Rout

As the oil price crash a few years ago demonstrated, the volatility of black gold can have a devastating impact on smaller companies. They require high levels of capital investment for exploration and to bring their undeveloped assets into production, as well as ongoing maintenance expenditure on any producing assets they have. When the oil price is high, they may be profitable and have eager lenders willing to fund them. When the oil price crashes, profits can quickly turn to losses and high levels of debt can become a huge problem, if lenders decide not to continue their support.

This is what happened to UK onshore developer and producer Igas. It only survived the oil price rout with a financial restructuring that left its existing shareholders owning a small fraction of the business. At the same time, it provided new investors with an opportunity to buy into the company as a recovery play. With a repaired balance sheet and a rising oil price, Igas has made good progress, as today’s results show.

Recovery

The company reported a 26% increase in revenue for the first half of the year against the same period last year, and a rise in net cash generated from operating activities to £6m from £0.4m. Management reiterated its production and operating expenditure guidance for the full year. This underpins a two-analyst consensus forecast of £44.5m revenue and 6.15p earnings per share (EPS).

At a share price of 103.5p (5.6% up on the day), Igas’s market capitalisation is £126m. Its current-year forecast price-to-earnings ratio (P/E) is 16.8 and this falls to 13.7 next year on a consensus forecast of a 23% increase in EPS to 7.55p. While Igas isn’t a stock, I’d want to hold through the ups and downs of the oil price cycle, I think that in the current up-leg, there’s still plenty of upside for the company. As such, I continue to rate the stock a ‘buy’ at this stage.

Shell for sure

There are very few oil and gas stocks that I’d buy and hold for the long term. Shell is an exception and I rate it a ‘buy’ today after the decline in the share price to around 2,500p. There are only a few things you really need to know about Shell, in my view.

It’s market cap is over £200bn, making it the biggest company in the FTSE 100. Lenders can’t afford not to support it through the tougher times, unlike many smaller companies in the industry. There’s infinitely less risk for investors in Shell of having their capital entirely wiped out. And the behemoth’s resilience is evidenced by the fact that it continued to pay generous dividends throughout the period of the recent oil price collapse. In fact, it’s never cut its dividend since World War II.

The stock sports a current-year forecast P/E of 11.8, falling to 10.2 next year on City expectations of 16% earnings growth. With it also offering a running dividend yield of 5.8%, I see good value here at the present time.

Existing shareholders suffered dilution of their interests, but now own stock in an enterprise that has cleared much of its debt and, in the process, secured financial backing from some strong – and presumably knowledgeable – players in the sector.

Steady cash flow

Today’s full-year results underline the firm’s improved position now. Revenue rose 17% during 2017 compared to the year before and net cash from operations came in at £6.7m down from £12.4m the year before. The big financial feature of the report is that net debt plummeted almost 94% to just over £6m, which puts the firm on a much more stable footing.

Production during 2017 was steady at 2,335 barrels of oil equivalent per day (boepd), which is the same figure as that achieved in 2016. Looking forward, the directors expect a similar outcome in 2018 with production coming in between 2,300 and 2,400 boepd. Such steady production should keep the cash flowing into the IGas coffers. Chief executive Stephen Bowler said: “The expectation of ongoing free operating cash flow provides us with a solid platform and financial flexibility to execute our growth plans.”

The plunge in commodity prices led to a difficult two-year period for the firm along with the rest of the industry, but the directors say that a more stable outlook for commodity prices now leaves it well positioned for its next phase of growth. The company is starting to drill and flow-test appraisal wells to assess the commercial viability of its shale resources, which could go on to deliver upside for shareholders from here. I think ‘right now’ is a good time to dig deeper into the opportunity with IGas.

Combining income and growth

If you do decide to take the plunge and buy some IGas Energy shares, why not pair them in your portfolio with some BP stock? The main attraction is the oil major’s fat dividend. At the recent share price of 462p, the forward dividend yield for 2019 runs just above 6%, which is handy income to collect as you wait for the upside potential from IGas to materialise.

In its full-year results report back in February, BP declared underlying profit up 139% compared to the year before, organic cash flows back in balance, downstream underlying profit up 24%, upstream production up 12%, a reserves replacement ratio of 143% and a restarting of the share buyback programme. It’s amazing what a difference the recovering oil price makes, and with forecast earnings now set once again to cover forward dividend payments, the dividend no longer looks threatened.

The firm expects underlying production during 2018 to be higher than 2017 due to “the ramp-up of major projects.,” which reinforces my view that BP could serve investors well in the coming years.

Looking forward, could further falls be ahead for the company? Or does it offer significant turnaround potential following its operational update released on Friday?

