Business Irish

Monday 18 December 2017

Irish oil shares undervalued, UK investment house believes

Peter Flanagan

Peter Flanagan

A host of Irish oil companies are either undervalued or have been hit disproportionately be sell-offs in recent months, according to a top London investment house.

In a note to clients, Liberum Securities said the market was taking a "dim view" of exploration and production companies and hitting them with an "onerous" cost of capital to valuations.

That means that the likes of Circle Oil, Tullow, Petroceltic and Providence Resources are chronically undervalued, Liberum claims.

Liberum, which usually takes a bullish view on the exploration sector, has assessed a number of firms, including the Irish ones, on the basis of their cost of capital, or how much it costs to finance their business.

LIberum calculates the average cost of capital for these firms as between 14pc and 30pc – very high compared with the wider market, and something the company believes is completely out of line.

The broker believes the true costs of capital are lower than its own estimates because the market assumes value will be destroyed by poor reinvestment.

Circle Oil's investments in Morocco are "potentially significant and low risk while the track record indicates management will add value by reinvesting the substantial free cash that will be generated over the next 2-3 years," claims Liberum.

Liberum rates Tullow, Providence and Petroceltic as "buy" because of the ability of management to deliver results to investors.

"We believe Tullow will add more value through exploration than the market is anticipating from the opportunities in Kenya, Mauritania and French Guiana, while at Providence the farm-out of Barryroe, expected before year end, should validate management's assessment of the field, crystallise an industry value and clarify the financing of the development," claim analysts.

There is "material upside" to the rest of Providence's assets, adds Liberum. In Petroceltic's case plans to complete a farm-out in Egypt and the company's expected move from the Alternative Investment Market in London to the main market should also provide "material upside", the firm says.

Petroceltic shares rose 0.4pc in London and were flat in Dublin.

Meanwhile, Tullow added 0.8pc, while Circle was unchanged. Providence Resources added 0.8pc.

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