RBC downgrades Energean, shares slide

RBC Capital Markets has downgraded Energean on valuation concerns, sending shares in the Mediterranean-focused energy firm lower.

Its analysts cut their rating from ‘outperform’ to ‘sector perform’, and reduced its price target from 1,100.0p to 700.0p. The downgrade weighed on the stock, and by 1300 BST Energean was trading 8% lower at 558.0p.

Last year, Energean agreed to buy the oil and gas operations of Italy’s Edison for up to $850.0m. But at the end of June, the two sides agreed to slash the value of that transaction to just $284.0m after Edison dropped its Algerian and Norwegian assets from the deal, and to reflect the weaker outlook for energy prices in the wake of the Covid-19 pandemic.

RBC said: “Despite the Edison acquisition, gas in Israel continues to dominate Energean’s investment case; the assets account for two thirds of our gross tangible valuation.

“However, we now see the company’s other assets as less valuable. As a result, we have lowered our price target and recommendation. And although the acquisition potentially mitigates risk by diversifying the portfolio, it increases the complexity of the business case.”

Thus, the broker reined in its valuation of Energean's Greek assets "materially", based on their performance and current 'strategic review' status. "Having equipped Energean with operatorship credentials, this challenging portfolio has largely served its purpose," it noted.

The bank continued: “We see potential for upside, and an unwinding of the stock’s discount to our tangible net asset value, as management integrates the Edison portfolio.

“However, we believe investors and analysts face a steep learning curve. As result, we anticipate that consensus valuations are likely to come down, before solidifying.”