s Dempsey 1-15 gas well in the Sacramento Basin in California. Given that the very same shares changed hands for just 1p each 12 months earlier, that is a quite incredible return for those who got in early.

Since then, they have come off the boil somewhat. In addition to a likely spate of profit-taking, the price fell heavily on Tuesday following a disappointing statement from the company.

Despite announcing that flow-testing and completion of the well was “continuing as planned“, it was revealed that the natural gas found at the lowest zone was flowing at “sub-commercial” rates based on current market prices. Seeking to reassure its owners, Empyrean stated that the analysis of the zone and its potential remained “at an early stage” with CEO Tom Kelly adding that the company remained “optimistic” on the well’s potential based on the “significant gas shows” found while drilling. 

With the company now preparing to target the next shallower zone, I can see further volatility ahead. As such, I remain wary of the shares at the current time.

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Looking ahead, it would not be surprising for this trend to continue. Interest in the oil and gas industry continues to increase, and this could help to push the company’s share price higher over the medium term.

Improving sentiment

With the oil price moving to its highest level since 2015, investor sentiment towards a range of oil and gas companies has improved in recent months. While in Empyrean Energy’s case its recent news has largely been responsible for its stunning share price gains, a rising oil price could mean that its valuation rises to an even higher level in future.

Certainly, there is likely to be higher volatility in the oil price. There is great uncertainty about whether OPEC will continue with its supply cut, as well as how non-OPEC producers will react to a rising oil price. However, leading producers such as Saudi Arabia and Russia seem to be keen on supporting the oil price in future. As well as this, increasing demand levels, which have reduced the supply surplus of recent years, are thus far showing little sign of slowing down. This could catalyse the oil price in future.

Furthermore, Empyrean seems to have a relatively sound financial position. It raised $1m in August of this year. With it having a net cash position, it appears to have the financial strength to deliver on its strategy. This could make investors more positive towards the stock, since a net cash position indicates that its risk profile may be lower than for a number of other oil and gas exploration companies.

Diversification

While a rising oil price may continue, it may also be prudent for investors to diversify into other assets. The gold price has also enjoyed a positive 2017, and gold miners such as Avesoro (LSE: ASO) have prospered this year. In fact, the company’s share price has gained 37% in the year-to-date, and quarterly results released on Monday showed it is making good progress with its strategy.

For example, gold production in the quarter to 30 September increased by 26% versus the prior quarter. This helped to boost revenue by 32% on the year, while adjusted EBITDA (earnings before interest, tax, depreciation and amortisation) increased fivefold versus the second quarter level. This figure was boosted by an EBITDA margin of 21%, which was up predominantly due to reduced operating cash costs per ounce and an increase in the realised gold price.

Looking ahead, both Avesoro and Empyrean Energy could offer further share price growth. The two companies seem to have highly enticing risk/reward ratios at the present time.

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I don’t know how many people invest like that, but those who bought shares in Empyrean Energy (LSE: EME) could be forgiven for celebrating. They’re now sitting on a 12-bagger over just 12 months, with their shares at 21p — they actually peaked at 31p, but I expect few will complain about that.

The success is down to a series of exciting results in September, starting with an analysis of seismic data obtained for its offshore China Block 29/11. It yielded results that beat expectations for the company’s Jade, Topaz and Pearl prospects — preliminary mean unrisked resource potentials of around 103m barrels (mmbbls) at Jade, 365 mmbls at Topaz, and 123 mmbls at Pearl were estimated.

California, Indonesia

That was quickly followed by news that the Dempsey 1-15 well in California had encountered “a potential sandstone reservoir with high gas shows“.

Since then, we’ve had regular updates on Dempsey which are making it look better and better. This includes two further zones of high gas shows apparent once the drilling reached its target depth, wireline logs confirmed “numerous zones for production testing” and the presence of gas saturated sands, and the stage of preparing to complete and flow-test the well has been reached.

Empyrean also has a 10% interest in the Duying prospect offshore Indonesia, where the Mako South-1 well has uncovered “better than expected reservoir quality, gas saturation, porosity, permeability and flow rates” with a stabilised daily flow of 10.9m cubic feet of gas.

