US Edition Salamander Energy
210.3p -3.8
Questor says HOLD
Since Salamander Energy shares were recommended two years ago, their performance has been disappointing. But, with the company predicting big things in the next six months, should investors keep holding on?
Salamander has built up a portfolio of oil and gas assets in Asia – specifically in Indonesia, Thailand, Vietnam and Laos. The company is not just an explorer – it is also currently producing. Salamander's average production forecast for the full year is 18,000 to 19,000 barrels of oil equivalent per day (boepd), which is in line with market forecasts.
The shares have slipped after a number of "high impact", or significant, targets were found to be uncommercial and because of the lack of any major target drill of late. However, there are some exciting prospects in the year ahead.
There will be a major programme of exploration drilling which Salamander says "has the potential for a step change in value-creation terms". Analysts also reckon that this event could be "company transformational".
However, these are terms that have been mentioned in reference to Salamander for some time. Indeed, the shares were initially recommended as a "tip of 2010" because of the potential for transformative discoveries to be made. They were tipped at 296.8p at the start of last year and they are now 29pc below that level. Indeed, they have only briefly been in positive territory since the tip, hitting 317.6p in April this year. The shares are trading on a current year earnings multiple of 9.5.
Although the drilling programme next year carries inherent risk, the first news should be January, so the shares are a hold until then.
Afren
90.2p -4.8
Questor says SELL
Afren had some good news this week after a 45pc subsidiary completed the purchase of some oilfields from Shell. However, there are still some concerns that meeting its production guidance of 50,000 boepd by December 31 could be tight.
In July, Afren cut its 2011 average production estimate by 15,000 boepd because of delays at its flagship Ebok field in Nigeria – and its shares have been moving lower since then.
Last month, the company said it was confident that it would meet the target, but this implies a substantial increase in output during the last month of the year. This could be a challenge.
Another concern for Questor is the balance sheet. It is carrying a large amount of debt. This means that it needs strong cash flows to service its debt – but also to invest in production to try to meet its targets. This is no easy task for the company's well-remunerated management. At the end of the first quarter of the year, debt stood at $518m (£331m) compared with its market capitalisation of £952m. Some analysts believe the debt figure could rise to north of $800m by the year end.
Management is working to hit targets and there are interesting prospects across Africa. Afren has even acquired licences in the Kurdistan region of Iraq, but Questor is cautious on oil interests in this region until a proper revenue-sharing agreement is agreed with the central Iraqi government and the Kurdish semi-autonomous region. Progress on this has been slow. Political issues in Nigeria are also far from ideal.
The highest the shares have been tipped is 148½p before the production guidance downgrade. Investors who bought in at that price will be sitting on a loss of 39pc, although buyers who got in on the original tip of 58½p on July 2, 2009, have made a paper profit of 54pc.
The 2011 price-earnings multiple is 9.1. On balance, Questor thinks the shares are now a sell after this week's bounce.
Gulfsands Petroleum
186p +3½
Questor says HOLD
Gulfsands Petroleum holds nine producing licences in the US and exploration assets in Tunisia. However, the big issue surrounding the shares is that its key asset is in Syria, where the government continues to try to put down the Arab Spring uprising. The EU said it would introduce new sanctions as a result of this. Gulfsands said it will comply with all new measures and is reviewing their impact. It will make an announcement once it has assessed them.
This has not had a substantial impact on Gulfsands' share price, as it has sat in the doldrums in anticipation of this. The company has been using the slump to buy its own shares and there have been some interesting new additions to the shareholder register.
Waterford Finance & Investment had increased its stake in Gulfsands to 9.27pc and Soyuzneftegaz Capital declared a stake of 3.39pc. The former is an investment vehicle of Russian investor Michael Kroupeev, who held a controlling interest in Emerald Energy, which was Gulfsands' partner in Syria, before it was sold to the Chinese. Yuri Shafranik, the former Russian energy minister, is chairman of the latter. The shares were first tipped on April 10, 2009 at 182¾p, but have been recommended as high as 384¾ in January. Trading on a 2011 earnings multiple of 5.2, Questor says hold.