Emerging markets - time to short?

With the fall out from Dubai and the huge surge in the emerging markets from the March lows, now seems to be the time to short emerging markets. Short CFD's placed on Templeton Emerging and JP Morgan Emerging this morning.

NightHawk Energy - a shale oil bet with huge potential!

At 35p, AIM listed Nighthawk energy (HAWK) is a very interesting play on shale oil in the U.S. and with its share price currently depressed, there looks to be a strong investment case for signficant gains in 2010 driven by news flow.

The case for investment:

1. THE JOLLY RANCH PROJECT

Nighthawk owns a 50% share in the Jolly Ranch Project in Colorado (its U.S partner Running Foxes owns the remainder). Hawk owns approximately 400,000 acres in the SE part of the Denver Basin. The hope is that oil can be produced from its black organic shales.

In July 2009, Schlumberger Data and Consulting Services, completed a survey of the oil in place at Jolly on an area of 246,000 acres.

The results were highly encouraging:

P10 - 1.22 billion barrels

P50 (most likely oil in place) - 1.46 billion barrels

P90 - 1.742 billion barrels

Schlumberger concluded that " the regional continuity of the formations was such that the resources in place were likely to be laterally continuous across the total acreage".

Hawk's efforts to date has been focused on proving the reserves in place and recovery rates using a combination of traditional vertical wells and a newer technique known as Lateral or horizontal Drilling. During the second half of 2009, it has been shown that oil recovery has been economic from several of these wells e.g. Craig 4-4, 65 barrels per day.

What is horizontal drilling?

The use of horizontal drilling technology in oil exploration, development, and production operations has grown rapidly over the past 10 years. Horizontal drilling technology achieved commercial viability during the late 1980’s and  It has been used successfully particularly in the Bakken Shale of North Dakota and the Austin Chalk of Texas, Of the three major

categories of horizontal drilling, short-, medium-, and long-radius, the medium-radius well has been most widely used and productive. Achievable horizontal bore hole length grew rapidly as familiarity with thetechnique increased; horizontal displacements have now been extended to over 8,000 feet. The technical objective of horizontal drilling is to expose significantly more reservoir rock to the well bore surface than can be achieved via drilling of a conventional vertical well. Significant successes include many horizontal wells drilled into the fractured Austin Chalk of Texas’ Giddings Field, which have produced at 2.5 to 7 times the rate of vertical wells, wells drilled into North Dakota’s Bakken Shale, from which horizontal oilproduction increased from nothing in 1986 to account for 10 percent of the State’s 1991 production, and wells drilled into Alaska’s North Slope fields.

Comparisons to the Bakken field

The Bakken Formation, occupying about 200,000 square miles (520,000 km²) of the subsurface of the Williston Basin, covering parts of Montana, North Dakota, and Saskatchewan.

There are significant reservoirs of oil in the Bakken shale. Oil was first discovered in the Bakken in 1951, but efforts to extract it have historically met with difficulties. An April 2008 USGS report estimated the amount of technically recoverable oil in the Bakken Formation at 3.0 to 4.3 billion barrels (680,000,000 m³), with a mean of 3.65 billion.The state of North Dakota also released a report that month which estimated that there are 2.1 billion barrels (330,000,000 m³) of technically recoverable oil in the Bakken.

Geologically, Jolly Ranch is similar to the Bakken shale field which is currently the largest shale play in N. America . Because the Bakken shale has generally low porosity and low permeability, it made the oil difficult to extract and until recently recovery rates were poor and it was the advent of the new horizontal drilling techniques that has signficantly increased recovery rates. Jolly appears to have superior porosity and permeability characterisitics and this geology together with the promising early drilling results give credence to the theory that Jolly could be more productive than Bakken in the longer term.

Bakken fields have attracted strong prices per acre e.g. Jan 08 Crescent point/londex $17,000 per acre, Dec 08 Cpe/vilanum $7398 per acre, March 09 tristar/cpe $9332 per acre.

Jolly Ranch financial models based on Schlumberger anaylsis

There is a strong financial case for investment in Hawk based on the Jolly Ranch Project alone. With relatively conservative assumptions, namely;

• p10 oil in place estimates (Schlumberger July 2009)
• 10% recovery rate
• 25% cost per barrel
• $55 per barrel oil price - WTI

Estimated earnings for the life of the project are $2.35 billion, which equates to lifetime earnings per share of $72 (£45). 


2. Financial health


In August 2009, Nighthawk raised US$37 million (£22.4 million) at 35 pence per share via an institutional placing. Cash balances of 30th June 2009 were $6 million. At the AGM in November, David Bramhill (MD) stated that if oil stayed close to the current $75/barrel level, the company would continue to be cash flow positive and as production ramps up (expected to be 700-800 BPD by end 2009), cash flow would continue to improve. Nighthawk is currently debt free and the board is clearly of the opinion that equity is advantageous to bank debt. It is unlikely that  a further placing of shares will be necessary until the end of 2010 and the financial position is helped because Running Foxes contribute 50% towards all costs as well as sharing 50% of all revenues. 


