These seven oil and gas and mining shares look undervalued but near-term newsflow suggests they’re unlikely to stay that way for long:
Strategic Natural Resources (SNRP)
Share price: 24p Market cap: £26m
Broker price target: 50p (Evolution Securities, 21 March 2011)
Strategic Natural Resources (SNRP) holds a range of coal licences in South Africa's Eastern Cape province. An initial resource of 150m tonnes of coal was based on just 3 per cent of SNRP's licence areas, which suggests substantial scope to increase resources.
The company has just signed an exclusive coal sales agreement with Trasteel International, a global steel supplier and commodity trader. The agreement covers all of the beneficiated coal to be mined from SNRP's Elitheni mine, up to an initial 2 million tonnes. The first shipment will be loaded in June 2012, with 500,000 tonnes scheduled to be shipped during the following 12 months. The balance of 1.5m tonnes is scheduled to be shipped before the end of 2014.
Why the company is undervalued: Comparing a range of recent M&A transactions involving similar-stage coal projects, and estimating net present value from a full production and cash flow model, Evolution Securities estimates SNRP's value at around 100p.
Upcoming share price triggers: The company is looking to conclude additional sale agreements that will demonstrate clear further value from the licences, and new drilling should increase coal resources.
Northern Petroleum (NOP)
Share price: 128p Market cap: £119m
Broker price target: 230p (Matrix, 5 April 2011)
Northern Petroleum offers strong core value through growing onshore production in the Netherlands combined with high-impact, though longer-term exploration, primarily in Italy.
The company has been working with Shell in the West of Sicily since 2008. Northern led the partnership during the technical evaluation work, but has just applied to transfer operatorship of six of the licences to Shell, which suggests the partners are moving towards drilling. Seismic surveys of two structures across these permits suggest they could hold 1.75bn barrels of mean prospective resources (resources the geology could hold, although nothing proven before drilling).
Meanwhile, Northern has just introduced Azimuth as its new 15 per cent partner in two Southern Adriatic licences that contain the Rovesti and Giove oil discoveries and 10 mapped prospects. Northern estimates that these two licences could between them hold over 3bn barrels of oil in place, plus another 1bn barrels of oil equivalent in gas prospects.
Why the company is undervalued: In its new 'oil screen' valuation, Edison Investment Research estimated that London's oil and gas independents trade on an average $8.59 per barrel on an enterprise value per barrel of oil or gas basis. This is significantly higher than Northern, which trades at just $1.56 per barrel.
Upcoming share price triggers: Northern holds a 1.25 per cent stake in Tullow's exploration block in French Guyane, where drilling started in March with results expected in June. Even though the stake is small, the volumes at stake are large. Success should bring to light the unseen value in Northern's other assets, which will be further highlighted if Shell advances drilling plans in Sicily.
IGas Energy (IGAS)
Share price: 72p Market cap: £117m
Broker price target: 130p (Numis Securities, 1 February 2011)
UK-focused coal-bed methane (CBM) operator IGas Energy is in production at its pilot site at Doe Green in Warrington and has been selling electricity from on-site generation – a first for CBM in the UK.
The company raised £20.6m in February and issued further shares to partner Nexen to buy out its UK licence interests. That deal gives IGas 100 per cent control of its licences from a previous average 45 per cent interest. The deal almost trebled IGas's production and increased contingent recoverable resources by 115 per cent to 1.74 trillion cubic feet, which is equivalent to some 289m barrels of oil.
Becoming operator gives IGas control of its destiny, and will allow it to accelerate development plans, which include drilling a number of new sites this year and preparing its first full site for commercial production.
Why the company is undervalued: The deal with Nexen provided a huge uplift in resources and increased IGas's interest to 100 per cent. Numis Securities has increased its long-term UK gas price forecast by 12 per cent, which raises its estimate of IGas's net asset value to 144p. What's more, on an enterprise value per barrel of oil or gas basis, IGas trades at under $1 per barrel compared with the sector average of $8.59.
Upcoming share price triggers: Management expects to complete its first full production site by the end of the year, which would be a pivotal event that should trigger a substantial re-rating.
ZincOx (ZOX)
Share price: 51p Market cap: £39m
Broker price target: 104p (Ambrian, 13 December 2011)
Zinc and ZincOx have been equally unloved over the past few years, although both are looking forward to a renaissance. Globally, 62 per cent of zinc is used for galvanising steel for construction and infrastructure and a further 23 per cent goes into automotive production, according to analysts at Ambrian. Asia-driven urbanisation is continuing apace and automotive markets are recovering.
