i3 Energy PLC

i3 Energy (LON: I3E) is a FTSE AIM-Share listed oil and gas entity that has a growing production base in Canada's most prolific hydrocarbon region.

Investment Rationale – SPECULATIVE BUY at GBX 11.15

• Favorable Demand and Price Outlook: As per experts, global oil demand is set to strengthen and surpass 2019 level by March 2022 as economic activities are reopening well. Moreover, investors are dubious about the effectiveness of US led release of oil from strategic reserves, which shall support the prices in the short-term.
• Positive Guidance: I3E estimates that, FY21 and FY22 net operating income (inclusive of i3's current hedges) is now projected to be around USD 65.7 million and USD 119.1 million, respectively.
• Technical Indicator: From a technical standpoint, the momentum oscillator 14-day RSI (~40.96) is around the oversold zone, while the stock price is hovering close to the lower Bollinger Band.
• Valuation Multiples: On a forward 12-month basis – EV/Sales and Price/Earnings metrics are quite undervalued against the median of the Energy sector, while the Company has higher Dividend Yield.

Key Risks

• Macroeconomic Uncertainties: Weak industrial date, global shortage of semiconductors, supply constraints, tightening of monetary policy can hamper early enthusiasm about demand.
• Oil Price Volatility: Suring US Dollar, resurgence in Covid-19 cases, and recent supply boost has impacted the oil prices, and thus, it can affect the Company’s cash generation as well.

Recent News:

Appointment of Brokers: On 18 November 2021, I3E announced the appointment of Stifel Nicolaus Europe Limited as a joint corporate broker alongside Tennyson Securities and WH Ireland Limited.

Q3 FY21 Operational and Financial Update (as on 26 October 2021)

• Production: During Q3 FY21, the average production stood around 13,740 boepd (barrels of equivalent per day), while the September 2021’s average was 18,985 boepd.
• Dividend: It has commenced the dividend payments with a special dividend of 0.16 pence per share paid on 6 August 2021 and interim dividend to be paid on 29 October 2021.
• Drilling: It completed drilling for six wells, adding combined net production of 565 boepd.

One Year Share Price Chart

 (Data Source: REFINITIV, Analysis done by Kalkine Group)

Valuation Methodology: EV/Sales Approach (FY21) (Illustrative) 

Conclusion

I3E is a penny stock that is exposed to significant volatilities and investors should gauge their risk-return profile before entering this stock. Notwithstanding, the acquisition of Cenovus has already expanded the production and considerably added future cash flow potential. Adjacently, it has completed a bolt-on acquisition of 230 boepd (barrels of oil equivalent per day) in the Wapiti area. It expects to grow its production base materially and finalizing capital programme for FY22. Therefore, it is well-positioned to create incremental value for its shareholders. The stock made a 52-week High and Low of GBX 16.80 and GBX 4.56, respectively.

Based on the strong activity level, completion of Cenovus acquisition, capital boost with equity placing, and support from the valuation conducted above, we have given a “SPECULATIVE BUY” recommendation on i3 Energy PLC at the current price of GBX 11.15 (as on 25 November 2021, at 9:45 AM GMT), with lower double-digit upside potential based 1.87x EV/NTM Sales (approx.) on FY21E Sales (approx.).

Shanta Gold Ltd

Shanta Gold Ltd (LON: SHG) is a FTSE AIM All-Share listed Company, which is involved in gold exploration and production in Tanzania.

Investment Rationale – SPECULATIVE BUY at GBX 10.75

• Favourable Macroeconomic Factors: The gold prices were trading around US$1,800 level again by taking cues from lesser than expected interest rate hike by the Reserve Bank of New Zealand, US inflation data, persistent inflation worries, and dented investor’s appetite for riskier assets.
• Strong Fundamentals: SHG has robust net cash, low debt, ongoing government support and stable dividend policy to deliver sustainable returns for our shareholders.
• Solid Exploration: It demonstrated exploration success in FY21 so far and discovered new high-grade resources at both New Luika and West Kenya project.
• Technical Indicator: From a technical standpoint, the momentum oscillator 14-day RSI (~21.28) is in the oversold zone, while the stock price is hovering near the lower Bollinger Band.
• Valuation Multiples: On a forward 12-month basis – EV/Sales, EV/EBITDA, Price/Earnings and Price/Cash Flow metrics are quite undervalued against the median of the Basic Materials sector.

Key Risks

• Gold Price Fluctuations: The rising treasury bond yield, and US Dollar strengthening can dent the gold prices trading around two-month high level.
• Business and Macroeconomic Risks: New Luika mine is the sole source of revenue and change in mining rules can increase the State’s royalty take. The Group is exposed to foreign exchange risk arising from various currency exposures primarily with respect to the Tanzanian Shilling, Euro and Sterling.

Recent News

Drilling Update: On 22 November 2021, SHG unveiled encouraging drilling results from the New Luika Gold Mine Exploration, boosting confidence for the sustainable growth. It expects to publish a reserve and resource update for New Luika in Q1 FY22.

Production Update (as on 21 October 2021)

• Operational Safety: SHG recorded zero lost time injuries during Q3 FY21, while surpassing 7.5 million man-hours.
• Dividend: It showed commitment to ongoing sustainable returns with an interim dividend of 0.10 pence per share.
• Liquidity: At the end of Q3 FY21, SHG reported cash and liquidity of US$27.5 million (Q2 FY21: US$28.0 million).

One Year Share Price Chart

 (Data Source: REFINITIV, Analysis done by Kalkine Group)

Valuation Methodology: Price/Earnings Approach (FY21) (Illustrative) 

Conclusion

SHG has shown an excellent exploration success and looks confident of its long-term prospects. Subsequently, FY21’s projections for production and all-in-sustaining costs have been revised to 60,000 - 65,000 oz (ounces) at US$1,325 - 1,375 /oz, respectively. By 2023, SHG targets to become a 100,000+ ounce of gold producer. The stock made a 52-week High and Low of GBX 19.50 and GBX 10.50, respectively.

Based on the ongoing exploration success, solid fundamentals, positive outlook, with support from the valuation conducted above, we have given a “SPECULATIVE BUY” recommendation on Shanta Gold Ltd at the current price of GBX 10.75 (as on 25 November 2021, at 9:52 AM GMT), with lower double-digit upside potential based on 16.89x Price/NTM Earnings (approx.) on FY21E Earnings Per Share (approx.).

*All forecasted figures and Peer Information have been taken from REFINITIV.

*The reference data in this report has been partly sourced from REFINITIV.

*Dividend Yield may vary as per the stock price movement.

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached.

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