3. Other prospects.


As well as Jolly Ranch, Hawk also has an interest in the Revere prospect. This is a 40,000 acre waterflood project and is located on or around the State border between Kansas and Missouri. It is comprised of the Devon Oilfield (80% interest), Buchanan, Worden and Xenia projects (50% interest).


The reservoir is underpressurised, therefore it is not possible for oil to reach the surface without water injection which displaces the oil in the well. This is a well used technique called Waterflooding.  


Initial gas production from Xenia is expected to be 500,000 cu ft per day plus oil. In addition the P50 (most likely) of the Devon, Buchanan and Worden sections of Revere has been calculated to be 210.5 million barrels. This is expected to increase as further deveopment occurs.


Nighthawk also own interests in smaller projects, Cisco Springs (50% owned) and the Cliffs shale gas project (80% owned).


4. Attractive share price below 40p


Nighthawk's current share price of 35p, gives it a market capitalisation of £116 million (329,639,480 ordinary shares). This is equivalent to the institutional placing price of 35p  which occurred in August 09. The 52 week share price range is 22p to 59p (the 59p coinciding with the release of the Schlumberger data in July 2009).


At the November AGM, David Bramhill (MD) stated that the share had been depressed by some institutional selling and this stock overhang as well as short term profit taking by private investors has moved Hawk's price down from the mid 45p range prior to the AGM to the current 35p. Certainly the news from the 2009 AGM that the company was producing only 250 BPD compared with an expectation of closer to 2000 BPD declared at the 2008 AGM made investors feel that this was "jam tomorrow" story and drove a lot of shorter term speculators out.  Production expected at the end of 2009 is closer to 850 BPD. However, investors should buy Hawk as a "production proving" play not a producer with an expectation of signficant news in Q1 2010:

• Production updates from the Jolly Ranch wells
• Production updates from the Revere Waterfloods and Xenia gas project

5. Moderate risk profile


Although recovery rates are being proved at Jolly Ranch, the Schlumberger assessment gives confidence that there is a signficant quantity of oil contained within the shale rock. Given development in horizontal drillig technology which has been succesfully applied in the Bakken, recovery prospects are encouraging.


The fact that this is a play in the United States cannot be underestimated. Infrastructure for the transport of oil and gas is good and geopolitcal risk is low. Cost of extraction is also low relative to deep water projects in the Gulf of Mexico, the Falkland Islands or Santos basin off Brazil.


6. Listing of ADR's on U.S. Market


Nighthawk was listed as a level 1 American Depository Receipt in November 2009 giving U.S. investors easier access to purchasing shares. 


7. No sale of stock options by directors


It should be noted that the following options for Directors of the company vested on the following dates:

• 4,500,000 shares , exercise price 7p, earliest vest date 15/8/09
• 500,000 shares, exercise price 7p, earliest vest date 25/9/09
• 500,000 shares, exercise price 12p, earliest vest date 11/12/09
• 1,250,000 shares, exercise price 53p, earliest vest date 1/11/07

The directors have not yet exercised these options at current share price levels. Though no directors have purchased, it gives confidence that the directors have not taken early profits.


8. Rumours of takeover


There have been some rumours of a bid for Nighthawk circulating. None of these have been confirmed but they may add spice to the share price. Competitors have been buying up land around Jolly Ranch so it is not inconceivable that a buyout may occur, but probably later in 2010 or 2011.

Coal of Africa - a quality South African coal play out of favour

Coal of Africa (CZA - AIM) has been an interesting stock for some time and now looks a compelling long opportunity as production is set to increase signficantly and there is takeover potential. Buy at 95p (52 week range 130 p - 32p).

ABOUT COAL OF AFRICA
CoAL is primarily focused on the acquisition, exploration and development of thermal and metallurgical coal projects in South Africa. The Company made the transition from explorer to producer when mining at the Mooiplaats thermal coal mine commenced in 2008. CoAL currently has four coal projects in various stages of exploration with the first of its coking coal projects, Vele, expected to commence H2 2009. CoAL also owns NiMag, which manufactures Nickel Magnesium alloys. NiMag’s growth strategy will be via the acquisition of similar alloy or foundry supply manufacturing enterprises.
CoAL’s four coal projects are:
Mooiplaats Coal Project
Vele Coal Project
Makhado Coal Project
Holfontein Coal Project

Coal of Africa Ltd, originally Golden Valley Mines, was incorporated in Western Australia in 1979, and listed on ASX Limited (Australian Stock Exchange) in 1980 primarily focused on minerals exploration in Western Australia and Indonesia. Through a series of strategic acquisitions CoAL has moved its focus from being a gold, platinum and base metals exploration company to becoming a coal mining and metals processing business, targeting predominantly South African mining and minerals processing assets. In 2005 it was decided to seek listing on the Alternative Investment Market (AIM) in the UK in order to expand the shareholder base. This was achieved in December of that year and has been the first of some major developments for the Company. At the end of November 2006 the Company listed on the Johannesburg Stock Exchange (JSE), a move which will assist the Company to further expand its interests in South Africa by allowing the Company to acquire assets by means of share issue.

