The past year’s been a tough time to be an oil investor. Volatile oil prices have rocked the sector, invalidating earnings forecasts and project economics. As a result, the industry is shrouded in a cloud of uncertainty.
Gulf Keystone Petroleum (LSE: GKP), Enquest (LSE: ENQ) and Tullow Oil (LSE: TLW) haven’t escaped the carnage. Since the beginning of October last year, Gulf Keystone’s shares have declined by 45%, Enquest’s shares have logged losses of 62% and Tullow is down 55%. Over the same period, the FTSE 100 has gained 2%.
The question is, is it wise to try and catch these falling knives?
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Difficult to value
Before deciding if it is wise to buy these explorers at present levels, I need to be able to value the companies, and this is difficult to do while the price of oil remains volatile.
For example, during November last year, City analysts expected Tullow to report earnings per share of 43p for full-year 2015. Additionally, based on an oil price of $85 per barrel, analysts valued the company’s assets in excess of 500p per share. So, after taking these figures into account, during November of last year, Tullow’s shares offered value for money below 400p.
Nearly a year on and analysts have reduced their earnings estimates for Tullow to only 16p per share for full-year 2015, a reduction of 63%. Tullow’s net asset value has also been eroded to 279p per share.
Clearly undervalued
Enquest’s management has made it quite clear that they believe the company is undervalued. Between October and December last year, Enquest’s management brought £1.5m of the company’s shares for their personal accounts, a huge vote of confidence in the company’s outlook.
Management buying has continued this year. Management and associated parties have ploughed hundreds of thousands, if not millions into Enquest’s shares and retail bonds.
Worst case scenario
While Enquest’s management believes that their company has a bright future, Tullow and Gulf Keystone’s executives don’t seem to be as keen.
With that being the case, the only way to value these two companies is to calculate a net asset value for each company — as a worst-case scenario estimate.
At the beginning of March City analysts calculated that Gulf Keystone’s net asset value, including the value of the Shaikan field, as well as other developments and intangible assets stood at 119p in the base case.
Three-and-a-half months on, and the figure of 119p is likely to have fallen, based on Gulf Keystone’s rate of cash burn. But even if you half the estimated net asset value to 60p, Gulf Keystone still looks undervalued by around 70% at present levels.
Tullow is harder to value. Analysts have placed a value of 146p per share on Tullow’s producing assets and 475p per share for exploration assets. However, debt and other liabilities amount to around 342p per share, which gives a net asset value of 279p per share.
On this basis, Tullow looks to be fairly valued at present. Although, further asset write-downs could quickly change this.