Time to buy?

Despite this latest update coming as recently as 1 November, the share price has actually ticked down slightly in the past couple of weeks, so is there anything to worry about?

Well, some of it will almost certainly be due to profit taking after September’s big spike — and who wouldn’t blame investors for selling at around 25-30p when they might have paid less than 2p per share a year previously.

But there’s clearly one caution that hangs over just about all small oil and gas explorers at a similar stage, and that’s profit… Empyrean isn’t making any.

Where’s the cash?

In fact, the last couple of years have seen losses widening, with a pre-tax loss of $13m recorded for the year to March 2017. There are no forecasts available right now, though the recent news of oil discoveries would have rendered them moot anyway, so how does liquidity look?

The company has been in a restructuring phase to return value to investors. After the disposal of its interest in the Sugarloaf asset in Texas, shareholders received a payment of 7.9p per share in November 2016.

August’s full-year figures showed cash and equivalents of $6.1m on the books at 31 March, with no debt. And subsequent to year-end, Empyrean also raised £1m (before costs) from a placing in August.

Empyrean looks like it’s on a firm financial footing to me — and with those assets, I’m optimistic.

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Ready for take-off

Empyrean’s shares first took off during June when the company announced solid progress developing a trio of assets spread over China, Indonesia and the US. Since then, the good news has continued. In Indonesia, testing at the Mako South-1 well  produced high-quality gas flows of 10.9m cubic feet of gas per day, a performance management described as “exceptional.” A few weeks later, the company reported that its partner in the US, Sacgasco Ltd had discovered “significant gas shows” at the Dempsey 1-15 well in the Sacramento Basin onshore California. While testing was being carried out at these two assets, Empyrean has been busy in China compiling seismic data with its own testing and through acquisitions. 

Today the company announced yet more good news from its California asset. The well, which has already produced positive results, is still being drilled and has reached a depth of 2,760 metres. Drilling will continue into the under-explored deeper targeted reservoirs in the 440 metres of the remaining section to be drilled. Initial indications are promising and management has high expectations.

In today’s release, CEO Tom Kelly declared: “After slow and steady drilling through some very hard rocks over the last few days, we are very encouraged to see the best looking gas shows from another sand in what we now believe to be part of the primary target zone in this well. We have not drilled out of this latest gas bearing sand yet, so it will be interesting to see how thick this zone is.“

Time to buy? 

So it looks as if this well could be better than expected, which is good news for investors and could ignite further share price gains. As well as these positive results from California, Empyrean has today released the findings from its surveys in China. Initial findings “greatly” exceed the firm’s early expectations. The three prospects considered by the company contain an estimated 591m barrels of oil in total, according to the preliminary survey. Further data processing is required to give a more reliable estimate. 

Considering all of the above, it’s clear Empyrean has a highly valuable portfolio, but could the company be a good investment? Well, as of yet it is not producing any income, and the company is burning through cash. 

At the beginning of August, the company raised £1m by the placing of 12m shares at 8p to finance development operations, following two fundraisings during June for £1.5m and a £1.2m cash raise at the beginning of May. Considering the recent rise in the firm’s share price, I would not rule out an additional capital raise in the near term to raise cash while the going is good. 

These fundraisings show Empyrean needs more cash to keep the lights on, and while the company’s asset portfolio looks attractive, I’d treat the shares with caution until it starts producing revenue. 

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Despite this, a turnaround is achievable. In fact, a small-cap reported on Wednesday which has generated a 270% return in 2017 following a 90% fall in its share price over a two-year period. This shows that even for the biggest-falling shares, a recovery is possible.

A changing business

One catalyst to push the Centrica share price higher is its new strategy. It is seeking to move away to a large extent from its oil and gas activities. Instead, it will focus on energy services. This is likely to be a more stable industry in which to operate, and could mean that the business returns to being a popular income stock. In other words, with dividend investors highly valuing the reliability and resilience of their income streams, a more robust business model could justify a higher rating for the stock in the long run.

As part of the company’s new strategy, it is seeking to reduce costs. In the current year, it has already achieved half of its targeted £500m in cost reductions. More cuts are planned in future as it seeks to reduce net debt levels to between £2.5bn and £3bn by the end of the year. Lower debt should equate to lower balance sheet risk, which may create more certainty for investors and generate a higher rating for the company’s stock price.

