Significant potential

Cairn’s balance sheet has a net cash position of $335m. This provides it with sufficient capital through which to embark on an ambitious programme during 2017. Already, it has drilled six successful wells in Senegal and plans to embark on further exploration and appraisal drilling in the coming year. Furthermore, it plans to continue development of its North Sea assets, where it’s working towards first oil and cash flow.

Both the Catcher and Kraken developments in the North Sea are on target for first oil in 2017, with a peak net targeted production to Cairn of around 25,000 boepd (barrels of oil equivalent per day). Alongside this, a third phase of drilling is to start thismonth in Senegal, with a further evaluation of the SNE discovery. While the company is currently unable to access its 10% residual shareholding in Cairn India, it’s confident in the strength of its case to seek damages.

An improving outlook

Clearly, the rising price of oil in recent months is a positive for Cairn and the wider oil and gas industry. The reduction in supply by OPEC means the price of oil could realistically move higher in the coming months. Therefore, the wider sector could prove to be a sound place to invest, with a number of large, profitable companies trading at low valuations.

For example, BP is forecast to increase its bottom line by 125% this year, followed by further growth of 23% next year. This puts it on a price-to-earnings growth (PEG) ratio of just 0.6, which indicates that it offers excellent value for money. Similarly, its dividend yield of 6.2% is also becoming more appealing. It’s due to be covered 1.25 times in 2018, which indicates it’s sustainable over the long run and could even rise in future years.

By comparison, Cairn is expected to remain lossmaking in the current year. While its net cash position is strong and it’s due to move into profitability next year, this already seems to have been priced-in by the market. The company has a forward price-to-earnings (P/E) ratio of 18.7 versus just 12.8 for BP. Therefore, due to the latter’s higher profitability, better valuation and income appeal, it seems to be the better option at the present time.

Certainly, Cairn could prove to be a star buy in the coming years, but with lower risk and higher potential rewards, BP could outperform it over the medium term.

The post Why I’d buy BP plc over Cairn Energy plc after today’s news appeared first on The Twelfth Magpie.

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Cairn Energy

Cairn Energy’s (LSE: CNE) half-year results show that the company is making strong progress with its drilling and exploration programme. The successful appraisal of the SNE discovery in Senegal has significantly increased the best estimate of contingent resources (2c) to 473m barrels, which is an increase of a third on the previous figure. Furthermore, Cairn’s best estimate for gross oil in place in the SNE field stands at 2.7bn barrels, with exploration potential for around 500m barrels.

Drilling is scheduled to recommence in Senegal soon. Cairn is likely to be a beneficiary of the low oil price in one sense, since drilling costs have fallen heavily across the sector. This will ease the pressure on its financial performance and with Cairn having $414m of net cash on its balance sheet, it’s in a strong position to develop its asset base. It remains lossmaking, but could become a sound long-term investment.

Sirius Minerals

Sirius Minerals (LSE: SXX) has released interim results today, highlighting the strong progress made by the company during the period. Although Sirius made a loss of £4.1m, this was a narrowing of the £4.7m loss made in the April-September period of last year. Furthermore, its cash resources remain significant, with cash on its balance sheet of £16.9m.

The period saw Sirius complete its definitive feasibility study for the polyhalite project. It also announced the funding requirement for stage one of the project, with Sirius requiring $1.09bn. Although progress is being made towards raising those funds, the reality is that resources companies remain out of favour among many investors due to the difficult period prior to 2016, when commodity prices slumped.

Therefore, a question mark remains over Sirius’s ability to generate the funding for the project on attractive terms. As such, it may be prudent to wait for further news regarding this issue before buying a slice of it.

Wood Group

Also reporting today was Wood Group (LSE: WG). Although its sales fell by 17% in the first half, its cost-saving programme reduced overheads by $50m. It continues to focus on a major reorganisation that will make the company increasingly efficient and improve customer delivery at a time when trading conditions are exceptionally challenging.

Wood Group has maintained its guidance for the full year. In addition, it sees the very early signs of a modest recovery in some areas and when this is combined with its strategy of reducing costs, it could begin to deliver improved profitability over the medium term.

