Would you buy the stock or the bond?

Retail bonds just keep coming…

Towards the end of last week, oil explorer and producer EnQuest said it’s looking to raise finance from the likes of you and me. They’re offering you a chance to pick up a nine-year bond paying 5.5%. Sounds tempting, doesn’t it?

Well, you can expect to see a lot more of these offers in the months ahead. Because this is what happens when the central planners screw down savers’ rates to practically nothing. The market finds a way round it. Right now, all manner of businesses are launching bonds, offering savers a few per cent more than they can get in the bank.

The question is, is the extra risk worth the extra reward?

Having looked into this proposition, it strikes me that it isn’t. But there is a great opportunity here that I want to tell you about today…

This industry is on fire

EnQuest was formed in 2010 when oilers Petrofac and Lundin demerged their North Sea assets and rolled them up into one company. The stock went straight into the FTSE 250. And with oil prices on the rise, the business is on a roll right now.

I think that will probably continue. As you know, I’m a long-term commodities bull. To my mind, oil has a strong future and, given that it’s priced in ailing Western currency, the price is likely to keep rising. We’re already back up at $113 on Brent – so prepare yourself for another potential hike at the petrol pumps!

By the way, if you’re as excited as I am about oil right now, you’ll definitely want to take a look at something my colleague Tom Bulford has been working on. It involves a vast untapped oil reserve and a tiny UK company. You can get the details from Tom himself by clicking here.

The high oil price certainly works in EnQuest’s favour. But there is more to it than that. What’s really exciting is the new wave of technology such firms like EnQuest use to drain depleting oil fields in the likes of the North Sea. EnQuest buys into mature fields and helps squeeze out the remaining barrels of oil – a great business plan!

The company has been targeting 20% growth in production per annum. That’s serious growth. I mean who cares about a lacklustre UK consumer economy when you can get in on a high-growth international market? And they’re making a lot of money. Revenues for this year are forecast to come in at just over £600m, and with profit forecast to be £259m, you can see this is a fantastic business. What a margin!

The stock trades on a price/earnings (p/e) ratio of around ten times – stocks in the low teens are always worth a look. And if you look ahead, profits ramp up to nearly £350m, putting the shares on just 8.5 times earnings.

With such wonderful returns available, I’m not surprised the finance director wants to tap the retail bond market for a few quid. EnQuest wants to borrow money from poor savers, starved of decent savings rates in the market. And the cash raised will be invested in the burgeoning energy industry. We’ve just looked at how profitable that is.

Now, the point is this…

Which side of the deal do you want to be on?

Do you want to lend the company your money for 5.5%, fixed for nine years? Or do you want to jump aboard as an equity holder and be a true owner of the business?

I guess the answer comes down to how your portfolio looks and your tolerance for risk. If you’re risk averse and just want some fixed interest with a tolerable return, then you should consider including this bond in your Isa portfolio. And remember, this can go in a stock Isa which allows you to invest around double what you can in a cash Isa. The offer closes on 8 February, so ask your broker if you’re interested.

But be aware, given that these bonds are not covered by the Financial Services Compensation Scheme, they should definitely not be considered anything like cash in a bank. You will not be entitled to compensation from the scheme if EnQuest goes insolvent. And if interest rates move up, you’ll be tied into your 5.5% rate right up until 2022.

Of course you could sell the bond, but if rates go up, bond prices tend to go down. I should also mention that there is a minimum initial order of £2,000. After that the bonds can be bought and sold in multiples of their £100 face value.

Even though there’s no dividend, and none forecast for the next few years, I would rather plump for the equity.

Now, normally a no-dividend policy would make me wary. What are we investing for, if not a return?! But in some cases, no dividend is a sign of great strength. What the company is saying is this: Why pay shareholders profits out of the company, when we can reinvest profits and get such a handsome return?

Better still, we can tap desperate savers for a few quid with these new-fangled retail bonds and raise more cash to boot…

Quite.

EnQuest is listed on the London Stock exchange, ticker ENQ. It’s worth a look.

• This article is taken from the free investment email The Right side. Sign up to The Right Side here.

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3 Responses

  1. 29/01/2013, JGH wrote

    There’s a useful analysis of EnQuest and this bond at Fixed Income Investor – see http://www.fixedincomeinvestor.co.uk/x/analysis.html?type=bond-of-the-week&cat=analysis-comment&y=2013&aid=896. This includes the observation that the CEO owns 10% of the company.

    On the question of bond vs shares, if the bond returns 5.5% a year for 9 years, that equates to 49.5% (assuming that payments are not reinvested). If you expect the shares (currently 130p) to trade 50% higher (ie: at 195p) at some point within the next 9 years, and can put up with the extra volatility in the meantime, then it makes sense to go for the shares.

  2. 30/01/2013, AGA wrote

    You talked about Northern Petroleum some months ago as an entry into Oil. Since then the price has dived. Any comments on that tip?

  3. 01/02/2013, mikkip wrote

    HAHAHAHA — nice one AGA… these journos have no real incentive to be right… they make money by writing BS and pretending to offer the reader an insight… which they don’t cos they are no smarter than the average man on the street when it comes to markets…

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