News flow

Of course, Centrica’s progress has been hampered somewhat by negative news flow in recent months. Increasing support for the Labour Party has meant the threat of nationalisation is now higher. Similarly, increasing electricity prices for consumers has also arguably made political risk higher for the business. Both of these issues could hold the company’s share price back, although the reality is that rising profitability, lower costs and lower debt levels could offset the company’s risks and allow it to deliver improved share price performance.

In that sense, it has the potential to follow fellow oil and gas operator Empyrean Energy (LSE: EME). As mentioned, it has risen significantly in 2017 following a challenging period. It reported on Wednesday that the 3D survey acquisition phase in Block 29/11 offshore China has now been completed. This means that its key prospects of Jade and Topaz now have high quality modern 3D seismic coverage. This is expected to provide potential resource size estimations for the two prospects within the coming weeks.

Clearly, Empyrean Energy’s future share price performance is likely to be volatile and it is hugely dependent upon news flow. It remains a relatively high risk, smaller company but has shown that it is making encouraging progress with its strategy. Therefore, further gains could be possible as it continues its recovery.

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Going for gold

The popularity of gold could increase over the coming months. That’s because the prospects for a US interest rate rise are fading, since there are major fears surrounding the prospects for the global economy. With a lack of interest rate rises, gold should deliver impressive price performance on a relative basis since it has historically moved inversely to interest rates. And with investor uncertainty being high, gold could represent a relatively safe place to invest.

With Hochschild trading on a forward price to earnings (P/E) ratio of over 80, it appears as though its expected return to profitability in 2016 is already adequately priced in. Certainly, its shares could move higher, but with other gold and silver miners offering superior value for money, there appear to be better options elsewhere.

Worse to come

Also rising today are shares in Enquest (LSE: ENQ), with the oil and gas company reporting an increase in its valuation of over 7%. Despite this, Enquest is still down by 32% since the turn of the year, as a falling oil price has weighed heavily on investor sentiment towards the company. Clearly, its future prospects are closely linked to the price of oil and with a glut of supply showing little sign of being reduced in the short run there is a realistic chance that things could get worse before they get better for the company’s investors.

Although Enquest has been able to reduce its cost per barrel in recent months, it has also lost out on the expiry of pricing hedges and this is likely to put its bottom line under a degree of pressure. With the company’s balance sheet being highly leveraged, it may be prudent to look elsewhere for companies that have higher profitability and lower balance sheet risk.

Further to go

Meanwhile, shares in Empyrean Energy (LSE: EME) are up by 8% today, also on the back of rising investor sentiment for the wider resources sector. This takes its gain for 2016 to 27% and much of this is due to the company selling off its interest in the Sugarloaf AMI project for $61.5m in cash, plus the potential for a further $10m based on future oil prices.

This disposal seems to make sense due to the cost involved in developing the asset. Although Empyrean’s share price will be highly dependent upon the oil price moving forward, it remains highly profitable and has been so in each of the last four years. With pre-tax profit due to be £4.5m in the current financial year, Empyrean may be of interest for less risk averse investors, with its shares having the potential to continue their recent gains.

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This is clearly impressive news since Blinkx has struggled to adapt to an increasingly mobile-focused industry in recent years. However, its acquisition strategy coupled with the rebranding of its offering appears to be moving it in the right direction. Importantly, the market now seems to have shifted its stance on Blinkx, with its cost-cutting measures and improved sales from core products having the potential to turn the business around.

Despite this, Blinkx remains a company with a challenging near-term outlook. For example, it’s expected to post a pre-tax loss of £15m this year, followed by a pre-tax loss of £8m next year. And while its third quarter result was impressive, it may be prudent to await evidence of improved performance over a longer period of time before buying shares in the business.

Tough road ahead

Similarly, today’s update from Petroceltic (LSE: PCI) also indicates that now may not be an opportune moment to buy a slice of the oil and gas exploration and production company. Certainly, it’s positive in the sense that the company has received a further waiver of repayments under its Senior Bank Facility extending to 29 January. Furthermore, the company’s lenders have also indicated their willingness to consider further waivers that may be required to continue the strategic review process that was announced on 23 December.

