Why I’d sell 88 Energy Ltd to buy this stock

Roland Head — Mon, 14 Aug 2017 10:45:41 +0000

Investors who bought shares in 88 Energy (LSE: 88E) in 2015 are still sitting on a profit of about 150%. But the firm’s share price has fallen by 32% so far this year, and progress seems to have stalled.

Supporters of 88 Energy will probably point out that the company recently reported 1.14bn barrels of unrisked net mean prospective resources for its Icewine project in Alaska. The company’s market cap of about £85m means that this equates to less than 8p per barrel.

The problem is that prospective resources are highly uncertain. They may not exist at all, or they may be unsuitable for commercial extraction. The firm’s shares crashed 37% in one day on 10 July, after it announced a six-week shut-in period for the Icewine#2 production test well following its completion.

Investors had been expecting news on flow rates, but the company said it hoped that a shut-in period to allow pressure to build might improve the well’s performance. A successful result could lead to the conversion of some of the firm’s prospective resources into more valuable contingent (discovered) resources. But in my view, the commentary so far suggests the well results may be disappointing.

A second concern for me is that Icewine won’t necessarily be cheap enough to be profitable at current oil prices. In February, 88 Energy said that depending on resource estimates and costs, an oil price of between $27 to $68 per barrel would be required to continue exploring and developing the field.

With US WTI crude oil currently trading at $48.60, I think there’s a genuine risk this project won’t be commercially viable.

We’ll know more when the results of the Icewine#2 well are published. But I believe there’s a significant risk of further losses for investors in 88 Energy.

A top resource buy?

Although I do invest in resource stocks, I prefer to focus on companies with proven assets, cash flow and profits. Doing this reduces the risk of permanent losses on my investments.

One company that’s come onto my radar a number of times is Caledonia Mining Corporation (LSE: CMCL). This gold mining firm owns a 49% stake in the Blanket Mine in Zimbabwe.

The company said today that gold production rose by 8.5% to 25,315 ounces during the first half of 2017, despite some “underground logistical constraints” during the period. The all-in sustaining cost of mining fell by 8.6% to $856/oz., while the average price of gold was broadly unchanged at $1,224/oz.

The end result for shareholders is that adjusted earnings rose from 43 cents to 45.7 cents per share during the first half of the year. Second-quarter earnings were low due to a variety of one-off factors, but management says that July saw a significant increase in the quantity and quality of material mined.

This company has an excellent financial record. It’s maintained a net cash balance since at least 2011, and generated an average operating margin of 26% over the same period.

Full-year earnings forecasts of $1.78 per share put the stock on a 2017 forecast P/E of 4. There’s also a cash-backed dividend of $0.30 per share, giving a prospective yield of 4.5%.

I believe that for resource investors with an eye for value, Caledonia could be worth a closer look.

The post Why I’d sell 88 Energy Ltd to buy this stock appeared first on The Twelfth Magpie.

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Roland Head has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Are these three underdogs a buy after today’s results?

Rupert Hargreaves — Thu, 11 Aug 2016 10:34:32 +0000

Three market underdogs have reported results today and while the companies may not be glamorous enough to appear in the headlines of market news bulletins, the results speak for themselves.

Golden cash cow

Caledonia Mining (LSE: CMCL) reported its figures for the first half of 2016 with gold production up by around 3,000/oz, or 12.7%, and the on-mine cost of production per ounce down to $629 at the end of Q2, a fall of $91/oz year-on-year. The company’s all-in-sustaining cost of production for the half fell to $943/oz from $1,007 for the first half of 2015.

Lower costs and higher production volumes helped Caledonia report a 172% increase in net profit for the first half and earnings per share more than doubled to 8.6 cents, from 4.1 cents for H1 2015. Cash generation for the half was just under $9m.

There’s no other way of putting it, these figures from Caledonia are extremely impressive. The company is a low-cost gold producer that’s generating plenty of cash and growing production steadily without leaning on debt. Cash generation of $9m, or around £6.7m, for a company with a market cap of £46m makes the company one of the most productive and efficient miners there is.

City analysts are expecting the company to report earnings per share of 15.9p for 2016 and 26.6p for 2017. Based on these figures the company is trading at an attractive forward P/E of 5.5 and supports a dividend yield of 4.4%.

Discount to NAV

Shares in energy investment company Riverstone Energy (LSE: RSE) are rising today after the company reported a 13.1% increase in its sterling net asset value per share for the six months ended 30 June. With a share price of only £10.55 at the time of writing and a NAV of £12.25 at the end of June, Riverstone looks to be undervalued.

The company has a portfolio of 16 oil investments around the world, covering both onshore and offshore as well as conventional and unconventional exploration and production, midstream and credit. Only 77% of the group’s total capital is invested, leaving room for further growth if opportunities present themselves.

Still, the group made a loss of $25.2m for the period, but most of this loss is due to high admin and financing costs. Earlier this week Riverstone announced its first exit transaction which is expected to generate a return of 2.1 times the group’s capital before costs or an internal rate of return of 77%.

Double-digit earnings growth

Lastly Coca Cola HBC (LSE: CCH), which today reported results for the six-month period ended 1 July. FX-neutral net sales revenue grew by 2.4%, or 3% taking into account one less selling day in the period and volume grew by 0.7% on the same basis. However, despite this sluggish volume and sales growth, earnings per share increased by 6.9% for the year and basic earnings per share grew by 12.5% as the firm continued to cut costs and improve margins. Net profit for the period expanded 10.8% year-on-year.

These upbeat figures have sent its shares up by 6.2% in early deals, but after these gains some investors may find that the shares are too expensive for comfort. City analysts are expecting earnings per share growth of 15% for full-year 2016 and if the company hits this target, the shares are trading at a forward P/E of 20.8.

The post Are these three underdogs a buy after today’s results? appeared first on The Twelfth Magpie.