The passive income idea is all about generating regular cash returns without investors needing to do much at all.
With strong earnings forecasts and long‑term contracted production giving it high, visible cash flow, Energean (LSE: ENOG) looks a great prospect, in my view.
The huge gap between the stock’s current price and ‘fair value’ could also mean big share price gains ahead.
So, what sort of returns are we looking at?
What will drive these increases?
Ultimately, rises in any company’s dividends and share price are powered by sustained increases in its profits. A risk here for natural gas giant Energean is its reliance on Eastern Mediterranean gas markets. This exposes it to geopolitical disruption in the Middle East. Another is any delay in major planned developments.
Nevertheless, analysts forecast its profits will increase by a whopping annual average of 27.3% over the medium term at minimum.
These projections follow CEO Mathios Rigas’s recently announced plans to double the firm’s size over the next decade. Much of this will include projects in West Africa that will diversify its geographical presence.
So, what about share price gains?
Price and value are very different concepts for shares. The former reflects whatever buyers and sellers are willing to agree on at a given moment. The latter is determined by the underlying strength and prospects of the business.
That distinction is crucial for long-term investor profits because, over time, prices tend to converge to fair value.
Discounted cash flow (DCF) modelling remains the best way of identifying any share’s fair value, in my view. It takes cash flow forecasts for the underlying business over the long term and discounts them back to today.
Where the projections become less clear, the discount applied increases, which is why analysts’ DCF outcomes can vary sometimes. Based on my modelling — including an 7.9% discount rate — Energean looks 72% undervalued at its current £7.16 price.
That suggests a fair value of £25.57 — more than twice the present price.
So, if markets keep correcting price-to-value gaps over the long run, this could be a terrific buying opportunity if those DCF assumptions prove accurate.
What about dividend income?
Changes in a stock’s price and/or annual payout can move dividend yields up and down. Nevertheless, Energean shifted firmly towards a shareholder‑focused strategy once its cash-rich Karish field came on-line in early 2022.
Analysts forecast its dividend will be a stunning 11.2% by 2028. Using this as an average would mean £20,000 invested in the shares would make £40,980 in dividends after 10 years. The figure assumes the dividends are reinvested in the stock to maximise the supercharging effect of dividend compounding.
On the same basis, the dividends would increase to £546,881 after 30 years — the end of the standard investment cycle for long-term investors.
And by then, the holding would be worth £566,881, including the initial £20,000 stake. And that would pay a yearly income of £63,491!
My investment view
I would have to sell one of my other energy stocks (BP, Shell, Harbour Energy) to allow me to buy Energean. Otherwise, my portfolio’s risk/reward balance would be upset.
So tempting is the stock that I am seriously considering doing this right now.
For others without this dilemma, I think the shares are definitely worth their attention.
Should you invest £5,000 in Energean Plc right now?
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Simon Watkins owns shares in BP, Shell, and Harbour Energy.