Furthermore, it has today announced a contract win with TCO worth $700m. This shows that while Wood Group’s future is uncertain, it remains a sound business that’s performing well given the current conditions. Due to it being profitable and having a brighter financial outlook than Cairn and Sirius Minerals, it’s my pick of the three resources companies.

The post Which is the best resources stock after today’s results? appeared first on The Twelfth Magpie.

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For example, Premier Oil has sought to reduce its cost base and drive through efficiencies. This should help its bottom line to recover in the long run, although with it due to remain in the red during the next two years it’s clearly in the midst of a hugely challenging period. Looking further ahead though, Premier Oil appears to have the right strategy to build rising profitability, with it acquiring the North Sea assets of EON for what appears to be a good value deal.

On the topic of good value, Premier Oil’s price-to-book (P/B) ratio of 0.5 indicates that it offers a wide margin of safety. Certainly, further asset impairments could be around the corner and Premier Oil’s net asset base could fall in value. However, with it trading at such a wide discount to intrinsic value, Premier Oil could prove to be a highly profitable, albeit risky, buy for the long term.

Profit potential

Similarly, gold miner Centamin (LSE: CEY) has performed exceptionally well in the last three months. Its shares have risen by 56% during that period and a key reason for this is Centamin’s ramp-up in production. With the company expected to produce 500,000 ounces of gold in 2017, Centamin’s bottom line is due to rise rapidly over the medium term.

In fact, pre-tax profit is forecast to rise from £40m last year to as much as £109m in 2017, which could rapidly improve investor sentiment in the coming years. And with Centamin likely to benefit from a higher gold price as US interest rate rises take place at a slower than expected rate, its profitability has the scope to soar yet further. This could provide the company’s investors with bright dividend prospects, with Centamin’s 2% yield being covered three times by earnings at the present time.

Long-term buy?

Meanwhile, Cairn Energy (LSE: CNE) has today announced further exploration and appraisal success in its latest well in the ongoing evaluation programme offshore Senegal. Importantly, the BEL-1 appraisal results have provided definitive information concerning the northern extent of the high quality reservoirs seen in other wells, while demonstrating an increased oil column in this area of the field. Cairn Energy will now drill SNE-4 alongside its partners in order to appraise the eastern extent of the field, with it aiming to confirm the nature of the upper reservoirs in the oil zone.

With Cairn Energy having a strong asset base and a significant cash pile, it could prove to be a sound long-term buy. However, with it lacking revenue and profitability, there may be better options elsewhere – especially since investors remain highly uncertain regarding the future for the wider resources sector.

The post Are Premier Oil PLC, Cairn Energy PLC And Centamin PLC 3 Must-Have Resources Stocks? appeared first on The Twelfth Magpie.

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As a result of this, a correction could be just around the corner for all resources companies. However, this realisation is perhaps more palpable today after a horrific period for miners and oil producers that has seen billions wiped off their valuations. So it seems prudent to seek out only those companies with a wide margin of safety, given the scope for a renewed fall in commodity prices over the short-to-medium term.

One company that seems to offer a sufficiently wide margin of safety is Antofagasta (LSE: ANTO). The diversified mining company has strengthened its financial position through sales of non-core assets such as its water services division, while at the same time seeking to improve efficiencies to make its cost curve even lower. This is set to have a positive impact on the company’s profitability and with Antofagasta trading on a price-to-earnings growth (PEG) ratio of just 0.4, it appears to have a wide margin of safety and strong capital gain potential.

Furthermore, with the price of gold likely to benefit from slower-than-expected interest rate rises and proving popular during uncertain periods, Antofagasta’s exposure to the precious metal could cause investor sentiment to improve relative to its mining peers. While this doesn’t make Antofagasta a defensive stock, it does provide its investors with a degree of diversification.

Sound strategy

Also offering a relatively wide margin of safety is oil producer Premier Oil (LSE: PMO). Like Antofagasta, it seems to have a sound strategy to not only survive the present difficulties within the oil sector, but to also take advantage of them. It has slashed costs and become a more efficient entity, while also planning for future growth through the acquisition of EON’s North Sea assets.

