The falling price of crude has hammered producers like Enquest (LSE: ENQ) and Afren (LSE: AFR).
But as the shares of these producers push to new five- and six-year lows, bargain hunters have been presented with the buying opportunity of a lifetime. Though the question remains: when should buyers pull the trigger?
Difficult to tell
Unfortunately, it’s difficult to try and come up with an exact price at which investors should buy Afren and Enquest. You see, as the price of oil continues to fall, asset values and earnings forecasts are constantly being revised lower, making it almost impossible to value the shares.
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In particular, at present levels Afren looks expensive as the company is trading at a forward P/E 18.9 — forecasts are based on current oil prices. Meanwhile, Enquest is currently trading at a forward P/E of around 12.3. If the price of oil continues to fall, then City earnings figures will be revised even lower.
This is also true of asset values. According to my figures, both Enquest and Afren are currently trading below their book value per share, meaning that the company is worth less than the value of its assets, after deducting liabilities. However, these companies are now susceptible to asset write-downs as lower oil prices impact the value of assets.
Peer Premier Oil wrote down the value of its assets by $300m this week due to lower oil prices. Afren and Enquest could be forced to make the same adjustments. For this reason, Afren and Enquest are difficult to value on a book value basis.
Overall, unless oil finds a bottom and starts to move higher, it’s almost impossible to place a reliable price target on Afren and Enquest.
Risk reward
Having said all of the above, from a trading perspective, both Afren and Enquest look to be attractive punts at present levels.
For example, on one hand both companies could see their share prices fall further, possibly to zero, which would be a total loss.
However, the potential upside for both Afren and Enquest is in excess of 200% if they were to return to 75p, or 500% if the shares returned to the level — around 140p — they were trading at during the first half of the year.
So all in all, the trading risk/reward profile is extremely attractive.
Not for the faint hearted
Enquest and Afren could be good trading bets at present levels but there are too many variables to accurately assess the companies for long-term investment potential.
Still, if you are thinking about buying Enquest, or Afren you need to be prepared for volatility. These companies are not suitable for widows and orphans.