Improving performance

The company’s performance in the 2017 financial year was generally encouraging. Its net production averaged 2,335 boepd (barrels of oil equivalent per day) for the year. Operating costs for the year were around $28.50 per barrel of oil. It expects to deliver net production of between 2,300 and 2,400 boepd in 2018.

During 2017, the company’s 2P (proved plus probable) reserves replacement was over 100%. Its cash balance at the end of the year was £15.8m, while it had net debt of £6.1m. This shows that it appears to have sufficient financial resources to implement its current strategy. And with the price of oil having risen significantly, it is generating free cash flow in its conventional business. This could mean it is better placed to deliver on potential additional projects with attractive prospects.

Looking ahead, the current year could be an eventful one for IGAS Energy. Its drilling programme is set to continue, with there being the potential for positive news flow on this front. Furthermore, with the supply surplus of oil not expected to return in 2018, the prospects for the wider oil and gas industry appear to be improving. As such, the company’s stock price could enjoy a relatively prosperous 12 months.

High growth potential

Also offering upside potential within the oil and gas sector is Nostrum (LSE: NOG). The Kazakhstan-focused explorer and producer has also experienced a challenging period, with its bottom line moving into the red in 2016. However, it is expected to return to profit in the 2017 financial year. Following an expected £1m pre-tax profit in 2017, its profit is forecast to rise to as much as £94m in 2019. This could prompt a significant improvement in investor sentiment.

Since the stock currently trades on a forward price-to-earnings (P/E) ratio of just 6.2, it appears to offer a wide margin of safety. This suggests that there could be a high level of capital return potential on offer, and may mean that the stock is able to post a recovery following its 35% share price decline over the last year.

Certainly, if the oil price experiences a disappointing period then this could cause Nostrum’s forecasts to be downgraded. But with such a wide margin of safety, the company appears to have an attractive risk/reward ratio for the long term.

It’s a strong comeback for a company that was forced into a painful refinancing in 2017. IGas now has backing from both chemicals giant INEOS and from oil and gas investor Kerogen Capital, which owns 28% of the group’s shares after pumping £29m into last year’s refinancing.

Although this AIM-listed firm is a relatively small investment for both INEOS and Kerogen, both are credible investors with industry knowledge. Their support suggests to me that they see considerable upside potential in the firm’s assets.

An action-packed year

INEOS support means that IGas now has a carried work programme worth up to £183m. The company is hoping to drill two new shale wells this year, and further data is expected from a number of rivals also hoping to drill or frack UK shale wells.

Rising oil prices have also helped the group’s portfolio of conventional oil and gas wells. These are now producing around 2,500 barrels of oil equivalent per day, at a cost of about $25 per barrel. Group revenue is expected to rise by about 10% to £36m this year, and broker forecasts suggest a net profit of about £3m.

The speculative opportunity for shareholders lies in the shale exploration programme. In my opinion, success could easily result in rapid gains. But if early results from shale wells are disappointing, then I’d suspect the shares may decline.

In my opinion this situation remains highly speculative. I’d only be prepared to consider this stock for a small part of my portfolio.

One share I’d buy today

A stock I’d be happy to own in much larger amounts is Porvair (LSE: PRV), a specialist maker of industrial filters. This £243m firm has risen by more than 850% since the financial crisis, and has gained 85% over the last two years.

Today’s full-year results suggest to me that the group’s growth potential remains strong. Pre-tax profit rose by 16% to £11.7m last year, while sales were 6% higher at £116.4m. Earnings per share climbed 14% to 19.5p.

Although Porvair spent £11.4m on acquisitions and capital expenditure last year, the group still ended the year with net cash of £9.8m. That’s just £3.8m less than the £13.6m reported at the end of 2016, highlighting the group’s strong cash generation.

Quality at a reasonable price?

Porvair shares are up 3% at the time of writing, reflecting chief executive Ben Stocks’ view that the group has started 2018 with “a healthy order position and is trading well”.

The firm’s growth strategy is based on the principle that it will only sell products which require specialist skills to make, and which must be replaced regularly.

This approach appears to provide a high level of repeat business and attractive pricing power, due to limited competition. The Kings Lynn-based firm’s operating margins have now been stable at about 10% for the last five years.

Although Porvair stock may look pricey on 28 times forecast earnings, I believe this is a quality growth business that’s worth owning. I’d be happy to buy at current levels, with a view to averaging down during any future periods of weakness.

Is it too late to buy these soaring stocks? Or are recent gains just the start of a bigger multi-year rise?

