As the old saying goes, you shouldn’t refuse to go on an occasional wild goose chase — that’s what wild geese are for!
With this in mind, take Roxi Petroleum (LSE: RXP), Enquest (LSE: ENQ) and Jubilee Platinum (LSE: JLP): which one should you buy right now and why, if you are looking for an opportunistic trade in the bruised and battered resources world?
Roxi: Buy On Weakness?
A highly speculative trade, the shares of this Kazakhstan-based oil and gas explorer, which has a market cap of £100m, have been on their way down since 9 June when they closed at 18p. In spite of a 40% drop since, they are still up 16% this year and they currently trade at 10.8p.
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Its shares shrugged off volatility for oil-related investments until early June (recording a +70% performance from 2 January to 8 June), but a recent drop in oil prices and business-related news put more pressure on the market value of a firm that, quite simply, offers plenty of uncertainty with regard to its drilling programme.
We are almost blind on financials and projections, too. That said, its funding needs are not prohibitive and are covered, while expectations are high for its flagship BNG asset.
Finally, its management team deserves trust based on its track record, in my view.
Enquest: Undervalued?
Enquest is a completely different story. The explorer has significant funding needs, but has secured increased financial flexibility earlier this year by amending debt covenants.
The problem is that oil investors have been shocked by hefty losses associated to Afren, and Enquest isn’t dissimilar in terms of size, while its books also carry a huge amount of debt — that’s where the similarities end, but it is enough to raise a red flag.
Including net debt, its enterprise value is about twice as much as the value of its forward revenues but only about four times the value of its adjusted forward operating cash flow — a combination that could signal stress at times.
Could Enquest be undervalued, though? That’s what management believes, and is backed by the view that its underlying business has proved to be more resilient than others in recent years, although its producing assets base and its current cost base will be severely tested over the next few quarters.
We’ll learn more on 18 August, when its interim results are due.
Jubilee: More Upside Than Downside From Here?
You’ll need more time to make an informed investment decision on Jubilee, in my view.
The shares of this small-cap miner have recorded an outstanding performance so far this year, and although shareholders may be tempted to sell out, you should consider that they are not incredibly overpriced based on the value of Jubilee’s assets.
According to my calculations, downside is just about 30% from its current level, which is a remarkable achievement for a £27m business whose operating losses are about £1m a year.
You should also consider, however, that nobody knows when the company will start to generate cash flow from its core business — platinum production — and at what price. Keep this in mind before snapping up its stock.
