Broker tips: Safestyle, Cairn Energy, Nostrum Oil and Gas, Premier Oil, Tullow Oil
Analysts at Berenberg feel the worst may finally be over for oil and gas exploration and production outfits, with the sector having emerged from its latest downturn stronger than before and ready to reap the benefits of a stronger commodities market.
Berenberg, which initiated its coverage on London-listed outfits Cairn Energy, Nostrum Oil & Gas, Premier Oil and Tullow Oil on Thursday, noted that integrated oil and gas companies - given their more diversified business model and in most case stronger leadership - had been able to address the key issues affecting them more swiftly, while E&P groups had adjusted more slowly to the new reality.
Despite that, Berenberg believed there was "more value in the E&P space".
"We estimate an average FCF yield of 17% and 3% for the sector in 2019/2020 (both at $65/bbl), respectively, with a relatively conservative leverage of 2x on average. This compares with an FCF yield of c.7% for the integrateds."
In the case of Cairn Energy, which Berenberg started off with a 'buy' rating and a 240p target price, the German broker said the company's current valuation was "broadly in line with the sector average", which led it to believe the market had not assigned any value to the potential $1.3bn coming the firm's way from its ongoing disputes with Indian tax authorities.
"This upside, coupled with Cairn's operational momentum, offers strong risk/reward, in our view."
With Cairn's operations being spread out across the UK, Norway, Mexico and Mauritania, Berenberg said it would prefer "a more concentrated approach from a geographic perspective" but highlighted the group's partnerships with bigger peers that have strong exploration track records, such as Lundin Petroleum, AkerBP and Eni as a positive.
The German broker also initiated coverage on Kazakhstan-focused operator Nostrum with a 'buy' rating and slapped it with a 280p target price, noting that in the near term there was a potentially strong risk/reward as the group focuses on continuing its success in unlocking the northern part of the Chinarevskoye field, which may potentially add 50m barrels of oil of 2P reserves.
However, the analysts did warn that in the medium/longer term, risks relating to Nostrum's booked 2P reserves would "still linger" and could only be addressed with increased development drilling.
On North Sea explorer Premier Oil, Berenberg started the shares at 'hold' rating with a 140p target price, stating that, although it was "one of the cheapest E&P companies" under its coverage, management still needs to demonstrate its commitment to capital discipline before it would feel comfortable changing its stance.
According to Berenberg, an E&P company needs to offer "strong operational momentum and/or attractive risk-reward via exploration and appraisal" in order to avoid being a "basket case" play on oil price, something it said the last London-listed group in its coverage had failed to do.
"We believe Tullow offers neither and yet trades at a similar multiple to the likes of AkerBP and Cairn – a too rich valuation for Tullow and an unfair reflection of the fortunes of the other two."
The broker started Tullow off at 'hold' with a target price of 240p.
Double glazing group Safestyle rallied on Thursday as Liberum upped its price target on the buy-rated stock to 94p from 80p, pointing to the fact that competitor SafeGlaze has gone into administration.
"We believe that Safestyle is well placed to see an acceleration in its recovery now that SafeGlaze, the aggressive new entrant, has been placed into administration," the brokerage said.
"We believe that SafeGlaze reached annual turnover of around £30m, almost entirely by disrupting Safestyle, and there is an opportunity for Safestyle to recover the lion’s share of this as direct and indirect employees return."
Liberum also highlighted the company's new banking facility and recent CEO share purchase as positive developments.
"We leave estimates unchanged for now while we wait to understand how many employees return to Safestyle," it said.
Back in February, Safestyle issued a profit warning as it cited the activities of "an aggressive new market entrant", which turned out to be SafeGlaze. It said at the time that SafeGlaze - which started trading at the end of January - had added to an already competitive landscape and hit certain areas of the group's operations.
Bradford-based Niamac Developments, which was trading as SafeGlaze, went into administration on Tuesday, just weeks after settling a legal battle with Safestyle for alleged "trademark infringement, passing off, misuse of confidential information and malicious falsehood" among other things.
As part of the settlement, SafeGlaze had agreed to change its trading name and fully re-brand.