Beyond the usual metrics, I also like to dig into the balance sheet. Debt levels, cash flows and margins all give a clearer view of how sustainable a company’s growth really is.

With that in mind, two FTSE shares I like the look of this month are Petershill Partners (LSE: PHLL) and EnQuest (LSE: ENQ). Both look undervalued relative to their earnings power, although each comes with its own set of risks.

Here, I explain why I think both stocks are worth keeping on the radar in September.

Petershill Partners

Petershill Partners is an investment firm that provides capital and strategic support to alternative asset managers. It is not a household name, yet its numbers caught my attention.

The share price is up only 7.5% over the past year, but earnings have grown 162%. That gives Petershill an eye-catching earnings yield of 25%. I could only find one other UK-listed investment trust with a higher yield. Add to that an extremely low P/E ratio of 4 and the combination looks tempting.

The market doesn’t appear to have priced in this growth just yet, so there could be potential for the share price to follow. That said, it would be unrealistic to expect earnings to continue expanding at that pace. Analysts have pencilled in a forward P/E ratio of 14, but this may also be factoring in some share price growth rather than a collapse in profitability.

One risk is that earnings from investment firms can be lumpy, especially when dependent on performance fees. Market downturns could also reduce valuations of the underlying assets Petershill manages.

What gives me confidence however, is the company’s free cash flow (FCF) margin of almost 60%. While that’s not unusual for an investment firm, it is high for one trading at such a low valuation. 

If nothing else, Petershill has ample cash to plough into fresh opportunities, so I think it’s a good stock for investors to think about in September.

EnQuest

EnQuest is a small-cap oil and gas producer operating in the North Sea and Malaysia. It became profitable again in 2024, posting earnings of £73.39m and achieving a net margin of 7.88%.

The balance sheet also looks healthier. Over the past four years, EnQuest has cut its debt almost in half, from £1.5bn to £798m. Profitability is decent, with return on equity (ROE) standing at 18.5%. Most striking is the forward P/E ratio of just 2.8, which suggests high expectations of continued earnings growth.

Expansion plans are also noteworthy. In August, EnQuest signed production-sharing contracts with the Indonesian government to enter the Gaea and Gaea II exploration blocks in Papua Barat. This followed similar agreements in July to develop the Merpati Field offshore Brunei.

Oil and gas companies are exposed to notable risks and EnQuest is no exception. It faces volatile commodity prices, regulatory pressures and geopolitical uncertainty in unstable regions.

Still, with debt trending lower and fresh projects under way, I think it is another promising FTSE share to consider this month.

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EnQuest share price soaring

EnQuest is an oil and gas production and development company. Its core operations are in the UK North Sea and Malaysia. The business was formed in 2010 as a result of assets from Petrofac and Lundin Petroleum merging.

As I write, EnQuest shares are trading for 32p. At this time last year, the shares were trading for 16p, which is a 100% increase over a 12-month period. The shares have been on an upward trajectory increasing nearly 70% in the year to date, from 19p to current levels.

I believe the EnQuest share price has been boosted by increased demand for oil as well as a positive full-year report.

The risks I took into account

EnQuest shares are trading close to all-time highs. This is a risk I must consider for any stock I buy for my holdings but this is heightened for small-cap stocks as they are seen as riskier investments generally. This is usually due to their smaller operations, lack of a track record and history, and, sometimes, a less cash-rich balance sheet. If EnQuest were to report any negative trading information or be hit with any operational issues, the EnQuest share price could fall sharply.

Next, EnQuest’s balance sheet shows a lot of debt on its books, $1,222m to be specific. Now debt can often be a red flag. However, I take into account other things, including performance and market conditions and look at why EnQuest has debt on its balance sheet. I can see the first two factors are favourable (more on these later). As for the reason, EnQuest is on a mission to grow. One of the ways it does this is by acquiring new sites, which can accrue a debt position.

Why I purchased EnQuest shares

Firstly, market conditions for oil companies are looking favourable. According to Statista, demand for oil is only increasing for the next few years and next year, demand should surpass pre-pandemic levels. This is good news for EnQuest as it should help boost performance and shareholder returns.

Next, despite the EnQuest share price trading close to all-time highs, the shares still look like good value for money to me on a price-to-earnings ratio of just two.

What about EnQuest’s performance? Well, its most recent annual financial report was released in March for the year ending 31 December 2021. Revenue increased by close to 50% and a loss in 2020 turned into a $352.4m profit for 2021. Cash flow also increased by close to 90%. I do understand that past performance is not a guarantee of the future, however.

