US Edition Gulfsands Petroleum
182¾p +1¾
Questor says BUY
Gulfsands Petroleum is expected to post a solid set of full-year numbers on April 20. Questor believes that investors should take a position ahead of this results statement.
The company plans to become a significant exploration and production company in the Middle East and seeks to be viewed as a preferred operator and partner.
Currently it has operations in Syria and the US, but it is looking to move into Iraq.
The company has a solid balance sheet with no debt and $35m (£24m) in cash. It is expected that the group will be able to fund its capital expenditure programme from current cash balances and its own cash flow, so the prospect of dilutive equity placings look slim.
When the company came to market in April 2005, its US operations were the main focus of the group.
However, things have now changed.
The group's Khurbet East oil field in Syria has transformed the company and led to a significant increase in production.
There is no doubt that 2008 was a transformational year. A series of commercial discoveries at Khubert East meant the group could establish an early production facility. There are also significant exploration opportunities in its Syrian block, known as Block 26.
Gulfsands has a working interest of 50pc of the block – with the other half held by Emerald Energy. Further production growth is expected this year and beyond. Production started in July 2008, and rapidly achieved 10,000 barrels of oil per day (bopd). It should increase to 16,000 bopd in the third quarter of this year, rising to a peak of around 30,000 bopd.
Block 26 lies in the north-eastern corner of Syria, and extends as far as the Turkish border to the north and the Iraqi border to the east. As part of the terms of the licence, the partnership has to pay a royalty set at 12.5pc of production.
In the US, Gulfsands has both on and offshore oil and gas production. The assets generate good cash flow, but they are not as key as the Syrian operation. Gulfsands owns interests in 48 offshore blocks, which contain 30 producing oil and gas fields, in offshore Texas and Louisiana. The company's working interest ranges from 2pc to 53pc. It also has two small onshore producing assets.
The company has made a move into Iraq, with a 100pc interest in the Maysan Gas Project in southern Iraq, close to Basra.
Gulfsands and the Iraqi Oil Ministry signed a memorandum of understanding that allows Gulfsands to refine a feasibility study for gas at Maysan. This is not generating any revenues at the moment but could add solid cash flow in the future. News flow from this project has been slow but it is expected to accelerate in 2009.
The company has battled through board-level management changes – last year its chief executive and chief financial officer resigned when the company's headquarters was relocated to London from Houston. However, these issues are now resolved.
The shares are trading on a December 2009 prospective earnings multiple of 14.4 times, falling to just 7 times in 2010. This looks good value. Note the company is not paying a dividend.
So, with the group being well financed, the probability of production growth in 2009 and cheap cost of production, shares in Gulfsands Petroleum are a buy.
QinetiQ
132½p +7
Questor says BUY
It's not just Questor that feels shares in QinetiQ have been unfairly punished over recent months. Goldman Sachs is the latest broker to initiate coverage of the stock with a buy stance.
Goldman argues that Qinetiq is a different kind of defence company, with a primary focus on high-technology defence services. As such, QinetiQ has less exposure to US defence budget cuts which may affect defence manufacturing businesses.
Although more than 40pc of sales come from US defence, Goldman believes that QinetiQ is exposed to market niches with superior long-term growth prospects – such as IT, security, intelligence, and robotics.
The broker has some concerns over the business with the UK Ministry of Defence, but it thinks the current valuation overlooks the long-term upside potential in the US.
The company's full-year results are scheduled to be published on May 21 – and Questor expects a solid performance. Current consensus expectations forecast revenue and earnings per share growth of 13pc in the year to March 31 2009. Questor thinks investors seeking a new position in the shares should buy ahead of the numbers.
In August this year the US government will publish its Quadrennial Defence Review. This will outline the Obama government's military and security aims over the next four years.
It is likely that QinetiQ's areas of expertise will take a high priority in this next review.
The shares were first recommended at 171.5p in November last year and have fallen more than 20pc since then on concerns over defence spending. The shares are now trading on a March 2010 earnings multiple of just 7.7 times, which Questor believes is far too low for a company that is likely to post double-digit increases in earnings for the next two years. Questor says buy.