A done deal?

The offer price represents a 12% premium to the closing price of the company’s shares on 3 February. It’s also ahead of the average analyst consensus target price of around 99p, which indicates the offer is fair. In fact, the board has unanimously accepted the offer, which indicates that there’s a relatively high chance it will go through. But their stake in the company is just 2.6%. So there’s no guarantee that other shareholders will accept the offer.

Valuation

Of course, when a bid is made for a company there’s always a chance of other bids. While this may be the case for Ithaca Energy, it seems somewhat unlikely. A key reason for this is the company’s valuation. Based on its forecasts for 2018 of earnings per share of 5.8p, the offer of 120p means the company is valued on a forward price-to-earnings (P/E) ratio of 20.7. While it has a relatively bright long-term future and could deliver rising profitability over the coming years, there are a number of resources companies that offer better value for money at the present time.

For example, BHP Billiton (LSE: BLT) trades on a P/E ratio using next year’s earnings of just 15. That’s a 25%-plus discount to Ithaca Energy, and yet BHP offers lower risk than its resources industry peer. For example, it has a far more diversified business from both a geographic and commodity perspective. In addition, it has a stronger balance sheet, superior cash flow and a better chance of surviving a prolonged downturn in the prices of commodities, which can’t be ruled out.

Outlook

The resources sector clearly trades on valuations that may tempt bid approaches such as the one received today by Ithaca. So there may be other opportunities to benefit from rapid rises in share prices elsewhere within the sector. Buying Ithaca now could prove to be a questionable move though, since the chances of an improved offer being made seem unlikely on valuation grounds.

Although BHP may be too large to become a bid target, its relatively low-risk business model and enticing valuation could allow it to record rapid share price growth. Certainly, its capital gain potential seems to beat that of Ithaca. As such, for investors in Ithaca, 120p per share may be worth taking, and potential buyers may be best looking elsewhere.

The post Is Ithaca Energy Inc. worth buying after 120p per share bid approach? appeared first on The Twelfth Magpie.

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• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?
• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

Peter Stephens owns shares of BHP Billiton. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Bubbling up

Fevertree Drinks (LSE: FEVR) has been one of the most successful stocks on the London market in the last two years. Since the company had its initial public offering in November 2014 the shares have risen by a whopping 470%. Interim results released in July are evidence of the explosive growth this stock has seen. Revenue was up 69%, earnings per share was up 89% and the interim dividend was almost doubled to 1.54p. 

Many investors have been put off the stock by the high price-to-earnings ratio and minuscule dividend yield. However, paying 83 times earnings for a growth stock like Fevertree isn’t completely unheard of. Many of the highly successful tech companies in the US have traded on price-to-earnings ratios of over 80.

With its growth potential, City analysts seem to think that Fevertree is fairly valued at the current price. This would seem to be a viewed held by the founders of the company too. Both Charles Rolls and Timothy Warrillow sold shares this year netting a cool £17.7m between the two of them. Yet this to me is a bit of a red flag to be honest and I would be wary if the founders sell further shares any time soon.  

Low cost production

Ithaca Energy (LSE: IAE) has been recovering well this year after a tough time in 2015. The shares are up 172% since 1 January this year and show no signs of stopping anytime soon. The recently released Q3 operational update shows that Ithaca is continuing to lower costs and work on asset profitability. The company produced 9,900 boepd (47% liquids) which was ahead of the 9,000 boepd target for the quarter. 

The key value lever for Ithaca in the short term is first oil at the Stella field in the North Sea. First oil is expected in November and a rapid ramp up in production should see the company reach an annualised production rate of approximately 16,000 boepd. This should drive the operating cost per barrel below the $20 mark and boost revenue and profits. In August, CEO Les Thomas said “production is running ahead of guidance, operating costs have been further reduced and we have continued deleveraging the business.” 

Ithaca has performed very well in the first half of 2016 and in the next few months the much anticipated Stella field will come online. First oil has been delayed multiple times but next year should be transformational for Ithaca. It plans to continue to pay off debt and deleverage the balance sheet. This plan should be good for shareholders as the business equity price should increase if oil stays above the $45 per barrel mark. 

The post Should you be buying these two growth stocks? appeared first on The Twelfth Magpie.

More reading

• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
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• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

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

The shares now trade at 35p, but I believe further gains may be possible. The Pilot well found a “very significant hydrocarbon column” of at least 620m, and test-flowed up to 11,000 barrels of oil per day without producing water.

