Are Further Gains Likely At Amur Minerals Corporation, Xcite Energy Limited & Premier Oil PLC?
Is the market is rerating these stocks for a brighter future, or is there a risk that prices will slide again?
Amur Minerals was one of Friday's biggest risers, climbing as much as 20%. The catalyst for the gains was news that Amur has signed a non-binding agreement with the Russian government's Far East and Baikal Region Development Fund.
Amur hopes that this state-backed fund will contribute to the cost of building its proposed Kun-Manie nickel copper sulphide mine. The firm plans to do 15,000m of drilling during the coming summer season, as it works to prepare a Definitive Feasibility Study (DFS). This will be used to try and secure funding for the mine development.
The Kun-Manie asset seems promising and there looks to be a reasonable chance that Amur will make a success of it. But there are still a lot of unknowns, and financing could be tricky. Friday's deal was only a non-binding agreement. There are no guarantees.
Amur shares have fallen by 50% over the last six months. In my view they remain highly speculative.
North Sea explorer Xcite Energy is in a race against time. The firm must find an investor willing to refinance its debts and back the development of its Bentley oil field. The problem is that Xcite has to repay $139.05m of bonds in June 2016. The group doesn't have this cash.
In better market conditions, Xcite might find a buyer for Bentley, which has proven and probable reserves of 265m barrels of oil. Costs are falling too. In a recent update, Xcite said that development costs had fallen to $30 per barrel.
However, the reality seems to be that the market isn't interested. If things don't change, I expect Xcite to default on its bonds in June. For a potential buyer, it will make sense to wait until then, in order to be able to buy Bentley's barrels as cheaply as possible.
Because of the risk of a bond default, I think Xcite shares could end up going to 0p. In my view, the recent gains could be a good selling opportunity.
Shares in Premier Oil have risen by 125% from their January low of 19p. The firm's 2015 results were no worse than expected and operating costs have been cut by 25%. Premier's deal to acquire the North Sea assets of E.ON has also been well received.
The production from the E.ON assets is well hedged and will generate valuable cash flow. The additional earnings this provides will also increase the amount of headroom available on Premier's debt covenants.
However, this may not be enough. Premier has net debt of $2.2bn and chief executive Tony Durrant warned in the firm's results that if oil prices stay low, "further relaxation of covenants may be required".
In my view this is a big risk to shareholders. Premier may end up needing to issue new shares to repay some of its borrowings. For this reason, Premier looks too expensive to me at the moment.
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Roland Head has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.