While everything is going smoothly in the energy sector, young oil and gas company Reconnaissance Energy (RECAF) is struggling with declining revenue and profitability. Shares have fallen over 20% in the last month. Hence, it is best to avoid it. Read more.
OPEC expects global oil demand to rise by 2.32 million barrels per day this year. Moreover, oil demand in China is rising due to the country’s easing of COVID-19 restrictions. OPEC expects China’s oil demand to rise by 710,000 bpd in 2023, compared to last month’s forecast of 590,000 bpd.
Despite the promising growth potential of the energy sector, Reconnaissance Energy Africa Ltd. (RECAF) is lagging behind. In this article, I will look at the industry outlook and possible reasons for the low performance of RECAF.
On April 2, 2023, OPEC+ and Saudi Arabia made a surprise announcement that they cut oil production about 1.16 million barrels per day. This brings OPEC+’s total oil cuts to 3.66 million bpd, Reuters calculates, or roughly 3.7% of global demand.
Amrita Sen, founder and director of Energy Aspects, said: “OPEC is taking proactive steps in the event of any possible reduction in demand.”
However, the number US oil platforms collapse Last week, according to a report by Baker Hughes, it was indicated that no increase in US production is expected in the near future, which should contribute to further price increases in the future.
In addition, despite economic uncertainty and geopolitical risks, the energy sector managed to maintain relatively positive results. Energy Sector SPDR Fund (XLE) is up 6.9% over the past year, outperforming the broader SPDR S&P 500 ETF Trust (SPY) 8.9% decline over the same period.
RECAF, headquartered in Vancouver, Canada, is a young oil and gas company that explores and develops the oil and gas potential in Namibia and Botswana.
The stock is down 76.4% over the past year and closed the last trading session at $1.07. It is down 21.3% in the last month and 69.8% in the last six months. Its 24-month beta of 1.40 indicates that the stock is relatively more volatile than the market as a whole.
Here are some things that may affect RECAF activities in the near future:
Weak financial performance
During the fiscal year ended December 31, 2022, RECAF’s revenue decreased by 15.9% year-on-year to CAD$5.52 million (US$4.08 million). Its general and administrative expenses rose 17.1% year on year to CAD$5.25 million ($3.88 million).
In addition, net loss rose 22.1% year-on-year to CAD$14.62 million (US$10.82 million) and loss per common share rose 16.7% year-over-year to 0. 07 Canadian dollars.
Low profitability
RECAF’s last 12-month gross margin of 13.32% is 70.7% lower than the industry average of 45.41%. Its 12-month asset turnover ratio of 0.03x is 95.2% lower than the industry average of 0.67x.
In addition, negative ROCE, ROTC and COMPANY 57.98%, 28.73% and 27.46% are significantly lower than the industry averages of 21.44%, 9.91% and 7.09% respectively.
Stretched scores
RECAF’s last 12-month P/S multiple of 55.47x is significantly higher than the industry average of 1.17x. Its last 12-month EV/Sales multiple of 48.22x is also higher than the industry average of 1.67x, and its last 12-month price/balance ratio of 3.05x is 93% higher, than the industry average of 1.58x.
Powr ratings reflect bleak outlook
RECAF is rated F overall, in line with strong sales in our own Power Ratings system. POWR ratings are calculated based on 118 different factors, each of which is optimally weighted.
Our proprietary rating system also ranks each stock in eight different categories. The stocks are rated F for value and quality, consistent with their premium valuation and lower returns than the industry.
RECAF ranks last among 42 stocks. Foreign oil and gas industry.
Click here to access the RECAF Growth, Momentum, Stability, and Mood scores.
Bottom line
RECAF’s poor financial performance, low profitability and high valuations may be the reason for its weak results in the near term.
While the energy industry is poised to thrive this year, RECAF is currently trading below its 50-day and 200-day moving averages of $1.24 and $2.26, indicating a downtrend. The stock’s sustained downtrend and high beta suggest this could be a risky investment right now. Thus, it would be ideal to avoid stocks.
Stocks to consider instead Exploration Energy Africa Co., Ltd. (RECAF)
Unfortunately, the chances that RECAF will do well in the coming weeks and months are greatly reduced. However, there are many good stocks in the overseas oil and gas industry with impressive POWR ratings. So instead, consider these three stocks rated A (strong buy):
OOO “GeoPark”GIC)
Santos Limited (SSLZY)
LLC “Petroneft Resource”PTR).
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RECAF shares were unchanged in premarket trading on Monday. Since the beginning of the year, RECAF has gained 12.63% compared to the 7.41% gain in the benchmark S&P 500 over the same period.
About the author: Critique Sarmah
Her interest in risky tools and her passion for writing made Kritika an analyst and financial journalist. She received her BA in Commerce and is currently pursuing a CFA program. Through her fundamental approach, she aims to help investors identify untapped investment opportunities.
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