Hurricane chief executive Dr Robert Trice now believes that the firm’s provisional analysis suggests the Lancaster field “is likely to be significantly greater” than the 207m barrels of 2C contingent resources previously projected.

Oil explorers often have a reputation for overstating good news, but in Hurricane’s case I think optimism is probably justified. So far, Hurricane’s modelling of the Lancaster field has proved to be very accurate.

Hurricane also has unusually strong finances. Despite the oil industry being in the middle of a major downturn, Hurricane managed to raise £52m by issuing new shares in April. As a result, it will be able to fund this year’s drilling programme without raising further cash.

The group’s decision to suspend farm-out discussions ahead of the Pilot well now looks smart. Resource estimates for Lancaster range from 62m to 456m barrels. If the firm’s drilling programme can firm up these estimates towards the upper end of the range, then the commercial value of the Lancaster field could rise sharply.

What’s next?

Hurricane is now proceeding to drill a horizontal side-track from the top of the Pilot well. This is expected to provide a second future production well and provide additional information about the Lancaster field to help with development.

If the horizontal well is successful, then I believe Hurricane shareholders could see further gains from here. Having said that, I’d expect the shares to pull back a little after today’s massive gains. A few days’ patience could be rewarded with a lower purchase price.

Next year’s big winner?

Shares in North Sea oil producer Ithaca Energy (LSE: IAE) have already risen by 312% from January’s low of 16p. But they remain 50% lower than they were two years ago, before the oil crash really got started.

Ithaca’s decision to develop the Greater Stella project wasn’t very well timed. But Stella promises to lift Ithaca’s oil production from 9,300 boepd to between 20,000 and 25,000 boepd. The firm’s finances should also be transformed.

Like Hurricane, Ithaca is well regarded by institutional investors and was able to raise $66m at 53p per share in October last year. This fundraising helped Ithaca toreduce its net debt from more than $800m in early 2015, to $606m at the end of June.

The start-up of the Stella field is expected to push Ithaca’s operating costs per barrel down to less than $20. Analysts are currently forecasting earnings per share of $0.11 for 2017, which puts Ithaca stock on a forecast P/E of 8.2.

That’s cheap enough, but I think those shareholders willing to wait until 2018 could see much higher levels of profit, as Ithaca’s debts are repaid and the oil market recovery gains strength.

I believe Ithaca remains a buy, for investors with a medium-term outlook.

The post 2 ‘must-buy’ oil stocks with huge potential? appeared first on The Twelfth Magpie.

More reading

• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?
• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

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

Alongside this, Ithaca has reduced costs. Its unit operating costs have now been lowered to $25 boe, which is a reduction of 17% on previous guidance. This should help the company to become increasingly competitive in a low oil price environment.

Furthermore, Ithaca’s cash flow from operations was $82m in the first half of the year. This has helped it to reduce net debt from $800m in the first half of 2015 to $606m at 30 June 2016. This deleveraging of the business reduces Ithaca’s risk profile and means that its long-term future is now increasingly sustainable. And with it having an attractive group of investment opportunities available within its portfolio, it’s well-positioned to make further improvements to its business even with current low oil prices.

Set to outperform?

Clearly, this is still a tough period for resources companies such as Ithaca. Sector peer Tullow Oil (LSE: TLW) is also seeking to improve its cash flow and reduce its debt levels, with its strategy to pivot towards production set to boost its profitability in future.

A key part of this is Project TEN in Ghana, which will see Tullow’s production levels increase rapidly in the near future. As such, it’s forecast to report a rise in earnings of 184% in the next financial year, which puts it on a price-to-earnings growth (PEG) ratio of only 0.1. This indicates that now is an excellent time to buy it and with Tullow having a stronger profit growth outlook as well as a larger and higher quality asset base than Ithaca, it looks set to outperform its smaller peer over the medium-to-long term.

Lower risk

However, Tullow lacks income appeal and on this front industry peer Petrofac (LSE: PFC) has huge potential. It currently yields 6% and with its dividends being covered 1.9 times by profit, they appear to be sustainable and have room to grow at a brisk pace.

Furthermore, Petrofac is forecast to increase its earnings by 25% next year and this puts it on a PEG ratio of only 0.4. While this is higher than Tullow’s valuation, Petrofac has a more stable balance sheet and therefore offers a lower risk profile. Its strategy of cost-cutting has also made a positive impact on the company’s outlook, while its diverse business model provides a degree of protection against further oil price falls.

