October 27th, 2022 | 10:14 CEST
Buffett loves oil stocks: BP, Shell, Saturn Oil + Gas, K+S
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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: Price target of CAD 8 and EV/EBITDA for 2023 at 1
Sometimes it takes longer than expected for a revaluation to take hold in a stock. This is what Canadian Saturn Oil & Gas and its shareholders have discovered in recent months. That is because the quantum leap the Company has made operationally in the past 1.5 years is not yet reflected in the share price. Whereas the Canadian oil producer produced only 700 barrels a day in the spring of 2021, by September 2022, it produced more than 12,000 barrels. Although the Company has taken on debt for the necessary oil field acquisitions, the massive cash flow means the liabilities are melting like snow in the sun. In the second half of 2022 alone, debt should be reduced by about CAD 43 million to about CAD 180 million. With sales prices secured, Saturn Oil & Gas also expects another CAD 100 million to be available next year to reduce liabilities. If things continue like this, the Canadians could be debt-free in just two years. If the share price does not finally pick up, the capital would be available to announce a share buyback or a high dividend payout.
Analysts also believe Saturn is undervalued. Most recently, VTC Research called for a price target of CAD 8. Saturn shares are currently trading at CAD 2.73. The analysts expect the Canadian oil producer to generate an EBITDA of CAD 226.2 million in the coming year. In order to put this in perspective, the Company is currently valued at only around CAD 162 million. Also, the enterprise value (EV) to EBITDA ratio would be just 1 for 2023. Accordingly, they consider Saturn one of the most compelling value/growth opportunities in the oil sector, especially since its extensive hedging operations offer a relatively high degree of cash flow certainty.
Shell and BP: Analysts impressed
Analysts are also convinced by the two European oil companies, Shell and BP. Shell is recommended as a buy by UBS, with a price target of 2650 pence. Like all oil groups, Shell should continue to earn strongly. Even if the price peak in the second quarter of 2022 has been exceeded for the first time. The price target of Credit Suisse for the Shell share is 3500 pence. The share is currently trading at 2270 pence.
Analysts also expect BP's share price to rise for the most part - although the room for upside is limited. RBC is the most optimistic, with a target price of 525 pence. Deutsche Bank still considers 472 pence to be realistic. BP shares are currently trading at 461 pence.
K+S: Analysts see potential again after price slide
One share that is influenced by the development of oil and gas prices is K+S. The German salt and fertilizer producer is currently benefiting from falling gas prices. This week, the forward contract (TTF) for natural gas fell to below EUR 100 per MWh, its lowest level since June. At its peak, the price was over EUR 200. With the mild autumn and full gas storage facilities, hopes are also rising that gas rationing will not occur in the winter. This would be the worst case for energy-intensive fertilizer production. The DAX-listed group is optimistic about the future. K+S expects increases in both its operating costs and selling prices for fertilizers in the second half of 2022. "The strong increase in the average price in the agriculture customer segment should significantly exceed expected cost increases, especially for energy, logistics and materials," K+S announced.
Following the sharp slide in the share price from over EUR 35 in April to around EUR 23 at present, Baader Bank upgraded K+S shares to "buy" from "add." The price target is EUR 27. DZ Bank even quotes a price target of EUR 34.
There will be no way around oil as a fossil energy source in the near future. Star investor Warren Buffett is not the only one to have recognized this. Among the European oil companies, Shell has upside potential. Saturn Oil & Gas is a good choice for those who prefer a more speculative approach. The current valuation is ridiculously low. At K+S, an upward trend seems to be forming again.
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