Responding to regulation

IG Group’s shares are little changed at 785p following today’s results, having enjoyed a strong run-up from 650p since a pre-close trading update on 5 December. In fact, this has been part of a longer rise since December 2016 when the threat of tighter regulatory controls initially caused a major share price crash for IG and its rivals.

Several announcements by regulators have caused some short-term volatility in the shares but the broad upward trajectory has continued. As the industry leader, FTSE 250 firm IG is well placed to pre-empt or adapt to new regulations. For example, it was able to respond to a recent fairly damning review of part of the contracts for difference market by the Financial Conduct Authority (FCA) with the statement: “IG believes that it complies with the applicable rules and FCA guidance and that this review has no new financial implications for IG’s business.”

Highly attractive valuation

Increased regulation could actually benefit the big players in the long run and IG’s half-year results today showed the business continuing to progress, with record revenue and profit for the period. City forecasts for the company’s financial year ending 31 May project earnings growth of over 13% to 52.4p a share, giving a price-to-earnings (P/E) ratio of 15. There’s also a very nice 4.6% yield from a forecast 36.3p dividend.

IG’s earnings multiple and yield strike me as highly attractive for an industry leader, which is also broadening its client base through the development of new products and services, and through the establishment of operations in new geographies. For these reasons, I rate the stock a ‘buy’.

Very buyable?

AIM-listed Igas Energy faced gale-force headwinds as a result of its high level of debt and the oil price crash of 2014. Indeed, so severe were these that, ultimately, the company’s very existence was threatened. A massive financial restructuring crushed existing shareholders but at least enabled the company to survive.

I turned bullish on Igas in June after its refinancing. I noted its transformed financial footing — net debt of $8m, compared with $122m pre-refinancing — and that the company was cash flow generative at the prevailing oil price. Also, that its shale development plan was well funded by its partners with a carried work programme of up to $230m.

Since then, it has released its half-year results and the price of oil has continued to recover (reaching over $70 a barrel recently). Management said that in addition to the carried work programme on its shale acreage, it now has capital to deploy in incremental growth projects across its conventional assets. It expects the latter to underpin increased production to 2,500 barrels of oil equivalent per day and operating costs of $25 a barrel in the medium term. As such, the shares of ‘New Igas’ continue to look very buyable to my eye.

To add to the group’s woes, the oil price crash of 2014 cut its cash flow dramatically. With seemingly everything going wrong for the business, the shares have cratered by more than 96% over the past five years, although they have bounced back recently. 

However, 2018 looks to be somewhat of an inflection point for the fledgling hydrocarbon group. With oil prices rising and low operating costs, IGAS is well positioned to return to profit in the years ahead, and long-suffering shareholders look set to profit. 

Profits flowing 

IGAS’ interim results showed off what the group is capable of. For the six months to 30 June, the firm reported adjusted earnings before interest, tax, depreciation, and amortisation (EBITDA) of £2.5m. Cash generated from operations during the period was £0.4m. 

Management’s estimate of the overall operating cost per barrel of oil produced for full-year 2017 was $40.50, equivalent at the time of the interim results. Since then, the price of Brent crude has risen by nearly 40% indicating that today, the firm is profitable and generating plenty of cash. Anticipated average production for 2017 was 2,250 boepd with output increasing to 2,500 boepd by year-end. 

After a transformative restructuring last year, IGAS is now almost debt free. The group restructured around $130m of debt to just $30m at the end of June. Net debt at the end of the period was $9.3m, giving the firm plenty of headroom to fund capital spending. Following the rise in the oil price, increased cash generation should help reduce this deficit even faster than expected. 

Future growth 

So IGAS is generating cash and has plenty of resources to support its growth, but what’s next for the business? 

Management is progressing with several growth projects to help improve output. The Welton Waterflood expansion project and Stockbridge production recovery projects are both expected to complete this year, yielding an estimated 100 boepd for a capital outlay of less than £2.5m. During the year, the company is also planning to start the exploration and development of its Springs Road and Tinker Lane shale prospects, as well as the Pentre Chert formation at its historical Ellesmere Port well. These prospects could provide significant upsides for the group’s production, rewarding shareholders. The good news is that IGAS is well funded as cash is flowing, so management can finance well development without building up more debt. 

Overall, I view IGAS as a sort of lottery ticket. Right now, the company is treading water although over the next few years, as it explores for further resources, there could be an enormous upside for investors if it strikes the black gold. If not, the company will continue to chug along at its current pace. 

I’m seriously starting to think that 2018 could be a very good year for oil & gas investors, and I reckon Soco International (LSE: SIA) could be one to go for.