Petrofac reported a change in its CFO today, but with a strong wider management team and a sound strategy, it seems to be a better buy than Tullow and Ithaca. All three could outperform the wider index, but Petrofac offers the best overall total return prospects and the most favourable risk/reward ratio.

The post Is this stock the best buy in the resources sector after today’s results? appeared first on The Twelfth Magpie.

More reading

• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?
• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

Peter Stephens owns shares of Petrofac. The Motley Fool UK owns shares of and has recommended Petrofac. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

A 66-year dividend history

Royal Dutch Shell (LSE: RDSB) hasn’t cut its dividend since WWII. The company is committed to maintaining the current payout of $1.86 per share, which equates to a yield of 7% at current prices. Last week’s interim results disappointed the market, but six months is nothing to a group like Shell, whose business plans stretch decades into the future.

Shell’s full-year profits are expected to rise by 40% in 2016 and by 67% in 2017. At 2,000p, I believe the shares are decent value for long-term investors.

A focus on cash returns?

Vietnam-focused oil and gas producer SOCO International (LSE: SIA) reported net cash of $90m on 8 June. That means about 27p of the current 150p share price is covered by cash. Generating cash is very much a focus of SOCO’s operations, perhaps because founder and chief executive Edward Story owns 4.4% of the firm.

SOCO’s low operating costs mean that it can achieve cash flow break-even with oil in the low $20s per barrel. The firm is also pursuing a $52.7m payment owed to it from a past asset sale. Future cash returns could be generous.

North Sea opportunity

Norwegian North Sea operator Faroe Petroleum (LSE: FPM) recently spent $70m to acquire a number of new producing assets from Norwegian firm DONG E&P. These are expected to add 8,000 barrels per day of production to Faroe’s output.

The new assets’ operating costs are estimated at around $19 per barrel. They’re expected to reduce Faroe’s group operating costs to $26 per barrel, compared to $30 per barrel without the acquisition. I believe Faroe shares could do well over the next few years.

Poised for profit?

Ithaca Energy (LSE: IAE) operates in the UK North Sea and is about to open the taps on the transformational Greater Stella Area development.

Stella is expected to add 16,000 barrels of oil equivalent per day (boepd) to Ithaca’s existing production of 9,000 boepd. Analysts are forecasting a profit of $47m on revenue of $454m for 2017. That puts Ithaca stock on a 2017 forecast P/E of just 6.1.

If Ithaca can use the Stella cash to quickly repay its $606m net debt, then I believe the firm’s shares could deliver big gains from here.

A high-quality explorer?

Raising cash for oil exploration is tough in the current environment. But North Sea firm Hurricane Energy (LSE: HUR) managed to raise £52m in a placing at 15p per share in April.

At the time, this represented a 46% premium to the previous day’s closing share price of 10.3p per share. That’s an impressive achievement, reflecting investors’ confidence in Hurricane founder Dr Robert Trice and the firm’s Lancaster oil field.

If this year’s two-well drilling plan is successful, I believe Hurricane could deliver further gains for shareholders.

The post 5 stocks to buy during this oil market retreat? appeared first on The Twelfth Magpie.

More reading

• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?
• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

Roland Head owns shares of Royal Dutch Shell. The Motley Fool UK has recommended Royal Dutch Shell B. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

No worse than expected

The model toy and train company announced its annual results this morning, alongside details of an rescue share placing. Hornby will raise £8m at 27p per share. That’s an impressively small 15% discount to Tuesday’s closing price of 32p.

However, Hornby warned the market this morning that the company’s future may be in doubt if shareholders don’t approve the placing. A new £10m lending facility that’s needed to refinance Hornby’s net debt of £7.2m won’t be approved if the placing doesn’t go ahead.

Last year’s results were no worse than expected. Revenue fell by 4% to £55.8m and the firm made an underlying pre-tax loss of £5.7m. Hornby suffered badly with IT and supply chain problems last year, which the firm says contributed to poor sales.

Under the guidance of new chief executive Steve Cooke, Hornby now plans to cut its product range by 40% and focus on core brands and markets. The firm also plans to make significant cost savings and deal with a sizeable overhang of unsold stock from last year.

In my view, big gains are possible — but significant risks remain.