While this could help Premier Oil to deliver rising profitability in the long run, the company is expected to stay in the red in the current financial year  and the next one. While this would be disappointing, Premier Oil’s price-to-book (P/B) ratio of just 0.5 indicates that it offers a sufficiently wide margin of safety to make it a relatively appealing long-term buy.

Long-term appeal

Meanwhile, Cairn Energy (LSE: CNE) continues to appeal regarding its long-term profit potential, with the exploration play having a sound balance sheet and a highly lucrative asset base. In fact, Cairn has a net cash position of over $600m and this could help to allay concerns among investors regarding funding for its operations over the medium term. And with Cairn’s North Sea assets due to begin production in 2017 and its operations in Senegal being a key focus this year, it may see an improvement in investor sentiment moving forward.

However, with Cairn having a P/B ratio of 0.8, there may be better options elsewhere. Certainly, it may be a stock to watch, but a wider margin of safety may be required before Cairn becomes a buy given the nervous climate in the resources space.

The post Are Premier Oil PLC, Antofagasta plc And Cairn Energy PLC In Danger Of Major Corrections? appeared first on The Twelfth Magpie.

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Up 31% this year

Shares in Cairn Energy (LSE: CNE) are 31% higher since the start of 2016, following positive results from its appraisal well off the coast of Senegal. The company was delighted with the flow rates from its well, which demonstrates the scale of the economically recoverable potential from the Sangomar offshore block.

The company has great potential in the region, as the anticipated break-even costs are competitive even in today’s low cost oil environment. With a projected total cost of less than $40 per barrel, Sangomar is a highly attractive offshore oil play. On the downside, investors have a long wait before the project returns cash to the company — the first oil will not be produced from Senegal until 2021 at the earliest.

Cairn is in no rush though. Instead, it’s more concerned about building its asset base through an exploration led strategy. Its North Sea developments, Kraken and Catcher, are closer to generating cash, with both projects on schedule to deliver first oil in 2017. Moreover, the company is cash rich, with net cash of $603mn at the end of 2015, which management believes will be enough to cover its capital spending and exploration plans until at least 2017.

Quality assets and a strong balance sheet are clear positives for its stock. But, valuations are expensive relative to the rest of the oil & gas sector, with shares currently trading at a mere 19% discount to its book value. That’s substantially lower than its historical 2-year average discount of 36%, despite oil price benchmarks being significantly higher during much of that period too.

With oil prices today still barely above the projected break-even costs for a majority of its oil reserves, Cairn’s discount to its net asset value seems unappealing. So, unless investor sentiment towards the oil & gas sector begins to turnaround, valuations are likely to face downward pressure in the coming months.

Sweet spot

88 Energy (LSE: 88E), an Australian-based small-cap oil explorer, has had an even stronger run in the first few months of 2016. It’s shares are up 740% year-to-date, after the company announced successful drilling results from its Icewine exploration well in Alaska. It expects a majority of its acreage there to be located in a thermal maturity sweet spot, which means shale formations in the area are favourable for hydraulic fracturing (fracking).

It’s too early to say whether production could become economically viable, with further appraisals needed to confirm its commercialisation prospects. Nevertheless, the results are encouraging and further positive news flow could see the shares re-rated upwards.

However, until the company can prove the economic viability of the project, 88 Energy will remain a risky bet. There’s still a lot of uncertainty surrounding the development, making the stock an extremely speculative play at best.

The post Are Shares In Cairn Energy PLC & 88 Energy Ltd Fully Priced? appeared first on The Twelfth Magpie.

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Turnaround or twitch?

Hopes that embattled grocer Sainsbury’s (LSE: SBRY) could finally be turning the corner has seen shares values explode in recent weeks. Indeed, the stock is currently dealing at levels not visited since last April, with investor appetite helped by a landmark trading update on Tuesday.

While like-for-like sales growth of 0.1% in the fourth quarter is hardly seismic, this represents the first quarterly rise for two years and underlines the firm’s steady improvement at the checkout. A sales drop of 2.1% in the first quarter improved to 1.6% in quarter two, and again to 0.4% between October and December.

Demand at the firm’s clothing and entertainment aisles surged 10% and 11% respectively in the period. Meanwhile, sales across the online channel galloped 14% higher during the quarter.

