• The London Stock Exchange (LSE) is full of diverse growth shares
• Energean’s revenue increased from $28m to $497m between the 2020 and 2021 calendar years
• Barratt Developments recently acquired Gladman Developments for £250m, increasing its potential construction sites by 406 

The London Stock Exchange is full of interesting and diverse companies. I’m currently on the lookout for the best LSE shares to buy now and I think I’ve found two firms that fit the bill. With surging oil and gas prices, I think European giant Energean (LSE:ENOG) could be a good investment for my portfolio at the moment. What’s more, historical results also draw me to residential construction business Barratt Developments (LSE:BDEV). Let’s take a closer look at these two companies.

An oil and gas LSE share

Energean is a giant within the oil and gas industry and operates four segments around the Mediterranean area. These are Europe (especially Italy), Egypt, Israel and new markets, including Malta. Its shares currently trade at 1,174p.

In addition, there is no doubt that the business is also currently benefiting from surging oil and gas prices. Revenue increased from $28m to $497m between the 2020 and 2021 calendar years. WTI Crude oil, for instance, is up 87.75% in the past year and 16% in the past month. It currently trades around $109 per barrel.

While this is good for firms in the sector at the moment, I question how long this underlying energy price trend can continue.

In an update for the three months to 30 September 2021, the company increased production guidance from 38,000-40,000 barrels of oil equivalent per day (boed) to 40,000-42,000 boed. This is a testament to the firm’s output efficiency and its expanding operations in Israel. Ultimately, it succeeded in achieving production of 41,000 boed.

A residential construction business

Barratt bought Gladman Developments in January 2022 for around £250m. This latter firm specialises in acquiring plots for construction, and brings 406 sites to Barratt’s portfolio. This enhances the potential areas for construction. Barratt currently trades at 506.8p.

In a recent update for the six months to 31 December 2021, the company recorded pre-tax profits of around £430m, an increase of 0.6%, year on year. What’s more, its dividend cover increased by about 50%.

Historically, Barratt’s results are also strong. For the years ended June, between 2017 and 2021, pre-tax profits rose from £765m to £812m, while earnings-per-share grew from 61.3p to 64.9p. This consistent growth is attractive as a potential shareholder. It should be noted, however, that past performance is not necessarily indicative of future performance.

There are risks with this sector, too. Rising interest rates essentially mean that that mortgages will become more expensive. This may cause the housing market to slow down as fewer people are able to purchase new homes. This problem, however, may subside in the near future.

Despite this, I think this LSE share might be cheap. Based on trailing and forward price-to-earnings (P/E) ratios compared to competitor Persimmon, I think the Barratt share price may be undervalued. It has trailing and forward P/E ratios of 8.52 and 6.74, while Persimmon has ratios of 9.07 and 8.53. The idea that I may be getting a bargain is very appealing.

Overall, while there are risks associated with both Energean and Barratt, I think they have strong records and are expanding in a controlled fashion. I will be buying both LSE shares very soon.       

On 15 July, Efstathios Topouzoglou, bought over £260,000 worth of shares in two separate transactions. He was already a substantial shareholder along with the CEO, so they have skin in the game, which is another positive. In theory, it aligns their interests with those of other investors.

Energean is an oil and gas exploration company based primarily in the Mediterranean but also with assets in the UK’s North Sea. The operations span Israel, Egypt, Croatia, Malta, Greece, Italy and Montenegro.

What’s good about the FTSE 250 company?

It has multiple assets so isn’t reliant on any one area for oil and gas. It’s also projected to significantly increase revenues from £28m in 2020 up to £1.1bn in 2022. That’s massive growth that I think comes largely from the $284m Edison Exploration & Production, which completed at the end of last year.

Arguably it’s a positive that the shares have become much cheaper recently, though of course they could continue to fall. So it could also be a value trap. The sell-off in the shares has been particularly sharp very recently. That might be because of concerns around interest rates, which would hit indebted companies like Energean hardest.

