December 20th, 2024 | 08:00 CET
CAUTION advised for Rheinmetall! COMEBACK for Bayer and Saturn Oil + Gas?
Christmas came a week early for Rheinmetall. Germany's largest defense company has secured further orders worth EUR 1.7 billion. However, investors are reacting cautiously, as a slump could be imminent. In contrast, the downside risk for Saturn Oil & Gas appears limited, with significant upside potential. As one of North America's most cost-effective oil producers, Saturn aims to generate total free cash flow of up to CAD 475 million over three years. Analysts’ targets represent a tripling of the share price. And what is Bayer doing? The Leverkusen-based company is trading close to its multi-year low. However, one analyst outlines an interesting scenario.
time to read: 3 minutes
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Author:
Fabian Lorenz
ISIN:
RHEINMETALL AG | DE0007030009 , BAYER AG NA O.N. | DE000BAY0017 , Saturn Oil + Gas Inc. | CA80412L8832
Table of contents:
Author
Fabian Lorenz
For more than twenty years, the Cologne native has been intensively involved with the stock market, both professionally and privately. He is particularly passionate about national and international small and micro caps.
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Saturn Oil & Gas: An estimated 475 million in free cash flow over three years!
Although 2024 showed that fossil fuels will be needed for a long time to come, it was a challenging year for stocks in the sector. Even industry leader Exxon Mobile clearly underperformed the Dow Jones and S&P 500. However, the losers of one year are often the winners of the next. One candidate for this is the stock of Saturn Oil & Gas. Since 2021, Saturn has completed four transformative acquisitions, propelling it to a mid-tier producer.
Just a few days ago, Saturn Oil & Gas published its 2025 annual forecast and a medium-term outlook. If the plans are implemented as announced, the share price – which is also actively traded in Germany – could be poised for a rerate. In 2025, the Company aims to maintain stable production at an average of 38,000 to 40,000 barrels of oil equivalent per day. With this, the Company aims to achieve an impressive free cash flow of CAD 125 to CAD 165 million. This would translate to CAD 0.65 to CAD 0.85 per share. Saturn’s shares are currently trading at CAD 2. The free cash flow will be used, among other things, for the agreed share buyback program, the reduction of net debt to between CAD 700 million and CAD 740 million, and opportunistic acquisitions.
The medium-term key data is also convincing: A cumulative free cash flow of CAD 450 to 475 million is forecast to be generated between 2025 and 2027. This would equate to at least CAD 2.34 per share based on forecast exit 2025 shares outstanding. At an oil price (WTI) of USD 80 and higher, it could also be more. In this context, the target price of CAD 6.50 set by the analyst at Ventum for the Saturn share seems anything but high.
Rheinmetall: Caution despite billion-euro orders
Unlike Saturn Oil & Gas, Rheinmetall's stock is no longer a bargain. However, the shares of Germany's largest defense company have more than doubled in the current year. And business continues to boom. Just yesterday, Rheinmetall received two orders worth EUR 1.7 billion from the German government for the digitization of the Bundeswehr.
Together with KNDS, Rheinmetall is to equip around 10,000 Bundeswehr vehicles with new digital communications systems. The two partners will receive EUR 1.98 billion over the next six years, which they will divide equally between them. The second order is for IT systems to be integrated into all vehicle and platform systems of the land forces. Of the order volume of EUR 730 million, EUR 470 million will go to Rheinmetall and EUR 250 million to its partner blackned.
Nevertheless, the share price of the Düsseldorf-based company rose 'only' by around 1%. On the one hand, the share had already performed very well. However, the possible end of the war in Ukraine following the inauguration of Donald Trump in the US could deter investors from buying the stock. Even if Rheinmetall continues to benefit from the arms build-up in Europe and beyond in the coming years, the end of the war should cause a sharp correction in the share price – how long this lasts remains to be seen.
Bayer: Beneficiary of a potential end to the war?
Could Bayer shares be among the winners if the war in Ukraine ends? This is the scenario outlined by UBS. Accordingly, they suggest that a ceasefire with Russia could lead to increased gas flows to Germany. Like other chemical companies and energy-intensive industries, Bayer would stand to benefit. But for now, uncertainty remains. Therefore, the UBS analysts maintain a 'Neutral' rating with a target price of EUR 22.
While Rheinmetall's shares are among the high flyers of 2024, Bayer's shares are among the disappointments – again. Around 45% of the Leverkusen-based company's shares have been lost this year. The reason for this is the ongoing court cases in the US. These simply do not seem to be coming to an end. However, UBS outlines a scenario that could benefit Bayer.
Saturn Oil & Gas's stock seems to be anything but expensive at the current price level. The Canadians have developed into a strong oil producer within a few years and aim to increase their high free cash flow further. A comeback for the stock in 2025 seems entirely realistic. Rheinmetall's shares have performed strongly in 2024 and over the past three years. It is not surprising that investors are cautious in light of the new US president. Bayer seems to have bottomed out. However, there is still a lack of upside potential.
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