At the same time, significant zinc mines representing some 8 per cent of current global output are set to cease production in 2012 as they come to the end of their mine lives. With other producers expected to follow suit in the near term, Ambrian expects the zinc market may well become tight beyond 2012, which is positive for the zinc price.
ZincOx suffered lengthy delays in the development of its US recycling project but has recently made rapid progress advancing a project in Korea. Modifying existing technology to produce zinc from steel mill waste, the company's first plant could be up and running early next year, just as the zinc price is expected to start flourishing.
Why the company is undervalued: In addition to the Korean project under development, ZincOx has a cash balance equivalent to around 54p a share, yet trades below this at just 51p.
Upcoming share price triggers: ZincOx will be announcing many operational updates as it advances the Korean project towards first production.
Goldplat (GDP)
Share price: 11p Market cap: £12m
Broker price target: 21p (WH Ireland, 12 April 2011)
Goldplat is often mistakenly perceived as a not very exciting company that derives moderate, though profitable, gold production of around 1,000 ounces per month from recovery operations (producing gold from mining by-products) in South Africa and Ghana.
Less well-known are the company's mining and advanced exploration projects in Kenya and Burkina Faso, and the company is in advanced negotiations to acquire a third mining project in Ghana. The Kenyan operation already produces gold and each of the three projects has extensive artisanal workings and/or historical drilling to suggest a high likelihood that the company will be able to demonstrate significant gold resources through near-term exploration drilling.
Why the company is undervalued: The shares trades on a PE of under six times 2011 earnings, which is cheap for the gold recovery operations alone, and ascribes no value to mining/exploration projects that have the potential to demonstrate resources of substantially over 1m ounces of gold and enable the company to produce 100,000 ounces of gold a year.
Upcoming share price triggers: Newsflow is expected over the coming months (receipt of Kenyan mining licence, completion of Ghana acquisition, drilling results and updated gold resources) that should raise the company's profile and help correct the misperception that the company is just a boring recovery operation.
Kentz (KENZ)
Share price: 410p Market cap: £480m
Broker price target: 500p (Liberum Capital, 12 April 2011)
Specialist natural resources engineer Kentz repeatedly beats analyst forecasts with its revenue growth and margins as many blue-chip oil and gas clients continue to increase spending on exploration and production projects. The core of the business remains the Middle East although the group has been following clients to more remote locations including Papua New Guinea and the Dominican Republic.
A key feature of Kentz's business is the evolution of new work from existing contracts, which contributed $507m out of total new orders last year of $1,265m. What's more, the bidding pipeline remains healthy with current prospects of over $3.7bn and longer term prospects of $4.41bn, on top of which the group last year signed two new framework agreements with oil majors ExxonMobil and Shell.
Why the company is undervalued: Stripping out the group’s own cash of $158m from a gross balance that also includes client prepayments, the shares trade on just 12 times forecast earnings.
Upcoming share price triggers: The company regularly wins contracts to top up its already burgeoning order book and the intended move of the shares from the Alternative Investment Market to London's main market should further enhance visibility.
Altona Energy (ANR)
Share price: 10p
Market cap: £41m
Broker price target: 35p (Evolution Securities, 29 March 2011)
Altona Energy is developing the Arckaringa energy project in Australia, which holds around 7.8bn tonnes of coal and has the potential to develop into a huge energy source. The project is needed to help address South Australia's rising power shortfall and Arckaringa's scale also makes it of global significance.
One of Altona's key advantages is its partnership with CNOOC New Energy, the new technology arm of one of China's largest oil groups, which has introduced technical expertise and de-risked the project financially from Altona's perspective.
A bankable feasibility study is underway to assess multiple projects including coal-to-liquids and power generation, coal development, synthetic natural gas and other potential clean energy projects, many of which are becoming increasingly attractive and commercial with the oil price above $121 per barrel.
Why the company is undervalued: The shares have retraced to where they stood before the CNOOC deal, despite the considerable progress Altona has made in the meantime, most notably completing the deal with CNOOC. On top of this, £41m for 7.8bn tonnes of coal is very cheap by global deal standards.
Upcoming share price triggers: Expect numerous announcements as the company progresses the feasibility study, including the anticipated start of drilling this summer to evaluate the mine plan and water management process.
