Not my department

Debenhams is company reviled, just like billionaire part-owner Philip Green. Edward Sheldon recently said he wouldn’t touch it with free money. Green has sinned but the high street is in general meltdown, and the department store model is looking broken.

The stock is down another 7.62% this morning following publication of a Christmas trading update that showed group like-for-like sales down 3.4% in the six weeks to 5 January, and by 5.7% measured over 18 weeks. Weak store footfall was offset by growth in digital, though, with sales up 4.6% over 18 weeks. Optimists will note that Debenhams failed to issue its traditional Christmas profit warning.

Fashion disaster

Today’s update blamed the volatile and challenging UK trading environment, as all retailers do these days. This forced Debenhams into “tactical promotional activity in order to be competitive,” slashing prices in other words, which will erode first-half margins.

Debenhams said it continues to generate cash and has cut net debt from £321.3m to £286m, comfortably within committed debt facilities of £520m. It’s looking to refinance existing bank facilities within the next year, and bring in new sources of funding after turning down Ashley’s offer of a loan. An annual £50m of planned savings will be upped to at least £80m.

On the rack

Investors clearly aren’t pinning too much faith on management’s claim that it remains “on track to deliver current year profits in line with market expectations, supported by further identified cost savings.” Analysts are forecasting an 81% drop in earnings in the year to 31 August 2019, although 66% growth the year after. There is no dividend.

Management has so far failed to convince the market that it has a strategy to turn things round. In contrast to Sheldon, I would invest with free money, just not my own.

Gassing on

Nostrum Oil & Gas (LSE: NOG), an independent oil and gas company focused on the pre-Caspian Basin, has also had a rough time of it lately. It’s falled 51% in three months, yet still boasts a far larger market-cap than Debenhams at £217m.

Nostrum has fallen despite making encouraging progress in its operational activities, with sales volumes rising due to the successful testing of site Well 40, while announcing the mechanical completion of the GTU3 project on 24 December, with the facility set to be commissioned this year.

Crude facts

The falling oil price undermined the good news, although investors have been boosted by the recent rally, and Nostrum is up 10% in the last week.

The explorer’s financial results for the nine month to 30 September showed revenues creeping up 2.5% to $311.4m, and net operating cash flows rising 9.4% to $187.7m. Cash stood at $102.4m against total debt of $1.1bn. City analysts are optimistic, forecasting 43% growth in earnings this year, and 23% in 2020. It’s clearly risky, but I would buy it ahead of Debenhams.

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For example, the Gulf Keystone Petroleum (LSE: GKP) stock price has moved over 25% lower in the last two months. With the potential for further volatility, could it be worth buying now alongside an industry peer which released a positive update on Tuesday? Or, are the risks still too high given the uncertainty surrounding the prospects for the industry?

Upbeat outlook

The company in question is oil and gas producer, developer and explorer Nostrum (LSE: NOG). It released an operational update for the nine months to 30 September 2018, with its average sales volumes during the period being 30,523 boepd (barrels of oil equivalent per day). This means that revenue for the first nine months of the year is expected to be $6m higher than in the previous year at $310m.

The company has made encouraging progress with its operational activities. In the third quarter, it saw an increase in sales volumes due to the successful testing of Well 40. It has now been shut as the company waits for the extension of the exploration licence, while it is close to completing the next two production wells in the Biski reservoir. This is expected to boost production, while it is targeting commissioning of GTU3 to start in the final quarter of the year.

With Nostrum forecast to increase its bottom line by 120% next year and it having a price-to-earnings growth (PEG) ratio of 0.1, it seems to me to offer an enticing risk/reward ratio for the long term.

Growth potential

Gulf Keystone Petroleum’s share price performance has clearly been highly disappointing in recent months. The company is relatively small, and lacks the diversity of some of its larger peers. Given its exposure to a region which contains significant geopolitical risks, I think its share price could remain highly volatile – especially if the wider oil and gas industry experiences an uncertain future.

The company, though, appears to me to offer growth potential. It has been able to deliver relatively sound operational performance, and this is expected to translate into profit growth in the next financial year. Its bottom line is forecast to rise by 62%, which puts it on a PEG ratio of 0.1. This suggests that while risky, its return potential could also be high.

The oil price may come under further pressure in the coming months, and this could act as a drag on the GKP share price. However, with the prospect of supply reduction due to sanctions and geopolitical risks across a number of OPEC countries, the future for the oil price may be more robust than investors are pricing in. As such, and while potentially only of interest to less risk-averse investors, I believe the stock could deliver a recovery over the long term.

