October 26th, 2023 | 09:10 CEST
Analysts love cash flow stocks: Nel, Volkswagen, Saturn Oil + Gas
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"[...] The Oxbow Asset now delivers a substantial free cash flow stream to internally fund our impactful drilling and workover programs. [...]" John Jeffrey, CEO, Saturn Oil + Gas Inc.
Saturn Oil & Gas: Halve net debt and pay dividends?
Echelon analysts' latest conclusion on Saturn Oil & Gas stock is clear: "Overall, we believe the valuation represents an extremely compelling entry point into the stock. We continue to rate the stock as "Buy" with a price target of CAD 5.65, representing an upside potential of 109%."
From the analysts' perspective, the junior oil producer from Canada is significantly undervalued compared to its peer group. Although the low oil price and forest fires in parts of the producing regions have slowed sales and earnings in the summer, the analysts have not reduced their estimates. For the current year, they expect Saturn Oil & Gas to post net income of CAD 1.55 per share on revenue of CAD 82.6 million. In 2024, net income is then expected to increase to CAD 1.65 per share. Most importantly: Due to strong cash flows, net debt is expected to more than halve from CAD 451 million in 2023 to CAD 220 million in just one year. The analysts' estimates for 2024 are based on a WTI oil price of below USD 80, which is rather conservative. At a price of USD 90 per barrel, free cash flow could even rise to CAD 250 million, and net debt could fall to CAD 143 million.
For reference, at a price of CAD 2.54, Saturn Oil & Gas is valued at only CAD 352 million. So, if only significantly less than half of the free cash flow should be distributed to shareholders as a dividend after the debt reduction, this could easily correspond to a double-digit yield. Therefore, the analysts' price target seems anything but unrealistic.
Nel: Quarterly figures fuel sell-off
The recent price target from RBC for Nel's stock is significantly more speculative. The analysts have again rated the shares of the Norwegian hydrogen specialist as "Outperform" after yesterday's quarterly figures. The price target is NOK 22. At the same time, the figures were not well received on the stock market, and the share fell below the NOK 7 mark. As a result, the security has halved in value over the past 3 months. It is, therefore, all the more alarming that the share still lost so significantly yesterday.
First, the positive figures: Nel increased sales by 121% to NOK 405 million in the third quarter. The EBITDA loss was almost halved from NOK 214 million in the same quarter last year to NOK 109 million. But it still remains a significant loss, and the net result was also deep red at NOK -226 million. The same goes for the operating cash flow of NOK -195 million. Due to cash and cash equivalents of NOK 3.8 billion, there is at least no pressure for a capital increase. What gives pause for thought is the order intake of NOK 352 million. This was, therefore, lower than the quarterly sales. However, Nel still has an order backlog of NOK 2.9 billion. The restrained order intake could also be related to the fact that Nel no longer accepts every order but instead pays attention to the margin. And this is also necessary. Nel CEO Håkon Volldal has a similar view: "As project size, complexity and risk increase, the need for competence and experience increases accordingly. Nel is, therefore, well-positioned to take the lead on a large scale. We are in a financially sound position and will only sign contracts with acceptable risk profiles that make a positive financial contribution."
Finally, we look at the valuation. Even after yesterday's price drop, Nel still brings NOK 11.6 billion to the stock exchange scales. Despite all the positive growth prospects in the hydrogen sector, this is still no bargain for a loss-making business.
Volkswagen: Doubling possible?
There are currently significantly different opinions on Volkswagen's growth prospects. JPMorgan is particularly optimistic at the moment. Following the preliminary quarterly figures, the analysts at the US bank have recommended the preferred shares of the Wolfsburg-based automaker with an "Overweight" rating and a price target of EUR 193. To reach this price target, the stock would have to almost double. Deutsche Bank is also among the VW fans with a price target of EUR 190.
UBS sees it differently. Their analysts are among the Volkswagen bears with a price target of EUR 100. They rate the preferred shares of the car company as "Sell". They say that after the expected reduction in the earnings forecast, Volkswagen is now below the consensus estimate. The further outlook also gives no room for optimism. Growth in Europe is slowing, and VW is expected to continue losing market share in China.
Cash flow is king at the moment. As long as interest rates remain high - and they may do so for longer than many think - stocks with loss-making business models are, at best, a portfolio addition. This also applies to Nel. That makes companies with strong cash flows, such as Saturn Oil & Gas, all the more exciting. If the significant reduction in debt demonstrates room for dividends and/or share buybacks, the stock should be able to stand much higher. At Volkswagen, much depends on developments in China. Can the Wolfsburg-based company stop losing market share?
Conflict of interest
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