Why following the director buy could be a bad idea

Buying shares in a company just because a director does isn’t a foolproof plan. It doesn’t guarantee anything. The likelihood is that although Mr Topouzoglou probably isn’t in the habit of losing money and buying shares if he’s not confident, he’s probably still not bet his entire wealth on the firm.

Let’s be clear, despite being a FTSE 250 business, investing in Energean comes with some major risks. It has substantial debt. In fact, far more debt than cash. Its current ratio is well below one, indicating it could have financial problems soon.

Also as oil and gas explorer it’s an inherently risky business and always at the mercy of the international markets that dictate prices. There’s talk of gas being phased out and National Grid is beefing up its electricity distribution – seeing that as having a brighter future.

On the balance of risk versus reward, I’m going to steer clear of Energean, despite the recent director buying and substantial holdings of the CEO and non-exec director. The risk of bankruptcy seems just too high to me. In the commodities sector, I much prefer Ferrexpo that combines being cheap with a high yield, despite it being a very cyclical business. I recently added it to my portfolio.

So let’s look at the details of the share price. It has a market capitalisation of £1.6bn, a price-to-earnings ratio of less than 15 and earnings per share of 61.5p. Its share price rose steadily from £6.35 in December 2018, peaking at £10.92 in August and has declined to around £9.10 today. So if you’d bought shares in Energean a year ago, they’d have gained around 43% today. The share price has actually doubled since listing on the London Stock Exchange in early 2018. outperforming FTSE 250 industry peers such as Tullow Oil, Cairn Energy and Premier Oil during this time.

Global gas prices fell by an average of 2.4% during the third quarter of 2019, which contributed to that share price decline from August to December. A glut of cheap gas available from Russia and the US has also kept prices subdued and the price of oil has been suppressed by the ongoing US-China trade war. 

Wheeling and dealing

In July Energean bought Italian Oil Company Edison for £600m. This deal included a 25% stake in the Glengorm North Sea project. In October, it then sold its stake in Glengorm, along with gas development stakes in the Norwegian North Sea, to Neptune Energy for £200m.

But where do its green ambitions come in? It has pledged to meet the sustainability agenda and hit net-zero carbon emissions by 2050 by committing to and supporting the UN’s ‘Business Ambition for 1.5°C: Our Only Future’ campaign. While such a pledge is an excellent PR move, Energean wants to lead on the ESG (Environmental, Social, and Governance) front. This could be a relatively easy promise for it to pull off compared with many of its Oil & Gas contemporaries. Mainly based in the Mediterranean, since selling its North Sea stake, it’s now close to becoming an 80% gas company with most of its gas fields focused on offshore Israel. With a concentration on gas production, it forecasts it will be able to successfully reduce emissions within the specified timeframe.

Environmental transition

One reason companies are against a rapid change from fossil fuels to renewable energy is that it can’t be transitioned quickly enough to replace electricity production. Renewable energy options are not yet comparable with existing electricity creation. A compromise is to allow gas plants to step in as a less damaging alternative to coal. However, natural gas is mostly composed of methane, so if it leaks into the atmosphere, its benefits over coal are negligible. How quickly the world can transition to renewables, while keeping up with the increasing demand for energy is the million-dollar question. 

Energean has good fundamentals, has strategically positioned itself as a major player in gas production and, with its ESG focus, I think it will continue to do well in 2020. It also has commercial interests in Montenegro, Italy, Croatia, Greece, Egypt and Algeria.

Exploration in the Eastern Mediterranean is a challenge, with political risks, warring religious factions and country rivalries to face. As far as Oil & Gas investments go, I think it has potential, but its location makes it a risky investment, particularly with no dividend to compensate. 

But this could present a buying opportunity for oil and gas shares such as Tullow. And with there seemingly being good value on offer across the industry, a FTSE 250-listed stock which released an update on Wednesday may also be worth a closer look in my opinion.

Improving outlook

The company in question is exploration and production business Energean (LSE: ENOG). It released news of a Gas Sales and Purchase Agreement with IPM Beer Tuvia to supply an estimated 5.5 BCM (billion cubic metres) of gas from its Karish and Tanin FPSO (floating production storage and offloading vessel) over a period of 19 years. The contract is in line with the company’s aim to secure offtake for the remaining capacity in its 8 BCM per year FPSO.