Soco, focused on Vietnam, has seen its share price crash by 67% over the past five years as the end of a previously lucrative exploration cycle faded. But over the long term the company has produced powerful returns for investors, and we could be heading for a new profit spell coupled with the prospect of a few years of tasty dividends.

New look

In the firm’s latest update on Wednesday, chief executive Ed Story said: “The new Soco vision is to build a growth-oriented E&P company of scale, generating through-cycle total shareholder returns whilst adhering to the company’s historic focus on financial discipline and an annual dividend.” The latest signs look good to me.

Production averaged “8,276 boepd net to Soco’s working interest during 2017,” and development of the company’s Te Giac Trang interest is on time and within budget.

For the full year, the firm’s balance sheet has been strengthened and boasts cash and liquid investments of $137.7m. And, of enormous importance, there’s no debt. Soco reported an enviable cash operating cost of only $14 per barrel, while the company realised an average crude oil price of $56 per barrel.

And with prices starting to climb, reaching $63 as I write, I think 2018 could be a very good year for Soco.

No profit yet

Another oily that’s been making waves in recent months is IGAS Energy (LSE: IGAS), which is moving ever closer to profit. IGAS, with onshore hydrocarbons in the UK being its focus, significantly improved its balance sheet in 2017 after Kerogen Capital invested $35m (£29m) in the firm, an open offer raised a further $22m (£18m), and net debt was reduced from $122m (£100m) at 31 December 2016 to just $9m (£7m) by 30 June.

With £16m in cash on the books at the end of June, chief executive Stephen Bowler told us” “We are well funded for the future and continue to be cashflow generative at current oil prices.” And it looks increasingly like we’re heading into the sustainable oil price recovery that the industry has been awaiting for a few years now.

Fall arrested

The IGAS share price had been in freefall, but it’s bounced back in the past few months, having put on 85% since late September to today’s 92p. The institutional investors out there appear to be happy with the company’s capital restructuring, and sentiment is clearly far more positive now than in the middle of last year.

I’ve been basing my own investment thoughts on a sustainable long-term price of around $70 per barrel, and we’re heading in that direction. After a flat spell of around $56 towards the end of 2017, the past month has seen a surge to $63, and I’ll be surprised if we’re not looking at significantly higher levels by the summer.

If IGAS was cash-flow positive at oil prices back when first-half results were released in September, I’m cautiously optimistic that 2018 and beyond should reward investors well.

Specialist media company Future (LSE: FUTR) delivered pleasing full-year results today driven by organic and acquisitive progress towards what chief executive Zillah Byng-Thorne describes as an ambition to “build a global platform business for specialist media with data at its heart.”

A plan that’s working

She explains that the company aims to focus on enduring content that connects with a substantial and expanding audience base. The figures suggest that the plan is working with revenue 43% higher than a year ago, adjusted operating cash inflow shooting up 160% and adjusted earnings per share following close behind with a 144% rise.

Acquisitions during the period of Imagine, Team Rock and Home Interest serve to increase the size and range of the firm’s offering. Meanwhile, we can see pockets of vibrant growth within the company’s overall revenue performance, such as a 34% organic advance in Media Division revenue, a 107% explosion in eCommerce takings and a 21% uplift from digital displays. Turnover from the magazine division ratcheted up 43% mostly powered by the firm’s acquisitions.

It seems to me that Future is adapting well to the needs of the modern digital media consumer, managing to secure more than 53m monthly online users during the fourth quarter of the trading year. That’s an 18% year-on-year improvement, 12% of which the directors chalk up as organic growth. The share price has responded well to the firm’s progress, up more than 100% since the beginning of 2017. Yet at today’s 385p, the forward price-to-earnings (P/E) ratio works out a little over 18, which looks manageable, suggesting further progress is possible if the company keeps up its strong operational performance.

Financial restructuring boosts growth prospects

I reckon Future could sit well in my portfolio alongside onshore oil & Gas exploration and production company IGAS Energy (LSE: IGAS), which continues to generate exciting potential and is moving closer to profits. After a major financial restructuring and fundraising event earlier in the year, the directors reckon the firm has the capital to deploy on growth projects across its conventional assets and a US$240m carried work programme on its shale acreage. At current oil prices, cash is flowing into the coffers, which bodes well for continuing progress alongside an already well-funded balance sheet.

IGAS claims to be one of the leading producers of hydrocarbons onshore in Britain and in September’s interim report, chief executive Stephen Bowler told us that the capital restructuring has enabled the company to bring forward an active programme of maintenance.”  He also expects incremental projects to boost the firm’s conventional production levels over the medium term.