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Prince Caspian

Nostrum Oil & Gas (LSE: NOG), an independent oil and gas company engaging in the pre-Caspian Basin, is down 2.11% after announcing its first quarter results, which disappointed on several counts. Q1 revenues fell just over 15% to $94.8m, while net operating cash flows were down almost 18% to $56m. EBITDA also fell 17% to $57.2m, with margins slipping slightly to 60.3%.

CEO Kai-Uwe Kessel put a brave face on matters, noting that its EBITDA margin was wider than in Q4 2017, due to the recent oil price recovery and a reduction in costs. However, he was also forced to admit that “Q1 2018 was disappointing operationally as we encountered water in the first production well of the year near the flanks of the Biski North East reservoir.” 

Well worries

This was forecast to produce 3,000 barrels of oil equivalent per day, forcing the group to revise down 2018 guidance to 34,000 boepd. Kessel said the group was working on potential solutions to bring the well into production, and was looking forward to bringing additional production online, with sales volumes recovering in 2018.  The group’s cash position improved slightly to $132.2m, while net debt crept up to $971.9m.

Nostrum’s share price is 40% lower than a year ago, and today’s report will do nothing to reverse that. The one bright spot is that City analysts are forecasting 81% earnings per share growth next year, suggesting there could be an opportunity here, although predicting future revenues is a risky business in this sector. My Foolish colleague Peter Stephens reckons that it has an appealing risk/reward ratio.

88E state

If you are still tempted by oil prospects, you might want to explore the outlook for 88 Energy (LSE: 88E), whose share price has been steadily recovering following a recent sell-off, doubling to more than 2.25p against less than a penny at the end of September.

The Alaska-focused shale explorer initially warmed investors’ hearts with positive statements about its Icewine 1 drilling operation, which turned it into a 12-bagger at one point, only to chill them again after announcing the shutdown of its Icewine 2 site for the Alaskan winter, as freezing conditions hit flow rates.

Penny problem

Interest is now recovering as the £129m AIM-quoted stock prepares to recommence testing on 11 June to determine if any reservoir degradation could be observed, which would require “remedial action” and dampen investor spirits. 88 Energy’s recent sharp share price slump is tempting many, but it looks highly risky to these eyes.

Effectively, you are taking a gamble, since even 88 Energy has no idea what the tests will show at this point. Good news from Alaska could have the stock gushing, bad news could lead to a whiteout. However, some investors remain loyal, with a recent placing to raise A$17m oversubscribed. It looks like a do or die stock to me, whatever the oil price. Are you ready to gamble?

The post Is the 88 Energy share price or this explorer the best way to play $80 oil? appeared first on The Motley Fool UK.

Looking ahead, further volatility seems to be on the cards. However, with the oil price set to offer an improved outlook than it has in the past, could the stock be a successful turnaround? Or is it now set to continue its recent downward trend?

Uncertain outlook

News released by UKOG in recent months is a key reason for its share price decline. The company has disappointed investors on multiple occasions in recent months, with test results calling into question the economic viability of its Broadford Bridge-1 well. Certainly, there is the potential for improving news flow, and there may be a blockage which can be worked though, but in the near term there seem to be significant risks ahead.

Turnaround potential

Of course, as with any smaller oil and gas exploration company there are challenges surrounding financing. The terms of its current financing arrangements have been called into question, and could cause investor sentiment to remain weak over the short run.

However, with the company fully funded until the end of 2018 and it having significant exploration potential, it could prove to be a highly-rewarding stock in the long run. Investor sentiment may be more buoyant than it has been in the past due to a stronger outlook for the wider oil and gas sector. And while there may be less risky options available elsewhere within the industry, UKOG could be of interest to less risk-averse investors.

Low valuation

Also offering upside potential within the oil and gas industry is Nostrum (LSE: NOG). The oil and gas producer, developer and explorer has experienced a difficult recent past, with its financial performance being highly disappointing. This has weighed on investor sentiment to some degree, with its share price fall of 36% in the last year being evidence of this.

The company’s future performance, though, may be a surprise to generally downbeat investors. Nostrum is expected to deliver a black bottom line over the next two years, with its earnings forecast to generate growth of 145% in the next financial year. This puts it on a price-to-earnings growth (PEG) ratio of just 0.1, which suggests that it may be undervalued at the present time.

While Nostrum is heavily dependent upon the oil price over the medium term, its risk/reward ratio seems to be favourable. Although there could be downgrades to its forecasts as well as a high degree of volatility in its share price, a wide margin of safety suggests that now could be the right time to buy it for the long term.

