Owners of Lamprell (LSE: LAM) shares may be buoyed by their very recent stellar performance. Rocketing upwards a massive 179% in the last week, shares in the FTSE-listed oil and gas support services firm may be signalling a turnaround after five years of sustained decline.
Investors eyeing up opportunities for future capital appreciation to make millions may be looking at Lamprell shares with interest. After all, it’s being greedy when others in the market are fearful that drives Warren Buffett’s investing strategy. To illustrate the validity of this method, if you’d bought and held 100 shares in International Business Machines (IBM) after their 50% drop in the early 1960s, you’d be a retired millionaire right now!
However, buying a stock for capital gains is risky and any enterprising investor needs to research carefully. On this basis, it’s worth digging deeper into the Lamprell share price to find out why some investors think now is the time to be greedy with Lamprell.
Lamprell shares surge on contract award
On 20 May, Sharjah National Oil Corporation (SNOC) awarded Lamprell a new contract, which caused the Lamprell share price to rise. However, investors have expected this for some time, as part of a $6.2bn bid pipeline. Indeed, the contract should reassure investors that Lamprell’s management is working towards promises made.
However, the timings of pipeline awards remain a challenge for long-term capital intensive industries like oil and gas. In addition, the double whammy of plunging oil prices and the Covid-19 pandemic is impacting Lamprell’s business by delaying project awards further. Costs have increased and productivity has dropped as redundancies and reduced working hours begin to bite.
This will not help Lamprell’s liquidity crisis. Declining revenues and net losses three years in a row are resulting in negative cash flows, eating into strategic reserves. Longer-term investments are being cut back to help with short-term cash needs. Consequently, I think Lamprell’s short-term strategy will be about cash conservation for survival. Funding to realise future pipeline activities will come later.
Lamprell looks to debt financing
Lamprell’s management is assuming the company will secure debt financing. However, the large depletion of assets gives the firm fewer assets to loan against. The coronavirus pandemic and the oil price crash means many firms are competing for funding. Lamprell may find securing financing a lot harder.Â
However, with a reputation for quality engineering and good project management means, Lamprell is in a strong position to win future projects. Indeed, the firm is expecting a major contract win within the next 12 months.
According to management, the firm’s UAE base will help its prospects for winning bids in the Middle East. The location ensures transport costs and risks are lower for customers when compared with Asian competitors. And a history of business interests there means Lamprell is culturally aligned with client expectations.
Currently trading at around 19p, Lamprell shares are cheap when compared with the per-share net tangible asset value of 46p. So, if the business collapses shareholders could gain, assuming Lamprell doesn’t divest any more assets.
But for long-term investors, Lamprell is a long way from demonstrating a sustainable business model that can increase earnings over time. I won’t be buying.