One small-cap turnaround stock I'd consider with 8% yielder Centrica plc

Today I'm looking at two very different companies which both offer exposure to the energy sector. One company has a monster yield, while the other is a deep value turnaround. I believe both stocks could be profitable buys at current levels.

A safe 8% yield?

It's hard to ignore the 8% dividend yield that's on offer at British Gas owner Centrica (LSE: CNA). City forecasts show that shareholders are expected to receive a payout of 11.7p per share this year, giving a prospective yield of 8.7%.

One of the reasons I own Centrica shares is for this high yield. Normally such a high figure would be a sure sign that the payout was likely to be cut. But I think this could be an exception.

The energy group's 2017 results showed that dividend cover by adjusted earnings had slipped to a wafer-thin 1.05 times. Despite this, Centrica's management was able to maintain the dividend and reduce net debt from £3,473m to £2,596m.

This strong cash generation is expected to continue. Management is targeting adjusted operating cash flow of £2.1bn to £2.3bn each year until 2020. Capital spending will be limited to £1.2bn each year.

If the company can deliver on this guidance, then I believe its operations should generate enough free cash flow to maintain the dividend. And with the shares trading at a 15-year low and on a forecast P/E of 10, I rate Centrica as a long-term buy.

A small-cap turnaround

Centrica still has exposure to oil and gas production through its shared ownership of Spirit Energy. But if you're looking for turnaround investments in the oil and gas sector, then there are probably better choices elsewhere.

One option is offshore support vessel provider Gulf Marine Services (LSE: GMS). This firm has a modern fleet of self-propelled, self-elevating support vessels -- ships which can sail into position and then lower their legs onto the seabed, providing a platform for drilling or other oil and renewable work.

Demand for these vessels crashed during the oil market slump. Unfortunately Gulf Marine's debt levels peaked at this time, as it was nearing the end of a major project to upgrade its fleet.

Things are still tight, but today's results suggest to me that the group will probably manage to stay afloat without requiring emergency funding.

Trading at a deep discount

Changes made to the group's borrowing arrangements enabled the firm to reduce its net debt from $402.1m to $372.8m last year. Loan repayments due in 2018 and 2019 have been reduced by two-thirds, and some of the group's lending covenants have been relaxed.

Last year's financial results suggest that the bank's support was badly needed. Revenue fell by 37% to $112.9m in 2017, while the group's adjusted net profit fell by 90% to $4.8m. Utilisation of the group's fleet fell from 70% to 61%.

However, Gulf secured three new long-term contracts in 2017 and has already agreed one contract extension in 2018. Management reported"increasing levels of enquiries and tender activity in the Middle East and Europe".

The stock currently trades at a discount of more than 50% to its tangible net asset value of 86p. Analysts covering the company expect adjusted net profit to rise from $4.8m to $26.3m this year, putting the stock on a forecast P/E of 7.1.

I'd rate the shares as a speculative recovery buy.

Buy-And-Hold Investing

Our top analysts have highlighted five shares in the FTSE 100 in our special free report "5 Shares To Retire On". To find out the names of the shares and the reasons behind their inclusion, simply click here to view it immediately with no obligations whatsoever!

Roland Head owns shares of Centrica. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.