Mr Bowler reckons that IGAS looks set to contribute “a number” of drilling or flowing wells to what he sees as a “significant level of activity” onshore UK over the coming year or so. Such operational progress could help move the company ever closer to profits, which could result in progress with the share price to reflect the improvement. I think ‘right now’ could be a good time to focus on IGAS and to run your own analysis of the firm’s prospects.

I’ll also look at the outlook for oil and gas group IGas Energy (LSE: IGAS). With the price of oil rising and a successful refinancing under its belt, is now the right time to take a fresh look at this firm?

Follow the smart money

IGas’s oil and gas assets fall into two categories. The company has a number of conventional UK onshore oil and gas fields, producing about 2,250 barrels of oil per day. But the big hope for future growth is shale gas, where IGas has one of the largest positions in the UK.

One clue that these assets might have potential is that energy industry specialist Kerogen Capital contributed £29m to the group’s refinancing, giving it a 28% stake in the firm. Kerogen is also a major backer of North Sea success story Hurricane Energy, suggesting to me that the company’s stock picks could be worth following.

As a result of several partnership deals, IGas is set to benefit from up to £183m of funded exploration work by its partners. Although the prospects for UK shale gas are still highly uncertain, the company is now well positioned to benefit if early exploration efforts are successful.

In the meantime, rising oil prices should improve the cash generation of the firm’s conventional oil assets. With operating costs of just $28.50 per barrel during the first half, the current Brent Crude price of about $60 should ensure the group continues to generate cash to fund its ongoing operations.

IGas isn’t without risk, but at under 80p per share, I believe the stock could be a speculative buy.

A surprise winner in 2017?

Tech firm Zoo Digital Group (LSE: ZOO) specialises in providing dubbing services for television and movie content. So if you want your film to be voiced and subtitled in a different language, for example, Zoo Digital could help. According to the group’s website, customers include Sony Pictures and Universal.

The shares have risen by a staggering 511% already this year, and now trade on a demanding 2017/18 forecast P/E of 100. So does the group’s current growth rate justify this premium valuation?

Half-year results published on Monday show that revenue during the six months to 30 September rose by 63%, to $12.7m, compared to the same period last year. Adjusted earnings before interest, tax, depreciation and amortisation (EBITDA) rose by 34% to $1.3m over the same period. Another piece of good news is that the group has reduced its dependency on its largest customer from 47% of revenue to a safer 28%.

I believe this could be a successful growth business. My main concern is that profitability doesn’t seem to be improving as it expands. The firm’s half-year operating profit of $413,000 gives an operating margin of just 3.2%. That’s actually lower than the 4% figure for the same period last year.

Zoo is spending money on expanding its capabilities, which makes sense to me. But I believe profit margins need to rise quite soon to justify the stock’s current valuation. I’d need to do more research before deciding whether to invest.

Clearly, this could be little more than a ‘dead cat bounce’. This is where a share price temporarily rises after a large fall as investors look to cover their short positions. As such, over the medium term, the company’s valuation may continue its decline. However, could it also be the start of an improved performance which sees the business continue to recover towards its 2017 high.

Mixed performance

According to the company’s most recent results, it is making some progress with its strategy. The producer of hydrocarbons in onshore Britain has been able to complete its capital restructuring and fundraising. This was crucial for the business as it reduced net debt from £100m at the end of December 2016 to £7m at 30 June this year. This debt reduction should create a less risky business which is well-funded for its immediate operations, with a cash position of £16.3m and positive cash flow providing further evidence of this.

While revenue increased from £12.1m to £16.8m in the first half of the year, maintenance issues mean that production for the full year is expected to be 2,250 barrels of oil per day (bopd). Meanwhile, operating costs have risen by $1 per barrel to $28.50. At a time when oil prices remain at a relatively low ebb and many of its peers have been able to cut operating expenses significantly, this does not suggest the company is performing relatively well in that respect.

Outlook

In addition, the huge potential for shale activity in the UK is moving along at a relatively slow pace. Despite this, IGAS has stated that momentum in the industry is continuing to increase. For example, it is focused on developing its sites in Nottinghamshire. It is also seeking to advance activities at its site in Ellesmere Port, as well as across its acreage in the North West and East Midlands.

However, with there being a number of stocks in the oil and gas industry which offer greater size, scale and profitability at the present time, there may be better options available elsewhere for long-term investors.

Certainly, the company’s 20% surge on Monday could be the start of a period of sustained capital growth. However, equally it could prove to be a dead cat bounce. In the long run, with the price of oil and the prospects for the wider oil and gas industry being uncertain, it may be prudent to buy stocks with diverse asset bases, low operating costs and improving profitability. Such companies may offer the most compelling risk/reward opportunities for the long run.