However, it indicates just how challenging the company’s outlook is and with the price of oil seeming likely to remain under a degree of pressure moving forward, Petroceltic’s near-term prospects appear to be rather downbeat. Further losses are forecast for the current year and with a number of other oil-focused stocks remaining profitable, there appear to be better risk/reward opportunities elsewhere.

Sweet Sugarloaf deal

Meanwhile, shares in onshore oil and gas producer Empyrean Energy (LSE: EME) have soared by as much as 68% today after it announced the proposed disposal of its right, title and interest in the Sugarloaf AMI project for $61.5m in cash. Empyrean may also receive a further $10m based on future oil prices and, with irrevocable undertakings from over 23% of its shareholders having been received, the prospects for the deal going through appear to be encouraging.

Proceeds from the sale would be used to pay US tax liabilities, repay the Macquarie facility and to further the company’s strategic goals. Additionally, Empyrean has stated that it will consider the most efficient manner in which to return surplus funds to its investors.

Empyrean’s CEO stated that in the current low oil price environment it would incur either an unacceptable cost or unacceptable dilution when compared with the transaction in order to further develop the Sugarloaf asset. So the sale appears to be a prudent move for the business. And with Empyrean remaining a profitable business that still trades on a price-to-earnings (P/E) ratio of  13.8, for less risk-averse investors it could prove to be of interest.

The post Are Petroceltic International PLC, Blinkx Plc And Empyrean Energy Plc 3 Top Turnaround Stocks? appeared first on The Motley Fool UK.

As such, a company or sector can be viewed as very high risk but, so long as the potential rewards remain relatively appealing, investing in it could prove to be a sound move. Therefore, the resources sector could turn out to be a very profitable space in which to invest – especially since it appears to be very unpopular among most investors at the present time.

Evidence of its unpopularity can be seen in the share price performance of oil major Tullow Oil (LSE: TLW). Its shares have slumped by 57% in the last year, although the company’s move into a loss-making position in the most recent financial year is a key reason for this. Looking ahead, Tullow Oil is expected to return to profitability in the current year and, with additional production due to come onstream part way through next year, the company’s earnings are forecast to rise by 422% in 2016.

Certainly, there is a risk that Tullow Oil fails to meet its current forecasts or that they are downgraded between now and the end of 2016. However, with it trading on a price to earnings growth (PEG) ratio of just 0.1, there appears to be a sufficiently wide margin of safety on offer which makes the risk/reward opportunity seem favourable.

Similarly, Premier Oil (LSE: PMO) has also endured a disappointing period, with it too slipping into having a red bottom line. This was mainly due to write downs in the value of its asset base and, realistically, a persistently low oil price may cause further pain in this space. And, with the company due to make a further loss in the current year, its shares could come under additional pressure even after having fallen by 70% in the last year.

However, Premier Oil is forecast to return to profitability next year, with its pretax profit due to hit £37m. Although this would be just over 10% of its 2012 level, it would represent a move in the right direction and it has the potential to cause investor sentiment in the stock to improve. And, like Tullow Oil, Premier Oil’s valuation indicates that its risk/reward ratio is relatively favourable, with the company having a price to book value (P/B) ratio of only 0.3.

Also falling heavily in the last year is US-focused Empyrean Energy (LSE: EME), with the company’s shares trading 64% lower than they were at the start of the year. That’s despite the company being a profitable entity in financial year 2015 and being forecast to remain so in the current year, too.

Furthermore, Empyrean reported a significant rise in reserves at its main Sugarloaf asset in Texas (in which it has a 3% working interest), with proven reserves increasing by 13.8% and probable reserves increasing by 9.8%. Despite this, investor sentiment has remained weak towards the stock and Empyrean now trades on a price to earnings (P/E) ratio of only 9.9, which indicates that there could be upside potential.

Certainly, Empyrean could be viewed as a risky investment due to its size and the volatility which is likely to remain a feature of the oil sector in the medium term. However, for less risk averse investors it could be worth a closer look.

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