Should you sell Trap Oil Group PLC (LON:TRAP) as costs rise?

Oil rigs in North SeaShares in Trap Oil Group PLC (LON:TRAP) fell 40% yesterday, after the firm revealed that decommissioning costs for its share of the Ithaca Energy-operated Athena Field would be 66% higher than expected — £9m, instead of the £5.4m previously accounted for.

This means that more than half of the firm’s £16.5m cash pile is already spoken for — plus there is further expenditure planned for this autumn on workover activities needed to bring the field back into full production.

Based on yesterday’s announcement and the group’s half-yearly figures, I reckon that Trapoil’s net current assets, are approximately £13m, or 5.7p per share.

To reach this, I’ve deducted 25% from the reported value of its IGas Energy shares and subtracted the £9m decommissioning cost from the firm’s cash balance. I’ve also assigned zero value to Trapoil’s licences and not accounted for future cash flow from Athena — I’d expect this revenue to at least offset the workover costs the firm incurs this autumn, so I’ve ignored both factors in this ‘fag packet’ valuation.

In addition to the current asset value of £13m, the firm also has accumulated losses of £35m, which could be of use to another North Sea operator to offset profits.

At around 3p, I reckon Trapoil shares are trading at approximately half the firm’s net current asset value, without considering the potential benefits offered by its historic losses. You’d think that a larger North Sea peer might make an all-share offer to takeover the firm at this level, which could realise some value for shareholders (including 18% activist shareholder Peter Gyllenhammar).

However, nothing is certain, especially while the oil price remains depressed, and there’s no denying that Trapoil shares remain very high risk, at present. If the market continues to ignore the firm, it will now, almost certainly, gradually grind its way into bankruptcy.

Disclosure: This article is provided for information only and is not intended as investment advice. The author has a long position in Trap Oil Group PLC. Do your own research or seek qualified professional advice before making any trading decisions.

Quindell PLC share price slides on Q3 trading update

A share tip circled in a newspaper share listingOn the face of it, today’s trading update from Quindell PLC (LON:QPP) was positive, assuming you didn’t read it too carefully.

Revenues were double those of the same period last year, while the firm’s favourite flexible measure of profit, adjusted EBITDA, rose by 141% compared to the same period last year.

These morsels of apparent good news might have satisfied the market six months ago, but the mood seems different now, and as I write, shortly before markets close at 4.30pm, Quindell’s share price is down by 6% on the day.

Why? Today’s announcement suggests to me (and clearly to others) that the Quindell train could be coming off the rails.

Disappearing revenue

The firm has cut its revenue forecasts for the full year to between £750m and £800m — down from £800m-£900m at the time of its interim results, three months ago (although many market commentators are citing last year’s forecasts of c.£1.1bn, I can’t find this number in print from QPP, although I do remember it).

As far as I can see, there are only two likely interpretations for this revenue guidance downgrade: either Quindell is turning away new work, because its cash flow is so dire it cannot fund the working capital situation, or the firm is writing down accrued income, which forms a substantial part of its annual revenue.

Rising profit margins

Quindell claims that it will meet full-year guidance for cash generation and adjusted EBITDA, thanks to rising EBITDA margins. The firm has now increased EBITDA margin guidance for 2014 to between 40% and 45% — the third increase this year, as I commented in a new article for the Motley Fool this morning:

This is the third time this year the firm has increased EBITDA margin guidance: in July it rose to “35 to 40%”, then in August it rose to “35% to 45%”. Now it’s risen again.

Hearing loss

There’s also a puzzling situation regarding hearing loss, where the case numbers — in my view – seem very high compared to industry-wide claim figures.

I explain this aspect of today’s Quindell update more fully in my Motley Fool article, which you can read here.

What next?

In my view, today’s update was the tip of the iceberg. In addition to the factors I’ve mentioned above, the trading update ended with this paragraph:

The Board continues to consider and pursue, with advisors where relevant, all options available to it, including share buy backs, North American listing, disposal or demerger of assets or divisions and strategic and/or financial investments by third parties, in order to maximise shareholder value. 

To me, this smacks of desperation and is somewhat bizaare: how can a company with such poor cash flow (the firm boasted of achieving adjusted operating cash flow of £9m in today’s update) possibly consider share buybacks?

Indeed, I suspect a shortage of cash flow may be at the root of the problem; the firm’s mention of asset sales and third-party investments sound to me like rescue funding, rather than ways of maximising shareholder value.

Incidentally, Gotham City Research agrees: the short sellers, whose original report wiped 50% off Quindell’s share price back in April, tweeted today:

We can only wait and see, but in the meantime I would remind bullish investors that while the market sometimes misprices assets, it rarely errs to the extent of assigning healthy, profitable companies a forecast P/E of 2.7…

Disclosure: This article is provided for information only and is not intended as investment advice. The author has a short position on Quindell PLC. Do your own research or seek qualified professional advice before making any trading decisions.

Can National Grid plc continue to hammer the FTSE?

Electricity pylonsDespite their reputation as boring, pseudo-bond investments that are only suitable for income investors, utilities can give shareholders a fairly lively ride — if your timing is good.