Finally, EnQuest has one eye on the future for growth which appealed to me. It recently bought two new oil fields close to the North Sea.

My investing mantra has always been to buy and hold for the long term. I am always on the look out for small-cap gems to diversify my holdings. I do wish I purchased the shares before the EnQuest share price has risen so sharply in recent months, however.

The post The EnQuest share price is flying! Here is why I added the shares to my holdings appeared first on The Motley Fool UK.

EnQuest shares rally

EnQuest is an oil and gas production and development business with operations in the UK North Sea and Malaysia. It was formed in 2010 when certain assets from Petrofac and Lundin Petroleum merged to create EnQuest. It added its Malaysian assets four years later.

A penny stock is a stock that trades for less than £1. So what’s been happening with the EnQuest share price? Well, as I write, the shares are trading for 33p. At this time last year, the shares were trading for 16p, which is a 106% increase over a 12-month period. The shares were trading for 18p at the beginning of the year, meaning they are up over 80% based on current levels.

I believe EnQuest shares have rallied because demand for oil has increased, supported by macroeconomic factors as well as recent geopolitical events. In addition to this, EnQuest has reported positive performance recently, but more on that later.

A penny stock with risks

One of my biggest issues with EnQuest currently is its high levels of debt. In its latest set of accounts, EnQuest confirmed debt stood at $1,222m. This is a concern for me as it could affect any potential returns I hope to make as a shareholder. After all, paying down and servicing debt must also be a priority.

The other issue I have with EnQuest is that the shares are currently trading close to all-time highs. The last time the penny stock reached current levels was in 2018. If the business were to encounter any operational or financial issues or headwinds, the share price could fall significantly.

Recent developments & verdict

EnQuest released its annual financial report on 24 March for the period ending 31 December 2021. I thought the report was generally positive. EnQuest reported revenue increased by 46.5% to $1,265.8m compared to 2020 levels. More importantly for me, a $566m loss in 2020 turned into a $352.4m profit for 2021. Free cash flow also increased by close to 90% to boost the balance sheet.

Looking ahead, EnQuest recently purchased two new oil fields in Aberdeen and Shetland. I like when a business has an eye the future and is looking to grow organically, especially a penny stock.

The demand for oil post-pandemic has continued on an upward trajectory. In recent months, macroeconomic and geopolitical factors have pushed oil prices to record highs. Despite the general volatility linked to oil and commodities, I am buoyed by the current outlook ahead and burgeoning demand for oil. I believe EnQuest could benefit and this could boost any returns I hope to make.

I believe EnQuest is a good penny stock option for my holdings currently. The shares look dirt-cheap on a price-to-earnings ratio of just two! I’d add the shares to my holdings and believe they will provide me with stable returns in the long term.

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Penny stock #1: EnQuest

As an oil and gas producer, EnQuest (LSE:ENQ) operates primarily in the North Sea and Malaysia. Currently trading at 36.05p, it is in prime penny stock territory.

Looking at recent results, the company managed to turn a $565m pre-tax loss into a $352m pre-tax profit between 2020 and 2021.

In addition, the firm’s free cash flow over the same period grew from $210m to around $400m. 

Despite this, production fell from 59,000 barrels of oil per day (bopd) to 44,000 bopd. This is something I would like to see improve in the near future as the oil price continues to be strong.

However, the firm is making efforts to increase output, having recently purchased the Golden Eagle and Bentley fields off the coast of Aberdeen and Shetland, respectively. 

Penny stock #2: dotDigital

A digital marketing and software services business, dotDigital (LSE:DOTD) has a strong financial record. It currently trades at 86.6p.  

For the year ended June, between 2017 and 2021, earnings-per-share (EPS) increased from 2.47p to 4.12p. By my calculation, this means the company has a compound annual EPS growth rate of around 10.88%. This is strong and consistent.

What’s more, it recently signed a two-year deal with software security giant Adobe, that will improve the visibility of dotDigital’s products around the world.

For the six months to 31 December 2021, organic growth in revenue increased by 10%. Its leadership, however, lowered growth expectations for 2022 as it forecast a decline in demand after the pandemic. 

Penny stock #3: Eurasia Mining

My final pick is Eurasia Mining (LSE:EUA), a firm specialising in platinum group metals (PGMs), gold, cobalt, nickel and copper. At the present time, it operates solely in Russia. It currently trades at 9.5p. 

It is currently benefiting from higher metal prices as the world recovers from the pandemic and deals with the war in Ukraine.

In addition, there has been significant interest in its metal assets. In February, the business announced that an unnamed buyer was in advanced stages of a deal to purchase “substantially all” of Eurasia Mining’s assets.

