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SP Angel Morning Oil & Gas: Circle Oil, Gulf keystone, SDX Energy

Published: 09:19 20 May 2016 BST

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Headlines
 Circle Oil (LON:COP – 0.62p) – (BUY – 11p) – Creditors Now Key – As They Always Were: The debt is and always has been the very question that should dominate investors’ minds, as all the rest is in a solid position. We are reiterating our BUY Recommendation and 11p target price and repeat our oft used refrain when discussing the Company, that debt will be the decider for the Company's owners and potential investors.

 In Brief:
 Gulf keystone (LON:GKP – 5.26p) – Tough Love or Hard Place?
 SDX Energy (LON:SDX – 22p/C$0.41) – Valuation Undemanding

News Items
Circle Oil (LON:COP – 0.62p) – (BUY – 11p) – Creditors Now Key
Circle today's update is a sanguine reminder of the potentially destructive power of debt, when the risks are not managed properly. The core value of the assets is significantly in excess of the debt, on a forward basis, but as they represent here and now, given that potential acquirers smell blood in the water, they are significantly discounted.
This has always been the issue with considering an investment in the Company. The value is there, over and above the debt, but it is a question of whether they will be allowed to trade that position out to achieve it. We believe that the Company has the management team and assets to do it, but it is now a question of whether the creditors allow it to happen – will they be provided with that opportunity? That is now down to the creditors.
The debt is and always has been the very question that should dominate investors’ minds, as all the rest is in a solid position. We are reiterating our BUY Recommendation and 11p target price and repeat our oft used refrain when discussing the Company, that debt will be the decider for the Company's owners and potential investors.

In Brief
• Gulf keystone (LON:GKP – 5.26p) – Tough Love or Hard Place?: Today's news is only news in that the standstill is so short. We believe that the creditors are doing the same thing to GKP that they are doing to trinity (TRIN LN), in that they are keeping short rollovers to maintain a tight grip on the Company. Ultimately, whether this is a constructive step, or not, is a moot point, as it really depends on what the creditors' main aims and objectives are. If it is to restructure and redeploy the balance sheet, then it is a positive as it keeps management in a constant state of alert. If, however, it is to sell the assets, as was the case with Trinity, it is counterproductive, as sellers will always be the rock that squeezes the seller between it and hard place. So, in this instance, the key question should be, are the creditors providing tough love, or a hard place?
• SDX Energy (LON:SDX – 22p/C$0.41) – Valuation Undemanding: Today sees the launch of the Company on the aim market, and the news of the latest well is a good foot to jump off of. We have liked this company for a while and it is good to see them list here in the UK. We believe that the management team are well balanced and is solid in its key areas. With an market valuation of multiple of ~$15,000/bpd and $3.00/2P bbl, the current valuation is trading at a 50% to the current liquids rich portfolio market multiples and 30% to the gas rich portfolio market multiples. We would expect this discount to close and the Company trade more in line with the appropriate multiple as investors become comfortable with the management team and their ability to deliver.

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