National Grid plc (LON:NG) is a case in point: the grid operator’s shares have delivered an average annual total return of 11% per year for the last ten years — hammering the FTSE 100 Total Return index, which has only managed just over 7% per year during the same period (Morningstar data).

There’s no doubt National Grid has been a stunning investment and its 5% yield remains attractive, albeit less so now that the dividend is only keeping pace with inflation, rather than bounding ahead of it.

Given all of this, I think a case can be made for selling National Grid. I’ve explored this subject in more depth in a new article for the Motley Fool, which you can read here.

Disclaimer: This article is provided for information only and is not intended as investment advice. The author may own shares in the companies mentioned in the article. Do your own research or seek qualified professional advice before making any purchase decisions.

Balfour Beatty plc proves that profit warnings come in threes…

Glass skyscraper buildingThe old City adage says that profit warnings come in threes, and the case of Balfour Beatty plc (LON:BBY) suggests this might be true.

Shares in the beleagured construction and engineering services business slid by more than 20% when markets opened this morning, after the firm said that UK construction profits would be a further £75m lower than expected – in addition to previous warnings that profits would be £35m lower than forecast.

The group continues to lack a CEO — something chairman Steve Marshall told analysts this morning would be resolved soon – and has clearly created an unholy mess for itself in the UK, presumably by bidding too low in an effort to win work, and then remaining in denial until forced to face facts.

However, the sale of the Parsons business will bring in some much needed cash, and a rebased dividend will ease the firm’s committed outgoings: could now be the time to buy back into Balfour Beatty?

In a new article for the Motley Fool this morning, I took a closer look at the numbers: you can read the full article here.

Disclaimer: This article is provided for information only and is not intended as investment advice. The author may own shares in the companies mentioned in the article. Do your own research or seek qualified professional advice before making any purchase decisions.

Is Trap Oil Group PLC being readied for sale?

Oil rigs in North SeaTrap Oil Group PLC (LON:TRAP) published its half-yearly report on Monday, triggering a slide that has left the firm’s share price down by 15% so far this week.

Following the recent, broadly positive, news on cost-cutting and gravytrain disembarkation  by senior executives, the half-year results were disappointing.

However, some aspects of the figures suggest to me that the company’s strategy may now be focused on maximising its attraction to potential buyers within its North Sea peer group. This approach might yet deliver results for long-suffering shareholders.

Production – Athena

The big disappointment was Athena: I think it’s probably fair to say that most shareholders didn’t realise how far production had deteriorated during the first half of the year, a situation made worse by severe weather preventing oil being offloaded from the FPSO and sold for a period early in the year.

Production levels for the first part of the year were not specified (why the hell not?) but the scale of the production decline caused by the failure of the A2 well pumps is clear from the fact that the amount of oil being sold has fallen from ‘multiple [tanker] loads being delivered for sale each month‘ to ‘on average … less than one tanker load per month‘.

As a result of this, Trapoil impaired the value of Athena by £4.7m, pushing the firm into a first-half loss, and taking total historic losses to £35m — something that could be advantageous for tax purposes to a potential acquirer.

However, the short-term effect of Athena’s poor performance on cash flow is obvious, and in addition, Trapoil is now required to fund its share of the costs of the workover being performed by Athena operator Ithaca Energy in October.

To meet these costs and preserve its cash pile, Trapoil raised £2.3m by selling around half of its stake in IGas Energy.

Latest NAV per share?

Cash flow should improve in the final quarter, once the Athena workover has been completed.

Ignoring the value of its non-current assets — data and exploration intangibles, plus property and plant, all of which would be hard to realise any value from — my reckoning of Trap’s net asset value is £16.9m, which I calculated as current assets – total liabilities.

This equates to a NAV per share of 7.4p per share, approximately 13% above the current 6.55p share price.

Exploration upside

There were two potentially positive pieces of news relating to exploration and appraisal drilling.

Trapoil is expecting a decision by the end of September from Valleys farm-out partner Total, regarding that firm’s decision on whether to drill an exploration well in these blocks. If Total decides not to drill, it has agreed to compensate Trapoil for the lost opportunity.

Secondly, Trapoil now says it is planning to drill Kratos (a new location for the prospect previously known as Niobe) in H2 2015.

Outlook

The reality is that Trapoil has a sizeable amount of cash, but is too small to do much with it. Athena production is expected to end by 2017, an unless either of the two exploration options mentioned above deliver the goods, the firm could be left with nothing much except a dwindling cash pile.

However, the outlook isn’t necessarily that grim: at its current distressed price, Trapoil could be a useful acquisition for a slightly larger North Sea firm, which would benefit from its £35m of historic losses and — if the acquisition could be funded by shares — from Trapoil’s £16m cash pile.

In my view that’s the most desirable outcome, and I wouldn’t mind betting that 18.6% activist shareholder Peter Gyllenhammar has something similar in mind.

However, this is only conjecture, and I wouldn’t hold your breath…

Disclaimer: This article is provided for information only and is not intended as investment advice. The author may own shares in the companies mentioned in the article. Do your own research or seek qualified professional advice before making any purchase decisions.