And while massive brand investment in its food items is also paying off, Sainsbury’s still has plenty of work ahead of it just to stand still. Indeed, chief executive Mike Coupe advised that “the market will remain competitive as food deflation continues to impact sales growth.”

We have seen similar sales resurgences at Tesco in recent times, but these have petered out as the popularity of Aldi and Lidl has intensified. And the discounters’ aggressive store and internet expansion plans are sure to keep Sainsbury’s on its toes long for much longer.

The business is expected to follow a 12% earnings fall for the year to March 2016 with a 3% drop in 2017, the latter figure creating a P/E rating of 12.5 times. I believe that Sainsbury’s remains in severe danger of prolonged slippage despite today’s bubbly results.

Driller still in danger

Fossil fuel giant Cairn Energy (LSE: CNE) also greeted the market with better-than-expected results in Tuesday business. But, like Sainsbury’s, I believe the possibility of severe revenues trouble makes the stock a risk too far.

Cairn Energy advised that losses before tax narrowed to $497.8m in 2015 from $559.1m in the prior year. The business also advised it will concentrate on moving its Senegalese assets towards commercialisation in 2016, following on from positive testing results earlier this month.

As well, Cairn Energy remains on course for maiden production from its Kraken and Catcher projects in the North Sea in 2017, it advised.

However, Cairn Energy is expected to keep making losses through to the end of next year, or so say the City’s army of analysts. And I believe forecasts of first revenues in 2017 could miss the target should crude prices continue to tumble, a very real possibility as bloated market supplies continue to grow.

At the moment the company is well capitalised, with Cairn Energy reporting net cash of $603m as of December. But while this makes the business better capitalised than many of its peers, the wider state of the oil market — allied with the high capex costs related to its operations — still leaves Cairn Energy on shaky footing, in my opinion.

The post Why I’d Keep Selling J Sainsbury plc & Cairn Energy PLC Following Today’s Results appeared first on The Twelfth Magpie.

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Certainly, Lonmin has been a hugely disappointing stock to hold in the last year. Its share price has tumbled by 99.5% in the last 12 months due to a severe fall in the price of commodities. While a further deterioration in the price of commodities is possible, Lonmin’s current valuation could offer a relatively appealing risk/reward ratio – especially for long-term investors.

The main reason for that is Lonmin’s turnaround plan. Following a fundraising last year, Lonmin stated that it now has the capital resources to follow through with its planned comeback strategy. This centres on reducing costs and generating efficiencies, which could help to boost the company’s financial outlook. And with its shares trading on a price-to-book value (P/B) ratio of only 0.2, they appear to offer significant upside.

Of course, things could get worse for Lonmin and its share price could come under further pressure in the short run. However, for less risk-averse investors it now seems to be worth a closer look.

Long-term play

Similarly, shares in support services company Cape (LSE: CIU) have also endured a disappointing period. Its profitability has come under severe pressure and it’s due to report a fall in earnings of 12% for 2015, with a further decline in its bottom line of 4% being pencilled-in for the current year. Clearly, this has the potential to cause a further deterioration in investor sentiment in the short run.

However, this level of performance seems to be fully reflected in Cape’s valuation. For example, it trades on a price-to-earnings (P/E) ratio of just 8.2 and it yields 6.7% at its current price. With dividends being covered more than twice by profit, Cape appears to have sufficient headroom to maintain them at their current level in the coming years. And with the combination of upward rerating potential and income appeal, investor sentiment in Cape could pick up, which makes now a good opportunity to purchase it for the long term.

Too volatile?

Meanwhile, shares in Cairn Energy (LSE: CNE) have risen by 15% in the last month, buoyed by an encouraging update released last month. As well as being confident of a positive outcome from its $1.6bn Indian tax dispute case, Cairn is also seemingly upbeat about progress made at its Mauritania and North Sea assets, with spending for the next two years due to be focused on its Senegal prospects.

With Cairn having a strong net cash position and considerable long-term potential from its asset base, it may prove tempting for a number of investors. However, with uncertainty in the resources sector being high, it may be prudent to stick to companies with bright futures and that are still profitable, due to the prospect for further volatility in the short run. In other words, Cairn may have appeal, but other resources stocks could prove to be better buys.

