Is Cairn Energy PLC A Bigger Opportunity Than Low & Bonar plc And Enquest Plc?

It is not a great time to invest in stocks with a beta higher than 1. That said, at their current price, the shares of Cairn Energy (LSE: CNE) trade broadly in line with the combined value per share of the cash and the undrawn credit facilities that that the group holds on its books. Meanwhile, its projects pipeline in Senegal and its stake in Cairn India are worth nothing at all based on its current equity value. 

By comparison, the shares of Low & Bonar (LSE: LWB), with their higher beta, trade some 20% above the book value of its cash and cash-like items, but they could be worth much more than that if the company meets its ambitious growth plans.

However, that’s not to say I am ready to buy!  

In fact, I’d likely be adding volatility to my portfolio with LWB, though it’d still be safer than investing in EnQuest (LSE: ENQ), whose stock is the riskiest investment of all, in my view, and not only because of its high beta of 1.7. 

Investment Requirements

At 154p, Cairn stock is valued at a level that is consistent with its cash per share value (81p) plus the amount of cash per share (64p) that is available for withdrawal via a bank facility — the combination of cash and undrawn credit stands at $1.3bn, which would cover for almost three years of heavy investment (capex). 

We are blind on financial ratios as the group doesn’t generate any revenues or income, but there could be hidden value in its 10% residual shareholding in Cairn India Limited (CIL), which was valued at $526m on 30 June. 

The market value of its stake in CIL is down 15% since the end of June, but it is still worth $447m. 

“Cairn continues to be restricted from accessing the value of its ~10% residual shareholding” in CIL, the group reiterated today. 

With regard to this matter, it has “commenced international arbitration proceedings with the Government of India under the UK-India Investment Treaty supported by detailed legal advice on the strength of the legal protections available to it under international law.“

Elsewhere, its trading update registered a significant impairment charge of $177m, which had a big impact on its economic performance, and contributed to a net loss of $230m for the first half of 2015.

That said, net cash used in operating activities was only $14m, which comes on top of capex at $151m. 

In short, Cairn has enough time to deliver on its promises, based on its projected capex requirements.  

Volatility 

The shares of Low & Bonar are not particularly cheap following a rally that reads +40% in 2015, but several elements contained in its balance sheet and income statement indicate that they could be more resilient than I thought.

At 70p a share, however, Low & Bonar’s valuation implies forward net earnings multiples of 14x and 13x for 2016 and 2017.

If investors continue to shy away from risk, its trading multiples could drop rather than rise based on the same amount of expected earnings per share (EPS). That would be the inevitable price to pay for a company that operates in a cyclical sector, and whose growth rate for EPS must be in the region of 15% to 20% annually to please the market over the next couple of years. 

Before investing in LWB, it’s also worth considering that in early September 2014 its stock was hammered — it fell almost 20% in a single day of trading — as it announced that sluggish demand in the European civil engineering space had harmed its earnings profile.

At 70p a share, and almost one year later, its shares currently trade some 13% below the level they recorded before the company warned investors. 

Heading Down? 

Finally, EnQuest — the most difficult investment case here. It’s so easy to be bearish that I’d love to be bullish. There are problems, though. 

First, it’s hard to see how EnQuest could surprise investors, who are scared about the combination of plunging oil prices and high leverage at oil and gas explorers.

Second, EnQuest managed to receive the backing of its lenders earlier this year, amending the terms on its existing debt obligations, but its financial position will remain problematic if oil prices remain below $70 a barrel (we are at about $50 right now).  

Its half year results are due tomorrow, and I have no idea what management plans to say about trailing figures that are unlikely to be exceptional in the light of tough trading conditions. 

I know the market will be unforgiving, pushing down its valuation closer to its all-time lows if it disappoints, however.