Is Cairn Energy PLC A Bigger Opportunity Than Low & Bonar plc And Enquest Plc?

Cairn Energy PLC (LON:CNE) isn’t too bad, but I’d also keep an eye on Low & Bonar plc (LON:LWB), while avoiding Enquest Plc (LON:ENQ).

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

It is not a great time to invest in stocks with a beta higher than 1. That said, at their current price, the shares of Cairn Energy (LSE: CNE) trade broadly in line with the combined value per share of the cash and the undrawn credit facilities that that the group holds on its books. Meanwhile, its projects pipeline in Senegal and its stake in Cairn India are worth nothing at all based on its current equity value. 

By comparison, the shares of Low & Bonar (LSE: LWB), with their higher beta, trade some 20% above the book value of its cash and cash-like items, but they could be worth much more than that if the company meets its ambitious growth plans.

However, that’s not to say I am ready to buy!  

Should you invest £1,000 in Rolls-Royce right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets. And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Rolls-Royce made the list?

See the 6 stocks

In fact, I’d likely be adding volatility to my portfolio with LWB, though it’d still be safer than investing in EnQuest (LSE: ENQ), whose stock is the riskiest investment of all, in my view, and not only because of its high beta of 1.7. 

Investment Requirements

At 154p, Cairn stock is valued at a level that is consistent with its cash per share value (81p) plus the amount of cash per share (64p) that is available for withdrawal via a bank facility — the combination of cash and undrawn credit stands at $1.3bn, which would cover for almost three years of heavy investment (capex). 

We are blind on financial ratios as the group doesn’t generate any revenues or income, but there could be hidden value in its 10% residual shareholding in Cairn India Limited (CIL), which was valued at $526m on 30 June. 

The market value of its stake in CIL is down 15% since the end of June, but it is still worth $447m. 

Cairn continues to be restricted from accessing the value of its ~10% residual shareholding” in CIL, the group reiterated today. 

With regard to this matter, it has “commenced international arbitration proceedings with the Government of India under the UK-India Investment Treaty supported by detailed legal advice on the strength of the legal protections available to it under international law.

Elsewhere, its trading update registered a significant impairment charge of $177m, which had a big impact on its economic performance, and contributed to a net loss of $230m for the first half of 2015.

That said, net cash used in operating activities was only $14m, which comes on top of capex at $151m. 

In short, Cairn has enough time to deliver on its promises, based on its projected capex requirements.  

Volatility 

The shares of Low & Bonar are not particularly cheap following a rally that reads +40% in 2015, but several elements contained in its balance sheet and income statement indicate that they could be more resilient than I thought.

At 70p a share, however, Low & Bonar’s valuation implies forward net earnings multiples of 14x and 13x for 2016 and 2017.

If investors continue to shy away from risk, its trading multiples could drop rather than rise based on the same amount of expected earnings per share (EPS). That would be the inevitable price to pay for a company that operates in a cyclical sector, and whose growth rate for EPS must be in the region of 15% to 20% annually to please the market over the next couple of years. 

Before investing in LWB, it’s also worth considering that in early September 2014 its stock was hammered — it fell almost 20% in a single day of trading — as it announced that sluggish demand in the European civil engineering space had harmed its earnings profile.

At 70p a share, and almost one year later, its shares currently trade some 13% below the level they recorded before the company warned investors. 

Heading Down? 

Finally, EnQuest — the most difficult investment case here. It’s so easy to be bearish that I’d love to be bullish. There are problems, though. 

First, it’s hard to see how EnQuest could surprise investors, who are scared about the combination of plunging oil prices and high leverage at oil and gas explorers.

Second, EnQuest managed to receive the backing of its lenders earlier this year, amending the terms on its existing debt obligations, but its financial position will remain problematic if oil prices remain below $70 a barrel (we are at about $50 right now).  

Its half year results are due tomorrow, and I have no idea what management plans to say about trailing figures that are unlikely to be exceptional in the light of tough trading conditions. 

I know the market will be unforgiving, pushing down its valuation closer to its all-time lows if it disappoints, however. 

We think earning passive income has never been easier

Do you like the idea of dividend income?

The prospect of investing in a company just once, then sitting back and watching as it potentially pays a dividend out over and over?

If you’re excited by the thought of regular passive income payments, as well as the potential for significant growth on your initial investment…

Then we think you’ll want to see this report inside Motley Fool Share Advisor — ‘5 Essential Stocks For Passive Income Seekers’.

What’s more, today we’re giving away one of these stock picks, absolutely free!

Get your free passive income stock pick

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Alessandro Pasetti has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Fans of Warren Buffett taking his photo
Investing Articles

With value investing back in vogue, I’m taking a leaf out of Warren Buffett’s playbook

With tariffs and trade wars resulting in heightened market volatility, Andrew Mackie takes comfort in Warren Buffett’s words of wisdom.

Read more »

Hand of person putting wood cube block with word VALUE on wooden table
Investing Articles

Around a 1-year high, is there enough value left in Next’s share price to make it worth me buying?

Next’s share price has risen a lot in eight months, but there could still be a lot of value left…

Read more »

Group of young friends toasting each other with beers in a pub
Investing Articles

OMG DYOR but IMO this ‘cool’ FTSE 100 stock offers bangin’ VFM!

Despite being one of the least trendy 50-somethings around, our writer considers how Gen Z could help push this FTSE…

Read more »

Investing Articles

2 cheap FTSE 100 and FTSE 250 growth stocks to consider as stock markets sink

I think these Footsie and FTSE 250 growth shares could be very shrewd buys to consider in the current climate.…

Read more »

Investing Articles

3 shares I’ve bought in the 2025 stock market sell-off

The stock market has experienced a lot of turbulence in recent weeks. Edward Sheldon has been taking advantage and buying…

Read more »

Investing Articles

Investors considering HSBC shares could aim for £8,453 a year in passive income from just £5 a day!

A relatively small daily investment in HSBC shares over several years can produce an extraordinary level of annual passive income…

Read more »

Investing Articles

The Rolls-Royce share price has fallen! Is this the moment investors have been waiting for?

Even the Rolls-Royce share price can't escape current stock market volatility, falling slightly over the last week. Should investors consider…

Read more »

Modern suburban family houses with car on driveway
Investing Articles

Down 59% from its 12-month highs, is this FTSE 250 stock too cheap to ignore?

Shares in FTSE 250 housebuilder Vistry are almost certainly too cheap to ignore. But are they discounted enough to offset…

Read more »