Lower costs for key oil project

Shares in North Sea oil and gas producer Ithaca Energy (LSE: IAE) edged higher on Wednesday, after the firm said that operating costs for its flagship Greater Stella Area (GSA) project would be lower than expected.

The expected savings are the result of Ithaca being given an opportunity to use a pipeline connection that’s been relinquished by another operator. First production from the Stella field is expected in late September 2016. Exporting oil by pipeline rather than tanker will save cash when the pipeline connection is completed in 2017.

Ithaca shares have risen by 132% so far this year and are no longer an obvious bargain. In particular, I’m concerned about the firm’s $630m net debt. However, Ithaca has some hedging in place through to mid-2017.

The firm also expects operating costs to fall to $20/boe when Stella production starts. This should allow the firm to start repaying its debt by the end of this year. In my opinion, Ithaca could deliver further gains for shareholders.

Woodford is backing this stock

Unlike Hornby and Ithaca, Game Digital (LSE: GMD) is already profitable. However, this hasn’t stopped the group’s share price from falling by 70% over the last year. A profit warning just before Christmas did most of the damage, but Game Digital isn’t a basket case.

Game is now expected to report earnings of 9.7p per share for the year ending 25 July. This puts the stock on a forecast P/E of 8.2, with a prospective dividend yield of 6.4%.

The firm’s big strength is that it has plenty of cash. Net cash was reported as being £120m at the start of January. Although this probably represents a seasonal high, the group’s ability to generate free cash flow is significant. Results for the first half of this year suggest that the dividend should be comfortably covered by free cash flow.

Neil Woodford’s funds own a slice of Game Digital, and I can see why. If trading stabilises, this company has the potential to generate a generous stream of cash for shareholders.

The post Could Hornby plc, Ithaca Energy Inc. & Game Digital plc double in the next 6 months? appeared first on The Twelfth Magpie.

More reading

• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?
• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

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

Meanwhile, annual results this morning from Ithaca Energy (LSE: IAE) saw the North Sea operator’s shares hold on to the gain they’ve made since a low in January.

I believe there’s a strong case for selling Gulf Keystone and buying Ithaca instead.

It gets worse for Gulf

Gulf Keystone is drowning in debt. The company is due to repay $250m of bonds in April next year, followed by $325m in October.

But Gulf Keystone’s problems are more immediate: coupon payments of $26.4m are due in 26 days time and again on 18 October.

The company said in last week’s results that there’s “significant uncertainty as to whether cash receipts between the date of this report and 18 April 2016 will be sufficient to enable the Company to make its coupon payments” without breaching a covenant to hold a $32.5m cash reserve.

Gulf Keystone received a monthly net cash payment of $6.7m yesterday, giving it total cash of $57.2m. That will fall to $50.7m by 18 April based on this year’s running daily operating cash burn of $0.25m. The coupon payment would take cash down to $24.3m compared with the covenanted cash reserve of $32.5m, so Gulf Keystone needs a cash payment of at least $8.2m by 18 April to avoid breaching the covenant. There’s a grace period totalling 20 days, but by the end of that time operating cash burn would have added a further $5m to the cash required.

If Gulf Keystone is unable to meet its covenanted obligation, bond holders have the right to request that repayment of the $575m principal is declared immediately due and repayable.

Even if Gulf Keystone does scramble over the April hurdle, the directors expect to be unable to make the October coupon payment, let alone next year’s principal. The company says there’s a “low likelihood of an asset transaction in the near future”, which means existing shareholders likely being diluted to homeopathic levels in a restructuring involving a debt for equity swap and further equity fundraising.

The shares are trading at 7.6p, but the situation for equity holders appears so precarious that I believe selling would be the most prudent move.

It gets better for Ithaca

There was a lot to like about Ithaca’s results and outlook statement this morning. The 2015 investment programme was delivered 25% under budget, unit operating cost of $31 a barrel was a 44% improvement on the previous year, cash flow from on-going operations increased by 70%, and net debt reduced from a peak of over $800m in the first half to $665m at the year end.

For 2016, Ithaca’s Stella field is on track for first production in Q3, adding an expected initial 16,000 barrels a day to the 9,000 barrels a day from the company’s other operations. This is forecast to bring unit operating cost down to below $25 a barrel. With substantial hedging at $60-plus a barrel through to mid-2017, bank loans not maturing until September 2018 and bonds until July 2019, Ithaca’s future appears bright, if it executes on its operations and there’s not a total collapse in the price of oil.

