UK Edition
There are so many reasons not to look at i3 Energy. It is a small cap. It is acquisitive. It is a junior commodity producer that may need to farm out assets to realise their value. It may need more cash from investors to make deals or invest in production. And it produces oil and gas, something that will deter those investors who want companies to meet their requirements when it comes to environmental, social and governance (ESG) issues.
Yet it is tempting to give the £126m company a closer look, not least because all those risks present opportunity too. One unintended consequence of the worldwide ESG drive could be that investors (or companies) sell assets indiscriminately. This may prove them to be admirably worthy members of wider society, but they may give up value to do so, unintentionally providing harder-nosed operators with a chance to step in and buy assets on the cheap.
Whether we like it or not, the globe is going to need oil and gas for some time to come. If oil firms pull back too far on exploration and production, the world could yet see growth in demand for energy exceeding growth in supply, at least in the near term, even as work continues on increasing capacity from wind, solar, hydro and other alternative sources.
Some investors will find all this very distasteful on environmental and other grounds and this column can thoroughly empathise with such a perspective. Others will focus more on dollars and cents, nickels and dimes and note how i3 Energy is following a business model that already works, judging by the successful trajectory of the share price of Diversified Energy, formerly Diversified Gas & Oil, now a member of the FTSE 250.
While Diversified Energy focuses on hydrocarbon assets in America’s Appalachians, i3 Energy is active in Canada, where it buys up conventional oil and gas fields as cheaply as it can. The plan is to run the assets and pay dividends from the resulting cash flow. The firm paid a 0.16p special dividend in August and has hinted at an interim dividend this month, based on a percentage of the cash flow generated.
This angle may appeal to income seekers, albeit ones prepared to take on smaller-company risk, especially as the firm’s management is seeking to hedge production and lock in future prices to protect its revenue and cash flow.
Volatility in oil and gas prices could easily have a say on the share price but the Canadian business has the potential to generate stable cash flow. Investors looking for something racier may note its Serenity oil discovery in the North Sea, although that is in its very early stages and a partner may well be required to help here.
All in all, i3 Energy could be an interesting play for risk-tolerant, contrarian yield seekers.
Questor says: buy
Ticker: I3E
Share price at close: 11.3p
Update: Rank
Victory in its long-running legal claim for a VAT refund from HM Revenue & Customs is a timely boost for bingo and casino operator Rank.
The windfall could come to around £80m, a tidy sum that will further top up the FTSE 250 firm’s coffers in the wake of last autumn’s £70m capital raising. The additional cash gives Rank further breathing space as it waits to see how many customers return to its bricks-and-mortar venues in the wake of the pandemic.
The early signs are good: initial weekly takings at the Grosvenor casino and Mecca bingo operations have been running ahead of break-even since the big reopening in May. Rank also continues to work on scaling up its online operations in the wake of its acquisition in 2019 of Stride.
The company could therefore benefit from rising consumer confidence as it seeks to bounce back from a £72m loss in the financial year that ended in June. Patience may be required, in view of the ongoing fight against coronavirus, while gambling as an industry continues to attract ever greater regulatory and fiscal scrutiny, so clear risks remain.
That said, the balance sheet is sound and the shares trade at a valuation discount relative to where they were before the pandemic.
Questor says: hold
Ticker: RNK
Share price at close: 174p
Russ Mould is investment director at AJ Bell, the stockbroker
Read the latest Questor column on telegraph.co.uk every Sunday, Tuesday, Wednesday, Thursday and Friday from 5am.
Read Questor’s rules of investment before you follow our tips.