The post Is It Too Soon To Buy Lonmin Plc, Cairn Energy PLC And Cape PLC? appeared first on The Twelfth Magpie.

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Digger keeps diving

Despite enjoying a solid share price uptick in the latter part of January, mining giant Rio Tinto (LSE: RIO) still had a month to forget, with shares in the business falling 13%.

Further falls in the first two days of February have resulted in  Rio Tinto’s stock value collapsing 46% over the past 12 months, and more than 66% over the past five years. But I believe the worst is yet to come, as the rout across commodity markets is far from over.

Sure, prices of iron ore are now above the $40 per tonne marker, supported by a rare uptick in Chinese steelmaking activity. But the industry still continues to contract thanks in no small part to China’s weak construction sector, leaving iron ore in danger of falling below recent multi-year troughs around $38.30 per tonne.

Indeed, fresh swathes of bearish data from the commodities-hungry nation threatens to send prices across Rio Tinto’s other key markets south, too. Chinese manufacturing PMI for January came in at three-year lows of 49.4, data yesterday showed, and I expect further rounds of disappointing data in the coming weeks as monetary easing from the People’s Bank of China flounders.

The City expects Rio Tinto to announce a 51% earnings slide for 2015 when it makes its full-year statement on Thursday, February 11th.

Investors should be braced for a colossal dive lower, like that of BP on Tuesday, should even these poor forecasts miss the mark. But an even bigger peril for the share price comes in the form of potential dividend cuts.

Rio Tinto is anticipated to keep the full-year payment locked frozen around 215 US cents per share in 2015 and 2016, creating a prospective yield of 7.3%. But should the mining giant finally grasp the nettle to address its worsening earnings outlook and swelling debt levels, I would expect share prices to head through the floor.

Crude play under the cosh

Naturally, I also reckon fossil fuel producer Cairn Energy (LSE: CNE) remains on shaky grounds, also thanks to the worsening state of commodity markets. The business saw its share value dip 10% in January, and a poor start to February has seen Cairn Energy fall an eye-watering 31% over the past year.

And like Rio Tinto, the oil play is in danger of further weakness should supply/demand data continue to worsen. Indeed, US oil inventories are expected to stand at new record highs just shy of 500 million barrels when numbers are released later this week. And these are likely to keep rising as supply from across North America, Russia and the OPEC bloc swells.

The City expects Cairn Energy to clock up a third year in the red in 2015, and losses of 47.7 US cents per share are currently forecast. And additional losses are predicted for 2016 as massive operating costs and weak crude values weigh, this time by 16.9 cents per share.

The post Why Rio Tinto plc & Cairn Energy PLC Should Fall Further In February! appeared first on The Twelfth Magpie.

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Importantly, it states that Cairn remains fully funded from existing financial resources to deliver its exploration and appraisal programme. Furthermore, it’s on track to take its North Sea developments through to free cash flow generation next year and with Cairn having a net cash position of $603m, it appears to be relatively financially sound.

With Cairn reporting positive flow tests on the SNE-2 appraisal well in Senegal that highlighted its commercial deliverability, it has now commenced drilling operations on the next appraisal well, SNE-3. Looking ahead, Cairn expects its development expenditure to be predominantly focused on its key assets in Senegal, with $492m being earmarked for spending across its asset base in 2016 and 2017.

Meanwhile, Cairn states in today’s update that it has a high level of confidence in the outcome of its tax dispute with the Indian government. Clearly, there’s no guarantee of a positive result in this regard and with the Indian government demanding $1.6bn plus interest and penalties, it remains a risk to Cairn’s future outlook.

With Cairn trading on a price-to-book-value (P/B) ratio of just 0.45 and having a relatively sound balance sheet, it does have appeal for long-term investors. However, with further losses due in the next two years and a number of other resources stocks being cheap and profitable, there appear to be better options available elsewhere.

Silver slump

It’s a similar story for silver miner Hochschild (LSE: HOC). It’s due to post its third year in a row of losses when it reports on its 2015 financial performance, with the slump in the price of silver being a key reason behind this. Clearly, resources companies such as Hochschild are highly dependent on the price of their respective commodities, but a number of other silver mining companies have remained profitable in recent years.