With the shares changing hands at 32p — 46% below their 52-week high — I believe this North Sea operator could be one of the better smaller oil companies to buy in a currently troubled sector.

The post Should You Sell Gulf Keystone Petroleum Limited And Buy Ithaca Energy Inc? appeared first on The Twelfth Magpie.

More reading

• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?
• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

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

One factor that’s excluded from this figure is finance costs. Heavily-indebted North Sea operators have avoided problems in this area so far with hedging, which guarantees a minimum sale price for future production.

But most companies’ hedging coverage is starting to tail off. If oil prices remain below $50 into 2017, I expect to see companies such as Premier Oil (LSE: PMO), Ithaca Energy (LSE: IAE) and Enquest (LSE: ENQ) facing problems servicing and refinancing their debts.

This could lead to emergency fundraisings of the kind we saw with Afren last year, in which shareholders lost almost everything.

Premier Oil

Shares in this former FTSE 250 company have fallen by 86% over the last year. The firm’s equity is now valued at just £97m ($138m), while its net debt is $2.2bn. The group has already been forced to negotiate more relaxed terms from its lenders, but I believe things could get worse.

During the second half of 2015, 60% of Premier’s oil production was hedged at an average of $92.3 per barrel. In 2016, this hedging cover falls to just 25% of forecast oil production, at an average of $69 per barrel. That’s a massive reduction in cash flow from hedging.

Although the firm’s planned acquisition of E.ON’s North Sea assets should help to improve cash flow, it’s not clear to me whether this will be enough.

Ithaca Energy

Shares in Ithaca rose sharply on Thursday, as oil hit $34 amid rumours that Russia and OPEC may agree to cut oil output.

However, even if this happens, it may not be enough. Ithaca’s net debt at the end of 2015 was $665m.The group’s latest update indicates that while most oil and gas production during the first half of 2016 will be hedged at about $60 per barrel of oil equivalent (boe), this coverage will tail off during the second half of this year.

In 2017, hedging coverage will drop to 7,000 boepd at $62. By 2017, Ithaca expects to be producing 25,000 boepd following the start-up of the Stella field. The majority of this seems likely to be unhedged.

I suspect Ithaca could face serious problems in 2017 if oil prices remain low.

Enquest

Enquest’s net debt was expected to be $1.55bn at the end of 2015, thanks to the ongoing costs of developing its Alma/Galia and Kraken fields.

For 2016, Enquest has hedging in place at $65 to $68 per barrel for 10m barrels of its forecast production. This is around 60% of total expected production and is similar to 2015. A lower average oil price could push Enquest’s revenue lower this year, but I think the big risk is 2017.

Enquest is due to start repaying debt in 2017. With expected operating costs of $26 to $28 per barrel, it could take several years for the firm to make much of a dent in $1.55bn of debt.

In my view, this risk is why Enquest’s share price has fallen by 90% over the last two years. Until the group’s debt levels come down, shareholders won’t be entitled to any of Enquest’s earnings. Buying now looks risky, in my view.

The post Why It’s Much Too Soon To Buy Premier Oil PLC, Ithaca Energy Inc. & Enquest Plc appeared first on The Twelfth Magpie.

More reading

• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?
• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

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

Small oil stocks are hardest hit of all, making the 750% gain achieved by Pantheon Resources (LSE: PANR) over the last year even more impressive. But at more than 100p per share, is high-flying Pantheon still a buy?

In today’s article I’ll look at the latest flow-testing update from Pantheon, plus the latest updates from North Sea stocks Ithaca Energy (LSE: IAE) and Faroe Petroleum (LSE: FPM).

Pantheon Resources

Investors were encouraged last year when Pantheon’s first well in East Texas, VOBM#1, flow-tested at 1,500 barrels of oil equivalent per day (BOEPD).

Today’s news was less good as flow-testing of the VOS#1 well has been interrupted by a blockage. Pantheon shares dropped by as much as 20% but have since recovered and are currently almost unchanged.

Pantheon said today that the net pay and initial flow rates from VOS#1 were consistent with the well being able to provide a mid-estimate total recovery of 3m barrels of oil equivalent.

The firm plans to drill well over a hundred wells of this kind in its fields in East Texas, so the scale of the attraction is obvious. What makes Pantheon a potential special case is its low costs. According to a presentation published by the firm in December, capital expenditure and operating expenditure for each well are expected to be less than $5 per barrel.