Looking ahead, Energean is expected to rapidly increase its profitability in the current financial year. In fact, the stock trades on a price-to-earnings growth (PEG) ratio of just 0.1. This suggests that it may offer good value for money at the present time, and that it has the potential to deliver improving share price performance. While it may experience a period of volatility and uncertainty, it could offer an improving risk/reward ratio when compared to some of its industry and index peers.

Low valuation

As mentioned, the near-term prospects for Tullow Oil appear to be relatively challenging. The company’s financial outlook may be negatively impacted by a falling oil price, and this could hurt investor confidence over the coming months. Since the company has a relatively high level of leverage versus some of its industry peers, it may be viewed as high-risk by investors. This may mean that it underperforms some of its more established sector peers in the short run.

However, with the stock now having a price-to-earnings (P/E) ratio of around 8.5, it could offer a wide margin of safety. Furthermore, the oil price has been negatively impacted by a six-month waiver placed on Iranian oil exports which may not be extended further. And since the medium-term outlook for the world economy remains relatively robust, according to various forecasts, demand levels for oil may remain at healthy levels.

As such, now could prove to be a good time to buy oil and gas companies such as Tullow Oil in my opinion. Although risky and potentially volatile, the reward potential on offer over the long run could be relatively high after what has been a challenging three months for the wider industry.

Generally, as pure-plays on upstream, mid-cap producers have a lot more to gain from a sustained upswing in oil prices. At the same time, many mid-cap companies in the sector continue to trade well below their historic highs and are valued at big discounts to the market.

Tullow Oil

Shares in Tullow Oil haven’t exactly been sparkling of late — they’re up just 5% since the start of the year, to 216p. The Africa-focused oil and gas explorer clearly has some way to go before it’s fully out of the woods, but early signs suggest that things are beginning to move up for the company.

Thanks to higher oil prices and increasing production, Tullow swung back into profit in the first half of 2018, after making a loss of $348m in the same period last year. Profit after tax in the six months to 30 June was $55m, while free cash flow nearly doubled to $401m.

Progress is also being seen with the ramp-up in production from its offshore Ghana TEN oilfields, with estimated reserves of 300m oil-equivalent barrels. In a recent operational update, the company said it expects to hit full output capacity of 80,000 barrels a day by 2020, up from 56,000 currently.

Exploration

With Tullow’s financials coming back into shape, we are once again seeing more investment into growing its reserves. Although exploration always requires a bit of a gamble, finding new oil has always been its key strength. Tullow has one of the best track records of discovering new reserves, so increased spending on exploration has the potential for significant upside.

On the other hand, however, plans to resume dividend payments aren’t a priority. Despite a big jump in free cash flow, net debt is still rather high, at $3.1bn, meaning Tullow is highly leveraged to the price of oil.

Eastern Mediterranean

Elsewhere, Energean Oil & Gas (LSE: ENOG) is another stock that deserves a closer look. The FTSE 250 company, which raised $460m from listing its shares on the London Stock Exchange in March, has big plans to develop its gas prospects in the eastern Mediterranean.

The eastern Med has become an increasingly active exploration and production region, following a series of high-impact discoveries in Egypt and Israel, attracting a hive of investments from Exxon Mobil, BP, Eni and Total. With the appearance of the oil majors in the area, infrastructure is being developed, opening up supply routes for independent producers such as Energean.

Significant upside

Energean, which has its main production base in Greece, intends to use the proceeds of its equity sale to develop two major gasfield discoveries offshore from Israel, Karish and Tanin. Together, they have potential reserves of up to 2.4trn cubic feet of gas and 32.8m barrels of light oil and condensate, representing significant upside potential for a firm that has just 50m oil-equivalent barrels of commercial reserves.

Of course, there are major risks involved too. On top of the usual cacophony of execution and commodity price uncertainty, investors will have to contend with political risks and rivalries that are typical of the region.