Certainly, Hochschild is expected to deliver much-improved performance in 2016, with the company due to record earnings per share (EPS) of 1.3p for the full year. However, with its shares trading on a forward price-to-earnings (P/E) ratio of 31, this improved performance already appears to be reflected in Hochschild’s valuation.

Volatility ahead

Also struggling to cope with lower commodity prices is Glencore (LSE: GLEN). In response to declining investor sentiment and a worsening operating environment, it conducted a fundraising towards the end of 2015 that reduced its degree of balance sheet leverage. Furthermore, Glencore implemented strategy changes in order to become more efficient and more financially stable after declining investor sentiment led to a collapse in its share price of 70% in 2015.

Undoubtedly, Glencore remains a highly volatile and relatively high-risk stock. However, with its trading division performing relatively well and its new strategy having the potential to improve investor sentiment, it may be of interest to less risk-averse investors. This is backed up by Glencore’s forecast earnings growth rate for 2016, which stands at 19% and, while such expectations can be downgraded, a price-to-earnings growth (PEG) ratio of 0.8 indicates that Glencore’s shares offer a relatively wide margin of safety.

The post Will Glencore PLC, Cairn Energy PLC And Hochschild Mining Plc Enhance Your Returns In 2016? appeared first on The Twelfth Magpie.

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But most worryingly Goldman Sachs cautioned that WTI could plummet as low as $20 per barrel. The Brent benchmark touched fresh six-and-a-half-year troughs of $42.50 late last month, some way off Goldman Sachs’ worst-case scenario projection but still underlining the bearish sentiment that threatens to keep oil prices under the cosh.

Goldman Sachs advised that “the oil market is even more oversupplied than we had expected and we now forecast this surplus to persist in 2016,” adding that “the potential for oil prices to… $20 per barrel is becoming greater.”

Goldman Sachs’ latest predictions may at first look outrageous. But then again, anyone who dared suggest that Brent could collapse from a peak of $115 per barrel last summer to below $50 within six months would be considered barking mad. And Goldman Sachs isn’t the only broker to warn of another shunt lower in the crude price — just last month Citi also suggested the black gold price could be on the cusp of visiting $20.

OPEC continues to concern

And OPEC’s latest statement this week has done nothing to quell fears of persistent oversupply, either. On the one hand, the cartel upgraded its oil demand forecasts for 2015 and now expects consumption to grow by 1.46 million barrels per day this year, to 92.79 million barrels per day.

But OPEC also reduced its forecasts next year “due to the projected slower economic momentum in Latin America and China” — the group now expects oil consumption to rise by 1.29 million barrels by day in 2016, resulting in total off-take of 94.08 million barrels per day.

All the while global output levels continue to rise. Whether or not sizeable US production cutbacks come to pass, output from the rest of the world’s oilfields continue to shoot northwards and OPEC’s own production rose to 31.54 million barrels per day in August, up around 13,000 barrels from the previous month.

Oilies on the defensive

Naturally these readings should make gruesome reading for operators across the fossil fuel segment. Tullow Oil (LSE: TLW) saw total revenues collapse by more than third during January-June, to $820m as previous hedging failed to tackle the full impact of a tanking crude price.

Things have been brighter over at Gulf Keystone Petroleum (LSE: GKP), however, and the company saw the top line expand to $30.1m during the first six months of 2015 from $18.7m a year earlier. However, the Kurdistan-focussed business had a 102% production flip to thank for this performance — total production clocked in at 4.7 million barrels in January-June.

Meanwhile, the earnings prospects of exploration play Cairn Energy (LSE: CNE) is also under pressure as the economic viability of its assets comes under question. The company is not alone in this predicament, of course, and while Cairn remains expects maiden oil at its Kraken and Catcher fields in the North Sea in 2017, a prolonged period of crude price weakness could see development work grind to a halt.

The post As Goldman Sachs Touts $20 Crude Price, Should You Keep On Selling Tullow Oil PLC, Gulf Keystone Petroleum Limited And Cairn Energy PLC? appeared first on The Twelfth Magpie.

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Royston Wild has no position in any shares mentioned. The Motley Fool UK has recommended Tullow Oil. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.