However, it’s worth noting that only two wells have been drilled to date, and that at $30 per barrel, the current price of US crude is 25% below Pantheon’s lowest planning estimate of $40 per barrel.

In my view, a lot of potential success is already priced into Pantheon shares. I’m not sure they’re an obvious buy.

Ithaca Energy

Shares in Ithaca Energy fell by 8.5% to 19p this morning, despite the firm reporting that production is on track to double to 25,000 BOEPD after the Stella field starts up later in 2016.

One problem is that the price of oil is now almost level with Ithaca’s operating cost of $30/BOE. Although 10,000 BOEPD is hedged at about $61/BOE until mid-2017, the firm also has debt costs, $50m of planned capital expenditure, and corporate overheads to fund.

Ithaca’s net debt of $665m means that pressure on cash flow is likely to remain intense. Ithaca could be a superb recovery buy when the market starts to improve, but I think it might be wise to sit on the sidelines for a little longer yet.

Faroe Petroleum

Norwegian specialist Faroe said today that it has spudded (started drilling) the Kvalross prospect in the Barents Sea. The well, in which Faroe has a 40% interest, will test two targets with “significant oil and gas resource potential”.

This is something of a wildcat so the risks of disappointment are high. But regardless of this I believe Faroe is a worthwhile addition to a watch list of oil recovery stocks. The group has net cash and a solid production profile. When the price of oil starts to recover, Faroe could perform strongly.

The post As Oil Crashes, Is It Time To Buy Pantheon Resources Plc, Ithaca Energy Inc. And Faroe Petroleum plc? appeared first on The Twelfth Magpie.

More reading

• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?
• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

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

I’ve chosen these firms because in better market conditions all three would be seen as high quality, low-cost operations, with good assets.

The problem is that commodity producers don’t stop producing just because they are losing money. If they did, the markets for iron ore and oil would probably come back into balance pretty quickly. As things stand, we may have a longer wait.

In the meantime, I think it’s worth monitoring these stocks. Is now the time to consider buying into a falling market?

Rio Tinto

Rio is a stock I hold in my long-term income portfolio. I’ve averaged down once this year and intend to do so again in the next few weeks. This should help me lock in a higher dividend yield on cost in years to come.

I’m confident buying more Rio because the firm has some of the lowest iron ore production costs in the world. Although iron ore has now fallen below $50 per tonne, Rio is producing it at a cash cost of $16.20 per tonne. Profits are almost guaranteed, and Rio will be there to benefit when prices do eventually recover.

Although the prospective yield of 8% flags up the risk of a dividend cut, I believe that Rio’s strong cash flow and manageable debt mean that any cut would be quite modest. I’m happy to accept this risk.

Genel Energy

Genel’s current enterprise value (market cap plus net debt) of £672m values the firm’s 429m barrels of proven and probable reserves at just $2.37 per barrel. That’s extremely cheap, especially as Genel also has very low production costs.

It’s tempting to see Genel as an easy buy, at less than 200p.

My only concerns are the political and commercial risks of operating in Kurdistan. Although Genel has plenty of cash to tide it over, it is owed around $400m by the Kurdistan government for past oil sales. There’s also the risk that the ISIS conflict will extend into areas of Kurdistan that have previously been safe.

I believe the Kurds will pay if they can — but what if they can’t? Genel is a riskier play than Rio, but I believe it could deliver a multi-bagging recovery when the price of oil starts to recover.

Ithaca Energy

Ithaca is one of the better small-cap North Sea firms, in my view. It was consistently profitable from 2009-2013 and is expected to report a profit for 2015 and 2016.

However, the firm’s lenders recently reduced the amount they were prepared to offer the firm through its reserve-based lending facility. That’s the result of the falling value of Ithaca’s 70m barrels of proven and probable reserves.

Although Ithaca stock currently trades at just 0.2 times its book value, the group’s net debt means these shares aren’t as cheap as they seem. Ithaca’s enterprise value is around £600m ($910m). This means that the group’s reserves are valued at about $13 per barrel. That’s not especially cheap.

As with Genel, I believe Ithaca shares could easily double when the price of oil starts to rise. However, there’s a real risk that things could get worse before they get better.

The post How Low Can Rio Tinto plc, Genel Energy PLC And Ithaca Energy Inc. Go? appeared first on The Twelfth Magpie.

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Roland Head owns shares of Rio Tinto. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.