The firm has also so far avoided Western sanctions on Russian companies and individuals. Given the uncertainty of the situation, however, I would always factor this big potential risk into my investment decision.

Overall, these are three strong penny stocks. Although they constitute greater investment risk, I think their track records justify adding them to my long-term portfolio. I will be buying shares in all three during May.

The post 3 hot penny stocks I’m buying in May! appeared first on The Motley Fool UK.

Not only will the enterprise benefit from higher prices, but I think investors will also benefit as the company’s profits grow, enabling the group to stabilise its balance sheet. 

Penny stock qualities

Most oil and gas companies hedge the price of their production. By using this approach, these enterprises can lock in future cash flows at predefined prices. This means they have some protection from a substantial fall in oil prices. Unfortunately, it also limits gains from rising prices. 

According to EnQuest’s latest trading update, the company has locked in 8.6 mmbbls of oil production this year with an average floor price of c.$63/bbl and an average ceiling price of c.$78/bbl.

If the firm is able to meet the upper end of its output target of 51,000/bbl a day in 2022 this means it has hedged roughly 50% of its production at these prices. With the current price of oil averaging more than $100/bbl, EnQuest could be on track for windfall profits this year. 

Even if oil prices fall substantially, the company’s decision to lock in a $63/bbl floor should help minimise the risk. 

Rising oil prices are one of the reasons why this group is my favourite oil penny stock to buy right now. Another factor is the corporation’s debt. Investors have been avoiding EnQuest for years due to its high level of debt. At the end of December, the company’s net debts amounted to $1.2bn (£900m) compared to its market capitalisation of £422m. 

Management was already projecting that debt would fall this year, thanks to lower costs and higher oil prices. With oil prices surging above the company’s expected range, it looks as if the business will have even more flexibility to reduce borrowings.

A stock to buy today

Still, the corporation will have to overcome some challenges. Rising maintenance and wage costs could increase operating costs. There are also growing calls for a windfall tax on energy producers. Such a tax could have a significant impact on the company’s projections. It would undoubtedly force me to revisit my expectations for the business over the next few years. 

Even after taking these risks into account, EnQuest remains my top oil penny stock to buy right now, and I would be happy to add it to my portfolio.

In the base-case scenario, I think the company will be able to start reducing debt over the coming year while investing in its operations.

In the best-case scenario, if oil prices remain high, I think the business will be able to take a significant chunk out of its borrowings. In this situation, the market’s opinion of the company could change significantly as it repositions itself on a more sustainable footing. 

The post My top oil penny stock to buy right now appeared first on The Motley Fool UK.

Oil prices on the up

EnQuest is an offshore oil production firm that operates in the UK North Sea, and Malaysia. Formed in 2010 through the combination of assets of Petrofac and Lundin Petroleum, it added its Malaysian assets in 2014.

Penny stocks are those that trade for less than £1. As I write, EnQuest shares are trading for 20p. At this time last year, the shares were trading for 12p, which is a 66% return over a 12-month period.

Oil prices are currently at seven-year highs. The pandemic in 2020 caused oil prices to plummet as demand fell and stock markets crashed. Prices have continued to climb as the world economy has attempted to kick start and demand has increased.

Penny stocks have risks

EnQuest is a small fish in a large pond with many players involved. This means it can often be out-muscled or outmanoeuvred in terms of production and be beaten to the best drilling assets. This can lead to performance being affected as well as any shareholder returns.

The oil market at the moment looks quite volatile. Supply chain and production issues have led to fears that demand is currently outstripping supply. Smaller firms, such as EnQuest, are those that suffer first due to their lack of cash, size, and operational ability.

Recent performance and outlook

EnQuest’s 2021 operations update and outlook released today was mixed, in my opinion. The firm’s average production of oil barrels stood at just over 44,000. This is significantly lower than 66,000 in 2020. Net cash came in at a handy $395m and net debt reduced too, both of which are positive. 

In EnQuest’s last update, it mentioned production issues at two of its prominent sites, Kraken and Magnus. I believe these disruptions have contributed towards the overall fall of production.

Despite issues, EnQuest has taken steps to mitigate the production issues and its sites mentioned and recently acquired a new asset, Golden Eagle, to help boost performance and growth. This acquisition cost the company $325m. Any penny stock that is able to complete such large acquisitions warrants my attention.

The outlook ahead is bright despite recent issues, in my opinion. Rising oil prices will boost the bottom line and its new asset could provide a timely boost after a difficult 2021.

