The Sirius Minerals (LSE: SXX) share price has gained 10% over the last week and is up by 27% from March’s low of 17.3p. Should I be buying?
There’s still no news of a deal to provide the $3.5bn needed to fund the remaining build of the mine. The company has already warned that it could run short of cash by the end of June.
Management has previously said it hopes to announce a deal by the end of April. I suspect the funds will be found, but I fear that the cost to shareholders will be higher than expected.
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Not so cheap
As I’ve pointed out previously, Sirius is already valued at nearly $5bn, if you include the money it needs to raise.
That’s roughly half the firm’s forecast net present value of $9.8bn. This represents the value in today’s money of the cash Sirius will generate over the mine’s life, based on mid-range predictions about fertiliser prices and production volumes.
In my view, a share price of 20p is about right at the moment. History suggests major projects like this usually cost much more than expected. As my colleague Rupert Hargreaves explained recently, Sirius has already increased its cost estimates several times.
I’m going to continue to avoid Sirius Minerals until funding is agreed. I’m more interested in the opportunities for value creation at this fast-growing oil and gas firm.
The shares are up by 1,200%
Shares in North Sea oil producer Serica Energy (LSE: SQZ) have risen by more than 1,200% over the last five years.
The firm went into the 2015 oil downturn with net cash and a production asset. In 2017, management used these advantages and its North Sea presence to agree a deal with BP to buy its share of the Bruce, Keith and Rhum fields, collectively known as BKR.
Serica has published its 2018 results today, giving investors their first chance to see how this deal is working out. The signs are promising. Although Serica didn’t become the operator of the fields until 30 November, my sums suggest that the resulting cash flow lifted Serica’s underlying operating profit from $14.1m in 2017 to $20.8m.
The accounting for this deal is a bit complex. But in my view, broker forecasts for 2019 revenue of $414m and a net profit of about $162m look reasonable. That means the shares currently trade on a forecast price/earnings ratio of less than 3, even after today’s gains.
What could go wrong?
It seems that the market is still a little sceptical about the long-term success of the BKR deal. So what could go wrong?
One risk is that Serica’s management will now use the firm’s cash flow to start empire-building, making too many expensive acquisitions.
Another risk is that the Rhum field is 50%-owned by the Iranian Oil Company. Due to US sanctions, production requires a US government licence, renewed annually. So there’s an ongoing risk of disruption.
Finally, it’s possible that the performance of the BKR fields will fall short of expectations over the next few years. So far there’s no reason to expect this, but I’m not an expert on these assets.
My verdict: I believe Serica Energy could continue to generate value for shareholders. To lessen the risks, I’d aim to buy on the dips from now on. I’d hold.
