September 9th, 2021 | 12:49 CEST
Royal Dutch Shell, Saturn Oil + Gas, Steinhoff: From 17 to 51 - Triples sought!
Table of contents:
"[...] China's dominance is one of the reasons why we are so heavily involved in the tungsten market. Here, around 85% of production is in Chinese hands. [...]" Dr. Thomas Gutschlag, CEO, Deutsche Rohstoff AG
Born in Munich, he first studied economics and graduated in business administration at the Ludwig-Maximilians-University in 1995. As he was involved with the stock market at a very early stage, he now has more than 30 years of experience in the capital markets.
Royal Dutch Shell - At EUR 17 just at book value
One of the largest private oil companies is the British-Dutch Royal Dutch Shell (RDS). In the first pandemic downturn in Q2-2020, the share price fell to around EUR 10 as global lockdowns were expected to cause a sharp economic downturn. In that quarter, RDS produced a loss of USD 18 billion. With the significant increase in oil and gas prices, Shell is now clearly back in the black, although supply chains disrupted since the pandemic still do not allow for old sales levels. However, net profit has already turned around to a plus of USD 3.4 billion, which means that Shell can pay out higher dividends again and think about debt repayment.
The US bank JPMorgan has left its rating for Shell on "Overweight" with a price target of 2200 pence equivalent to EUR 25.60. Investors should be optimistic about the third quarter in the European oil sector, analyst Christyan Malek wrote in a recent industry report. The oil giant's A-share has already gained 70% from the October low and has been consolidating at the EUR 17 mark for 4 months. RDS is unlikely to triple, but with a price-to-book ratio of 1, a P/E ratio of 8 and a dividend yield of 4%, the cards look good for medium-term appreciation.
Saturn Oil & Gas - At CAD 0.17, plus 200% is not witchcraft
Those looking for undervaluation are more likely to find it in the case of Saturn Oil & Gas from Calgary. The Company, which was still relatively small at the beginning of 2021, managed a mega-deal in the middle of the year and took over the Oxbow property, which is 20 times as large with 6700 barrels of daily production.
Paving the way for this acquisition was, of course, the persistently low WTI price in 2020, between USD 30 and 50 per barrel. The discounting models thus allowed for a moderate purchase price. The completed acquisition has turned Saturn Oil & Gas into a completely new company, with high cash flows and a permanent ability to self-finance projects. While the deal cost Saturn Oil & Gas CAD 93 million, it brings vast oil reserves and a massive production volume from the start. The undeveloped well fields also mean good opportunities for regenerating production output over the next few years.
Saturn Oil & Gas now has a drilling area of 30 square kilometers. There are 350 wells, of which we count 260 booked locations with certified reserves. Proven or probable reserves in the area are 43 million barrels. In today's prices, this corresponds to an undiscounted value of USD 2.8 billion.
Based on the daily production rate, with the reserves mentioned above and a current profit per barrel of around CAD 30, there is enormous profit potential over the next few years, as the liabilities from the acquisition are expected to be paid off as early as mid-2023. At the current production rate, debt will already have been reduced by CAD 70 million by the end of 2022, equivalent to about 60% of existing borrowings. A significant part of the financial planning is based on forward sales, so the balance sheet quantum leap is already easy to calculate.
The stock exchange had to evaluate the financing details in recent weeks, and the actual value of the new Company is now coming to light. With a price of CAD 0.17, Saturn's market capitalization has reached CAD 85 million. However, the sum-of-the-parts valuation and the discounting of future cash surpluses deliver an intrinsic value per share of approx. CAD 0.50, which would correspond to a market value of CAD 255 million. So if you use a sharp pencil, you will be served a triple on a platter. The Saturn share is highly liquid in any order of magnitude, with daily trading volumes of 3-7 million shares.
Steinhoff International - 17 cents and strong fluctuations
Finally, a highly liquid second-tier stock that has been traded on the stock exchange as an insolvency paper for a good 3 years now. It is the furniture retailer Steinhoff International based in South Africa. The German-South African Group is still in dispute with various creditor groups, but the back and forth is likely coming to an end. The foggy veil on how and whether the Company will continue is increasingly clearing.
The Company's 4.27 billion shares in circulation are currently fluctuating wildly, as the creditors' meeting planned for Sept. 3, 2021, on a settlement proposal with which the Group intends to resolve disputes arising from the billion-dollar accounting scandal has again been postponed by a few days. The proposal has already received approval in exploratory talks among some financial creditors but now still needs to be officially ratified by a vote of all invited claimants. But new vetoes from various stakeholders keep coming. If the settlement proposal is approved at the third meeting, the continuation of operations will be secured in the medium term. So far, so good!
In the last few days, the share price started to climb, jumping from EUR 0.12 to over EUR 0.20, then down again to EUR 0.07, and most recently hovering around EUR 0.17. Despite the euphoria, investors should remember that Steinhoff has been running at a loss in recent years, and the fundamentals are still extremely weak. And after all, the market capitalization is over EUR 700 million. Whether a quick triple to EUR 0.51 is lurking here is something we confidently leave to the many speculators, who go wild with every invitation to the creditors' meeting. Steinhoff is and remains a casino stock!
The stocks considered here offer a differentiated spectrum of opportunities. Royal Dutch Shell is a solid dividend stock. Steinhoff is a highly speculative lottery ticket for better times. In Saturn Oil & Gas, the facts are on the table in the best manner, and the story just needs to get going. It is, therefore, the clear triple candidate among the three companies mentioned.
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