The last three years haven’t been kind to oil and gas companies. Investors are now reluctant to place much value on assets in the ground, preferring the safety of production.
Three of the biggest casualties have been BG Group (LSE: BG), Tullow Oil (LSE: TLW) and Afren (LSE: AFR) — so do any of these asset-rich firms rate as a buy in today’s market?
BG Group
BG shares rose slightly following its half-year results, thanks to a 22% increase in first-half adjusted earnings per share, and a 10% hike in the interim dividend. However, all is not well.
The scale of the challenge facing BG can be seen in the numbers: first-half operating profits of $4bn were insufficient to cover cash capital expenditure of $4.8bn.
In my opinion, BG remains a break-up candidate, as it simply doesn’t appear to have the operational capacity or financial scale needed to realise the potential of its impressive portfolio.
My verdict: Investing in BG is essentially a gamble on the firm finding some way to realise the value of its assets, either through a takeover or through assets sales.
Tullow Oil
Tullow Oil plunged to a loss during the first half of this year, thanks mainly to $402m of exploration write-offs.
The results were broadly in line with expectations, but only served to highlight Tullow’s problem: after several years of legendary exploration success and strong production growth, the firm’s development has stalled.
Unfortunately, Tullow shares still trade on an ambitious forecast P/E of 28.
My verdict: Flat production means that Tullow remains far too expensive, and the firm’s unchanging 1.5% yield is poor compensation for the likelihood of further share price falls.
Afren
Afren has suffered corporate governance problems in the past, and is in hot water again this morning.
The firm’s share price plunged by 30% after it announced that chief executive Osman Shahenshah, and chief operating officer Shahid Ullah, had been suspended, due to evidence suggesting that the two had received “unauthorised payments” from third parties.
Worryingly, these payments were uncovered as part of an independent review “of the potential need for disclosure of certain previous transactions to the market”.
This suggests there might be more bad news to come — a suspicion given weight by Afren’s decision to delay its half-year results announcement, a move that nearly always signifies bad news.
My verdict: Afren’s quality assets are worth more than today’s share price, but questions about the firm’s management make it a risky investment.