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Prince Caspian

London-listed Nostrum Oil & Gas (LSE: NOG) is an independent multi-field oil and gas company operating in the pre-Caspian Basin, with operations in Kazakhstan. This morning it issued its full-year figures for the year to 31 December, and the stock has crept up 0.48% as a result. However, it still trades 25% lower than 12 months ago, after suffering operational struggles over the last year.

2017 revenues grew 16.5% to $406m year-on-year, while EBITDA grew almost 20% to $232m, with margins climbing 150 basis points to 57.2%. The downside is that net operating cash flow slumped from $202 to $183m, while net debt increased from $858m to $961m. Average daily sales volumes dipped to 37,844 barrels of oil equivalent per day, down from 39,043 in 2016.

Challenging times

CEO Kai-Uwe Kessel admitted that 2017 was a challenging year operationally for the £573m company, with a delay to the completion of its GTU3 project and some disappointing results from “watered out” wells, which knocked 3.1% off sales volumes. However, positive results suggest it may have more reserves than thought in a new northern area in the Chinarevskoye field.

Nostrum successfully refinanced all of its debt due in 2019, taking advantage of lower oil prices to reduce the cost, and now has no maturities until 2022. My Foolish colleague Peter Stephens recently noted that it offers a potentially high level of capital return. City analysts are forecasting 651% growth in earnings per share (EPS) this year, and another 110% in 2018. That should reduce its valuation to just nine times earnings.

Out of its Shell

Nostrum is worth further examination and here is a more mainstream way to play the oil price recovery, this time with a juicy dividend. Last month, oil major Royal Dutch Shell (LSE: RBS) reported that its profits more than doubled in the fourth quarter, due to higher oil prices and increased efficiency, yet its investors are currently in a bit of a sulk.

The stock has actually fallen by around 9% over the past three months after Q4 cash flow weakened. This hit hopes that Shell will further increase its dividend to offset the damage done by last November’s decision to scrap its scrip dividend, which paid investors in shares.

Dividend delight

Another concern is that management will focus on paying down debt, rather than rewarding shareholders. However, this may help to build long-term sustainability, and Shell certainly deserves applause for maintaining its dividend throughout the oil price slump, amid constant speculation that its proud post-war record of continuously rewarding investors would finally fall. The forecast yield is still an impressive 6%, covered 1.3 times, which is nothing to grumble about.

Shell’s EPS are forecast to grow 53% in 2018 and 9% in 2019, while the stock trades at a forecast valuation of just 13.1 times earnings. The recent dip looks like an excellent entry point to me.

The post Why I’d invest £2,000 in Royal Dutch Shell plc and this ‘secret growth stock’ appeared first on The Motley Fool UK.

Looking forward, could further falls be ahead for the company? Or does it offer significant turnaround potential following its operational update released on Friday?

Improving performance

The company’s performance in the 2017 financial year was generally encouraging. Its net production averaged 2,335 boepd (barrels of oil equivalent per day) for the year. Operating costs for the year were around $28.50 per barrel of oil. It expects to deliver net production of between 2,300 and 2,400 boepd in 2018.

During 2017, the company’s 2P (proved plus probable) reserves replacement was over 100%. Its cash balance at the end of the year was £15.8m, while it had net debt of £6.1m. This shows that it appears to have sufficient financial resources to implement its current strategy. And with the price of oil having risen significantly, it is generating free cash flow in its conventional business. This could mean it is better placed to deliver on potential additional projects with attractive prospects.

Looking ahead, the current year could be an eventful one for IGAS Energy. Its drilling programme is set to continue, with there being the potential for positive news flow on this front. Furthermore, with the supply surplus of oil not expected to return in 2018, the prospects for the wider oil and gas industry appear to be improving. As such, the company’s stock price could enjoy a relatively prosperous 12 months.

High growth potential

Also offering upside potential within the oil and gas sector is Nostrum (LSE: NOG). The Kazakhstan-focused explorer and producer has also experienced a challenging period, with its bottom line moving into the red in 2016. However, it is expected to return to profit in the 2017 financial year. Following an expected £1m pre-tax profit in 2017, its profit is forecast to rise to as much as £94m in 2019. This could prompt a significant improvement in investor sentiment.

Since the stock currently trades on a forward price-to-earnings (P/E) ratio of just 6.2, it appears to offer a wide margin of safety. This suggests that there could be a high level of capital return potential on offer, and may mean that the stock is able to post a recovery following its 35% share price decline over the last year.

Certainly, if the oil price experiences a disappointing period then this could cause Nostrum’s forecasts to be downgraded. But with such a wide margin of safety, the company appears to have an attractive risk/reward ratio for the long term.

