Cairn Energy Plc

The oil and gas producer Cairn Energy is a United Kingdom-based company, engaged in the business of exploration and distribution of oil & gas. The Company's portfolio is focused on approximately three geographical regions, such as North West Europe, the Atlantic Margin and the Mediterranean. BlackRock Investment Management (UK) Ltd and MFS Investment Management are among the top institutional investors in the company. (Source: Thomson Reuters)

Recent Updates
On April 08, 2019, the group notified the selection of Alison Wood as Non-Executive Director of the Cairn and his designation will come into effect by July 01, 2019. On March 12, 2019, the company has announced its full-year financial results for the period ended as on December-31-2018.

Financial Performance – (FY18 US$ mn)

Source: Company Annual Report FY18

For FY18, the group’s revenue stood at US$ 410.3 mn and witnessed a significant surge against US$33.30 mn reported in FY17. During FY18, the group received revenue from the UK North Sea (Kraken) and Catcher. Production started on both the assets during FY17.

For FY18, average production cost stood at US$20.5 per mmboe, and average realised price stood at US$68 boe. Net Cash inflow (oil and gas production) for the period stood at US$229 mn, and Capital expenditure stood at US$252 mn. Operating loss from impairment of Kraken after downward revision in reserves stood at negative US$182.1 mn and a net loss of US$1.1 bn on account of write-down of Cairn's investments in India.

Stock Performance – 1 Year

Daily Price Chart (as on April 17, 2019), before the market close. (Source: Thomson Reuters)

At the time of writing (as on April 17, 2019, at 11:35 AM GMT), shares of Cairn Plc were quoting at GBX 170.90, up by 4.9 points or 2.83% against its previous day close price. In the past one-year, shares have registered a 52w high of GBX 270.96 and a 52w low of GBX 138.0. The stock was carrying a beta of 1.61 which indicates the stock is comparatively highly volatile against the benchmark index FTSE 100. On a year-to-date basis, the share was up by 10.67%.

Valuation Methodology
 

Conclusion
Cairn’s Return on Equity of 10.5% was considerably higher as compared to the sector’s average ROE of 5.6% and the market average of 6.5%. The company’s Revenue and Gross Profit surged significantly as compared to the last year. In terms of exploration activity, with up to six wells scheduled across the UK/Norway and Mexico, the rest of 2019 promises to be busy. With production already started in the financial year 2017 across the UK North Sea (Kraken) and Catcher, the future growth prospects look strong. Based on the above rationale and valuation done using above method, we have given a "BUY" recommendation at the closing price of GBX 166 (as on April 16, 2019), based on 19.5x Price-to-Earnings (approx.) on FY19E Earnings Per Share.
 

Vivo Energy Plc

The United Kingdom-based Vivo Energy Plc is engaged in the business of Oil refining and markets under the brand of Shell to retail and commercial customers. The company distributes fuels, lubricants and liquefied petroleum gas (LPG). Helios Investment Partners LLP and Capital Research Global Investors are the top institutional investors in the company. (Source: TR)

Recent updates:
On March 6, 2019, the company proposed a final dividend of US$1.3cents per share for the period ended December-31-2018. On March 06, 2019, the company reported its full-year financials for the period ended December-31-2018.

Financial Performance – (FY18 US$ mn)

Source: Company filings, LSE

Volumes surged by 4% to 9,351 mn litresfrom 9,026 mn litres in FY17, driven by a stellar performance in their commercial segment. For the financial year ended December-31-2018, the group's revenue surged by 13% to US$7,549,318 k as compared with the revenue of US$ 6,693,515 k, driven by a surge in the volume and improvement in the price realised. Total gross cash unit margin stood at US$73 per thousand litres as compared with US$74 during FY17. Adjusted EBITDA for the period improved by 6% to US$ 400k as compared with the adjusted EBITDA of US$ 376k and Net Income stood at US$146k as compared with the Net Income of US$130k during the corresponding period of the previous financial year. During FY18, leverage ratio declined to 0.79x as compared with 0.97x during the FY17. In FY18, the total dividend stood at 1.9 cents.

Stock Performance – 1 Year

Daily Price Chart (as on April 17, 2019), before the market close. (Source: Thomson Reuters)

At the time of writing (as on April 17, 2019, at 12:53 PM GMT), shares of Vivo Energy Plc were quoting at GBX129.20 and declined by 0.31% against its previous day close. During the past one-year, shares have registered a 52w high of GBX 198.10 and a 52w low of GBX 93.71. At the current price level as quoted in the price chart, the share was trading 37.8% above its 52w low price level. Also, the stock was trading marginally above its 30-day and 200-day simple moving average (SMA) which is a positive technical indicator and stock carrying potential to move up further from the current price level. On a year-to-date basis, the stock was up by 3.68%.

Valuation Methodology


Conclusion
Vivo Energy has flexibility within a diversified portfolio. The business was able to grow its EBITDA in FY18 while the biggest profit contributing region of Morocco was facing margin pressure. This highlight the flexibility and diversification strength of the company's portfolio. Vivo operates in a favourable macro environment, and with the EVO acquisition, it can step up its exposure to Africa and collect the upside from the integration because of the lower efficiency level of EVO vs Vivo.  Supply constraints that have impacted 2018, seem to be behind and Vivo is well positioned to demonstrate its capabilities if everything goes according to the plan. Based on the strong fundamentals and valuation done using the above methodology, we have given a “BUY” recommendation at the closing price of GBX 129.60 (as on April 16, 2019), based on the 7.8x NTM Industry Median Price-to-Cash flow per share on FY19E Cash Flow Per Share.

*The buy recommendation is valid for the current price as covered in the report (as on April-17-19).

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