EnQuest shares are dirt cheap, but there is a lot of uncertainty involved and recent market issues, including supply chain constraints, coupled with EnQuest’s small slice of the market put me off investing my hard-earned cash. I believe there are better penny stocks out there that could offer me a superior return on my investment. I would not add the shares to my holdings at current levels, but I will keep an eye on developments.

The post This penny stock just released a FY update! Should I buy shares? appeared first on The Motley Fool UK.

However, due to the risk of investing in these smaller businesses, I am only willing to allocate a slim percentage of my portfolio to penny stocks. As such, only a few make it through the strict criteria I use to analyse opportunities.

Here are two penny stocks I would buy right now for my portfolio. 

Penny stocks to buy for growth 

The first is the commercial property company Hammerson (LSE: HMSO). This business has come close to collapse in recent years, but it has managed to keep the lights on with emergency fundraisings and asset sales. Now, as commercial property prices start to rise from pandemic levels, it looks as if the outlook for the enterprise is improving.

In a trading update issue towards the end of January, the organisation announced that adjusted earnings for its 2021 financial year would range £75m-£80m, ahead of the £60m it previously expected. It collected around 88% of rents due for the period. 

The firm has also gathered 74% of rent due in the first quarter of its 2022 financial year. 

Clearly, the business is not out of the woods yet. It is still struggling to collect rents from tenants and will likely continue to do so as the brick-and-mortar retail sector remains under pressure. It is unclear how long this challenge will last for the business and is probably the most considerable risk hanging over the stock right now. 

Still, with the outlook for the enterprise improving, I would be happy to add the shares to my portfolio of penny stocks. On top of its improving outlook, the shares also look dirt-cheap. They are trading at a price-to-book (P/B) value of 0.6. This suggests to me the market could be overlooking the potential here. 

Profit potential 

Another opportunity where it looks to me as if the market is overlooking the potential of the business is at oil producer EnQuest (LSE: ENQ). 

Even though the price of Brent Crude recently hit a multi-year high of $90 per barrel, the stock is still trading at roughly the same level it was before the pandemic began. And it is not as if the business is not benefiting from the higher oil price. Analysts believe the firm will earn $156m this year and $312m in 2022. Based on these numbers, the stock is trading at a 2022 forward price-to-earnings (P/E) ratio of 1.5. 

These numbers assume the price of oil remains high. If it does not, the company may miss these earnings expectations. This is probably the most considerable risk to my investment thesis at this point.

Nevertheless, even after factoring this risk into consideration, I think EnQuest is one of the cheapest penny stocks on the market at the moment. In my opinion, even a modest improvement in investor sentiment could lead to a significant increase in the company’s share price.

Therefore, I would be happy to add the stock to my portfolio today. 

The post My top 2 penny stocks to buy right now appeared first on The Motley Fool UK.

Penny stocks with potential

With oil prices currently trading at a seven-year high, I think the outlooks for Tullow Oil (LSE: TLW) and its peer, Enquest (LSE: ENQ), are brighter than they have been for years. However, it does not look as if the market holds the same opinion. I think that presents an opportunity. 

According to current City projections, Enquest could report net earnings of $156m for 2021, rising to $312m for 2022. Based on these numbers, shares in the business are currently selling at a forward price-to-earnings multiple of 1.6. 

Tullow’s valuation is just as attractive. With analysts projecting $260m of net profit for fiscal 2022, the stock is currently selling at a forward P/E of just 5. To put these numbers into perspective, shares in peer BP are currently changing hands at a P/E of 7. 

Of course, these two penny stocks are not entirely comparable to the oil giant. They have far more debt and less diversification. This means they are more susceptible to sudden changes in the oil price. If it suddenly slumps 10% or 20%, their outlooks could change overnight. This is the most considerable risk I will have to keep an eye on going forward. 

Still, with profits surging, both companies can make a material reduction in their liabilities over the next 12 months.

Unfortunately, they will not be able to capitalise on the current oil price boom immediately.

Undervalued stocks to buy

Both Tullow and Enquest use hedging programmes to protect their bottom lines from oil price volatility. This can reduce losses when prices fall, but it can also cap gains. 

Nevertheless, Tullow was forecasting $100m of free cash flow for 2021 in November, even with its hedging programme. Enquest has said that its debt position will remain unchanged during 2021 after acquiring the Golden Eagle area asset, which added 10.5k barrels of oil to the group’s overall production. 

So some headwinds will hold these companies back in the short term. However, I project that as 2022 progresses, these businesses will revise their growth and cash generation plans. As they do and begin to stabilise their balance sheets, I think the market will return to these penny stocks.