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However, for investors who are perhaps less risk-averse, there could be a number of strong growth opportunities within the industry. One example is Premier Oil (LSE: PMO), which is expected to deliver improving profitability over the next couple of years. However, there is another company operating within the same sector which could also offer strong share price growth potential.

Mixed performance

The company in question is production, development and exploration business Nostrum (LSE: NOG). It reported a somewhat mixed update on Tuesday which showed that while its third quarter was upbeat from a financial perspective, its operational performance was slightly disappointing. For example, it announced a delay to the GTU3 tie-in, while production continues to be behind its 2017 targets.

However, it has been able to complete a bond refinancing and implement its cost saving programme. Alongside improved oil prices, this means that it is on track to move from loss to profit in the current year. This in itself could stimulate investor sentiment and help to push its share price higher. But looking to next year, the company’s forecast rise in earnings of 148% could be the major catalyst behind its future share price performance. It trades on a price-to-earnings growth (PEG) ratio of just 0.1, which suggests that it offers a wide margin of safety for the long run.

Low valuation

Of course, Premier Oil also has investment potential at the present time. After three years of losses it is expected to move back into the black in 2017 with a pre-tax profit of £21m. Next year, that figure is forecast to rise to almost £139m as the company’s strategy of reducing costs and increasing production is set to have a positive impact on its bottom line. And with it trading on a forward price-to-earnings (P/E) ratio of just 5.3, it appears to have significant upside potential over the long run.

Uncertain outlook

Clearly, both Nostrum and Premier Oil are highly dependent on the performance of the oil price in future. While it has made strong gains in recent months, there is no guarantee that the trend will continue. Should supply increase or demand come under pressure, the price of oil could easily slip back to recent low levels.

However, with OPEC’s supply cut, exploration spend being under pressure across the industry and demand continuing to remain robust, the prospects for the industry remain relatively bright. As such, buying Nostrum and Premier Oil could be a sound move, with both stocks offering high risks but also significant potential rewards in the long run.

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The big uplift came from initial findings at the company’s Broadford Bridge exploration well at the Weald Basin. The company found light mobile oil in the fractured Kimmeridge shales, and told us this was “highly significant“.

This was similar to findings from Horse Hill-1, and the company was examining the possibility that it had “encountered a single 600-700 feet thick, naturally fractured oil reservoir section, encompassing all four Kimmeridge Limestones and underlying a significant proportion of the wider Weald Basin.” 

Broadford Bridge may just have tapped into the so-called Gatwick Gusher and the hoped-for 100bn barrels of oil that might underly the region.

Time to buy?

But the wheels came off a bit after the company revealed that due to cement-bond quality at Broadford Bridge, the drilling had “not effectively connected the wellbore to much of the best open natural fractures” and that the flow potential had not been properly evaluated.

But that’s an operational problem, and a further update this week told us that the well “continues to flow light, sweet oil and gas from the Kimmeridge Limestones“, that the firm is confident there’s a “thick regionally extensive continuous oil accumulation” there, and that flow testing of multiple 30-100ft zones should start by the end of the month.

The teething problems at Broadford Bridge don’t suggest any major issues with the underlying discovery to me, and I see the recent price dip as a tempting buying opportunity.

Turnaround?

Nostrum Oil & Gas (LSE: NOG) has also seen its shares slipping of late. After a slide from late May, which lopped 30% off the share price, it was starting to recover a little.

Until Wednesday, that is, when an update on the completion of Nostrum’s third gas treatment unit (GTU3) led to renewed dip. At 391p, the price is down 5% in two days, so far.

It seems there’s been a delay in the delivery of some special valves for connecting the new plant to the other two (GTU1 and GTU2), and so GTU3 is not going to be seeing any gas in 2017, as previously planned.

The problem is compounded by the oncoming winter, as welding joints need to be hydro-tested prior to the admission of any gas, and that will not be possible when temperatures are below zero.

The planned shutdown and tie-in is now not going to happen before next April, which means production guidance for the first half of 2018 will be hit, limited to the existing capacity of 45,000 boepd.

Recovery potential

I can’t help feeling that this latest problem has presented investors with a renewed buying opportunity. In the longer term, Nostrum still expects to get production up to 100,000 boepd by 2020, and the overall cost of the GTU3 plant and commissioning should remain at $532m.

Interim results showed what looks like sufficient liquidity after a successful bond issue, and the company says its is “fully funded to complete GTU3 and ramp up production“.

My only concern is debt, which stood at $868m net at 30 June. But barring any significant further delays, I think that should be easily manageable in the long term.

