The Bitcoin price has fallen by 50% over the last year. So far this year, there’s been no respite. The original cryptocurrency has fallen another 10% over the last month.
Will things turn around for Bitcoin? I’m not sure. I think it’s worth remembering that Bitcoin is not backed by any assets and isn’t widely accepted as a currency.
When it comes to my own savings, I prefer investments with real asset backing, such as property and oil. Today I want to look at two special situations which I think could deliver attractive profits.
Debt is falling steadily
North Sea-focused oil producer Enquest (LSE: ENQ) went into the 2016 oil crash with far too much debt. But the company has weathered the storm, refinanced and now seems to be performing well.
Group production rose by 48% to 55,447 barrels of oil equivalent per day (boepd) in 2018, while net debt fell by $217m to $1,774m. Production is expected to rise by a further 20% to between 63,000 boepd and 70,000 boepd in 2019, paving the way for further debt repayments.
The acquisition of the Magnus field from BP last year has added approximately 60m barrels of proven and probable reserves, increasing Enquest’s total reserve base by around 30%. The deal was approved by the company’s lenders, which suggests that they believe it will improve Enquest’s ability to repay its loans.
Despite this positive outlook, the firm’s high debt load means its shares currently trade on just 4.1 times 2018 forecast earnings.
The investment opportunity here is that as the group repays its debt, the value of its stock will rise proportionately. I see this as high risk and high reward. If things go well, I think the Enquest share price could double from current levels.
A different type of opportunity
If you’re still not keen on investing in companies with a lot of debt, then Kurdistan-focused Genel Energy (LSE: GENL) offers a different type of opportunity. Financial risk is pretty low here, in my view. The company has almost no debt. My sums indicate that it generated free cash flow of about 59p per share during the 12 months to 30 June 2018.
This outstanding cash generation is possible because the company’s oil fields are extremely cheap to operate. I estimate operating costs of about $2.50 per barrel — among the lowest in the industry.
At under 200p, the Genel share price is equivalent to less than four times the group’s trailing free cash flow. That’s very cheap.
Buy, sell or hold?
One risk for shareholders is that the company’s operations in the Kurdistan Region of Iraq will be disrupted by political events or further conflict.
A second risk is that the company will not find a way to return any of its cash to shareholders. This is a common problem with resources companies — in my opinion they are often one-hit wonders. After a notable success, they spend cash on new exploration that fails to deliver any worthwhile results.
In fairness, Genel’s management indicated in January that it might consider “returning capital to shareholders at the appropriate time”.
For now, this stock looks good value to me, trading on 7.5 times 2019 forecast earnings.
As with Enquest, this special situation stock isn’t without risk. But I strongly believe that Genel and Enquest are both likely to deliver greater returns than Bitcoin over the coming years.