This change in sentiment could lead to a re-rating of the shares. Although this is far from guaranteed, I do not think it is unreasonable to suggest that both stocks could command a similar valuation to BP as their outlooks improve. 

Considering this potential, I would be happy to add both penny stocks to my portfolio today as a way to invest in rising hydrocarbon prices over the next year. 

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The share price versus operational performance

I’ve explored this business before. But as a quick reminder, EnQuest is an offshore oil production company operating around the UK and Malaysia. 2021 has been a particularly challenging year, with several of its projects encountering production disruptions. This is what caused the EnQuest share price to take a bit of a tumble back in September.

Since then, solutions have been devised and are slowly being executed. Today management provided an update on how things are going. And since the stock is once again suffering through double-digit declines, I think it’s fair to say, investors aren’t exactly pleased.

The disruptions experienced at its Magnus and Kraken oil fields appear to have been more extensive than initially anticipated. Consequently, average net production has fallen to 44,306 barrels per day. And management expects this figure will come in at around 45,000 by the end of the year. That’s below the previously reduced guidance of 46,000-52,000 barrels. It’s worth noting that in 2020, production volumes were sitting at just over 66,000 barrels. So seeing the Enquest share price tumble on this news is hardly surprising to me.

Looking on the bright side

As frustrating as the drop in oil production is, there are some optimistic takes from this update. Firstly, oil prices are back on the rise. Over the last 10 months, the average price per barrel stood at $66. That’s up 63% from $40.60 a year ago. And it will undoubtedly help offset some of the revenue loss from reduced production and boost profit margins.

At the same time, EnQuest also acquired a new oil field called the Golden Eagle area for a total consideration of $325m. The company estimates that this new drilling site will increase annual net production by just over 10,500 barrels, with at least two product deliveries before the end of the year. Assuming Golden Eagle doesn’t suffer the same disruptive fate as its other projects, performance throughout 2022 could improve significantly.

The bottom line

The operational interruptions in 2021 have been frustrating. But they’re ultimately short-term issues with unfortunate timing. Management has already begun taking the necessary steps to return production back to full capacity. And with the addition of Golden Eagle in the portfolio, this recovery process may have just been accelerated.

Having said that, my overall opinion of this business remains unchanged. I still believe there are better growth opportunities to be found elsewhere. Therefore, even if EnQuest’s share price drop is a buying opportunity, it’s not one I intend to act on.

The post Why did the EnQuest share price crash today? appeared first on The Motley Fool UK.

So were these latest results as bad as investors think? And moving forward, can the stock continue to provide similar long-term performance? Let’s take a closer look.

The EnQuest share price drops on earnings

Looking at the latest set of numbers, investors may be correct in being concerned. Daily oil production volumes fell to 46,187 barrels, following several disruptions at its upstream operations. That’s a 30% decline compared to the 66,055 barrels produced in 2020. So what happened?

Its Magnus project suffered from an unplanned third-party outage and power failures. Meanwhile, production at its Kraken oil field was also adversely impacted due to necessary maintenance and repairs. To make matters worse, production from its Malaysian operations also dropped by 42.1% due to a severe incident. A riser at its Seligi Alpha platform had detached, resulting in a gas leak which in turn triggered a fire. The platform was automatically shut down by safety procedures, and fortunately, the fire was extinguished with no personnel being injured. Repairs didn’t take too long. But the platform remains at limited production capacity.

Revenue still managed to grow by around 9.7%, thanks to rising oil prices. But this wasn’t sufficient to push the group back into the black, with losses for the first six months of 2021 coming in at $56.4m. This is a substantial improvement on the $472.4m loss incurred in 2020. But it seems investors were simply expecting more. As a result, the EnQuest share price took a hit.

The road ahead

Combined, these disruptions have led to management estimating full-year production guidance to be between 46,000 and 52,000 barrels per day. That’s obviously lower than 2020 levels. However, as maintenance is completed across its various platforms, production will likely improve in 2022.

A replacement for the damaged riser on the Seligi Alpha platform is expected to be installed in October. After this process is completed, the platform should be able to return to full production capacity. What’s more, the disruptions experienced at its other sites ultimately appear to be short-term problems rather than permanent production issues.

Providing that oil prices can maintain their current level, and there are no further disruptions, the EnQuest share price could be set to have an explosive 2022.

The bottom line

It’s been a rough year or so for EnQuest and its share price. But it seems that the problems caused by the pandemic and various site incidents are coming to an end. Having said that, I’m personally not interested in adding this business to my portfolio since I believe there are far better investment opportunities to be found elsewhere.

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