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Positive update

Reporting on Tuesday was oil and gas producer Nostrum (LSE: NOG). The company’s half-year results showed it is making progress with its strategy. Revenue increased from $163.5m in the first half of 2016 to $210m in the same period of the current year. Its net operating cash flow of $118.5m was a major improvement on the $78.9m from the prior year. Its transport per barrel of oil equivalent cost was further cut to $5 from $5.30 last year, which shows the business has the potential to become increasingly efficient over the medium term.

Nostrum’s average daily production for the six-month period was 46,685 barrels of oil equivalent. It has been able to deliver a successful new bond issuance, while its construction of the third Gas Treatment Unity continues to be in line with guidance. This is due to complete before the end of 2017.

With Nostrum having recorded a share price fall of 24% in the last three months, it has clearly been a difficult period for the company’s investors. Looking ahead, more volatility could be present due to the uncertainty regarding the oil price. However, with the company performing well from an operational standpoint, it could produce high capital returns. That’s especially the case since it trades on a price-to-earnings growth (PEG) ratio of just 0.1. This suggests a wide margin of safety is currently on offer.

Encouraging outlook

Also posting significant losses for investors in the last three months has been pharmaceutical company Shire (LSE: SHP). Its news flow has been somewhat disappointing and management changes seem to have affected investor sentiment to at least some degree. In the short run, there is the potential for further volatility in the company’s share price. However, in the long run its tie-up with Baxalta could lead to a more profitable business which is worthy of a considerably higher valuation.

Next year, Shire is forecast to report a rise in its bottom line of 9%. Since it trades on a price-to-earnings (P/E) ratio of just 9.8, this means it has a price-to-earnings growth (PEG) ratio of only 1.1. As such, there is obvious scope for an upward re-rating. Given the strength of its pipeline and the potential synergies from the recent merger, its overall outlook is relatively positive. Within an industry which may become more important among investors due to its low positive correlation to the wider economy, now could be the perfect time to buy Shire.

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Life’s a gas

Kazakhstan-focused multi-field oil and gas company Nostrum Oil & Gas (LSE: NOG) has hit the highs lately. Like other companies in the sector, it was given a lift by the OPEC and non-OPEC production cuts at the end of last year, but unlike many of them, it has held onto its gains even as oil has slipped back to around $50 a barrel.

Nostrum’s Q1 results, published last month showed revenues leaping 51% from $73.9m to $111.9m year-on-year, the strongest in more than 12 months, with net operating cash flows soaring from $27m to $69.8m. That partly explains its successful share price showing, as does rising production, a slight dip in net debt to $841.3m and a 21.5% improvement in its closing cash position to $122.8m. 

The $50 question

It isn’t hard to see Nostrum’s appeal to investors: operating costs of less than $4 per barrel give it handsome margins. Management is nonetheless determined to keep the lid on operating costs to brace against sub-$50 a barrel oil, putting it in a much stronger position than many oil stocks.

The outlook seems promising, with its KazTransOil (KTO) pipeline connection set to complete and analysts predicting revenues of £372m this year, rising to £578m in 2018. If correct, earnings per share (EPS) could rise a whopping 257% next year. Forecasters expect its valuation to fall from 34.8 times earnings to just 9.8 times. I am wary of oil stocks at the moment, amid signs that OPEC members are starting to cheat on production cuts, but Nostrum looks like an honourable exception.

Indivior-ism

Speciality pharmaceuticals business Indivior (LSE: INDV) is also up 60% over the past year, although share price growth has slowed in recent months. The £2.33bn company specialises in addiction treatment, where it has 20 years of experience, and investors have been attracted by its strong market position and product pipeline.

However, the company has run into controversy, with 35 US states filing a joint civil complaint over its conduct with its heroin replacement Suboxone product, after it allegedly switched treatment from tablet to film formulation to block the introduction of generic alternatives. It incurred a $220m litigation charge in Q3 that knocked pre-tax profit from $258m to $98m, dampening share price growth.

Film star

Indivior nonetheless expects full-year 2017 net revenues of between $1.05bn and $1.08bn, buoyed by a rapidly rising treatment market and strong product pipeline. Q1 results show a solid business with resilient sales of Suboxone film, and net revenue rising 3% to $265m.

Management is in talks with the Department of Justice about a possible resolution to its litigation investigation and is also awaiting the outcome of patent challenge trials with Dr Reddy’s, Actavis and Par. It otherwise looks healthy with operating profit up 27% to $128m and net cash of $182m. I expect Indivior’s recent share price sogginess to continue as litigation threats drag on and forecasters predict EPS will drop 8% this year, then rebound 5% in 2018, but the long-term looks more promising.

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