REASONS FOR A CONTRARIAN INVESTMENT IN CZA

1. The company had a placement issued at 95p in October 2009 to raise £59.8 million and fund the acquisiton of Nucoal Limited, a thermal coal producer based in South Africa. Following the announcement of the placing, the share price has fallen from 130p to today's 95p (UK AIM). The current share price is equivalent to the instritutional placing price, which was 1.5 times oversubscribed.

2. The company plans to move to the main market and away from UK AIM in Q1-Q2 2010 increasing UK investment access and visibility

3. The VELE coal project approval is expected Q4 2009.

The Vele coking coal project is located in the Limpopo Province. CoAL will develop Vele in two phases, with phase one commencing in the second half of 2009 which will initially comprise the establishment of a modular coal treatment plant, and have the ability to deliver in the order of 1 million saleable tonnes (yield dependant) of coking coal per annum, likely to be delivered to ArcelorMittal for use at it steelworks in Vanderbijl Park. Phase 2 will produce the planned full capacity of 5 million tonnes of coking coal per annum.

The New Order Mining Right application for this project was lodged in October 2008.
The Environmental Scoping Report was submitted to the Department of Mineral Resources(DMR). Specialist studies for the Environmental Impact Assessment and Environmental Management Plan were also completed and submitted to the Department of Mineral Resources(DMR) as the final phase of the NOMR application process. A revised mining schedule to include both underground and open-cast sections was announced H1 2009. This revised schedule will result in significantly improved coking coal yields, reduced mining costs and an extended mine life to beyond 2040. The Company is ready to launch Phase 1 immediately upon the granting of a New Order Mining Right, currently under review by South African Department of Mineral Resources ("DMR"). A significant amount of preparation has already been completed for Phase 1, and some capital expenditure committed to shorten the production lead time. Phase 2 expansion will deliver 5 million tonnes per annum of saleable coking coal.

4. The company's flag ship Mooiplats coal mine is in production and increasing capacity.

The Mooiplaats coal project in which CoAL has a 100% interest is situated in the Ermelo coal fields 1.7km from the recently re-commissioned Camden Power Station. Development of the underground single seam thermal coal operation using the first continuous miner , resulting in the extraction of the first coal was on 20 October 2008.The second Continuous Miner was handed over on 24 November 2008. Mooiplaats which involves capital expenditure of R1billion will take approximately 18 months to ramp up to its full production of 3Mtpa of coal and 0.5Mtpa of middlings. The colliery sccessfully railed its first load of ’lean’ coal on the 11th of September 2009 to Matola and will continue to transport product to the port to fully utilise the 80000 tonne stockpile facility. Although the mine is currently mining the lower grade ’lean’ coal the target is to intercept and mine the high quality bituminous coal by Q1 2010. Life of mine has been estimated at 20 years. Infrastructure development has progressed according to plan.The coal handling and preparation plant (CHPP) was commissioned in May with capacity to process 110000 tonnes of run-of-mine coal per month.The completion and commissioning of the second CHPP module is planned for Q4 2009. CoAL expects to ship export quality thermal coal in Q1 2010. The latest consolidated resources statement indicates that Mooiplaats has 88.2 Mt measured and 25 Mt inferred resources with the potential of another +200 Mt from neighbouring unexplored properties.

5. Arcellor Mittal bought a 16% state in the company in April 2009. There have been persisitent rumours that they are interesting in increasing this stake or buying the company outright.

6. Strong balance sheet. No debt and $43 million in cash (sep 2009)

7. The company will be profitable in 2010. Expected Revenue of $187 m Aus (year ending June 2010). EPS of 10.12 A cents and forward p/e of 17.

8. Strong recovery in global coal prices following slump in 2008.

U.S. dollar flight to quality trade comes good

The markets reacted badly to the announcement on Wednesday that Dubai (part of the United Arab Emirates federation), asked to delay payment on billions of dollars of debt issued by conglomerate Dubai World and its main property subsidiary Nakheel. This has been the culmination of the end of a property boom that that gripped the Kingdom and was part of its strategy to diversify away from Oil and make Dubai the leisure capital of the world. A strategy that has been scuppered by the collapse in the property market.

Both the FTSE and Nikkei fell over 3% yesterday with the U.S. markets being closed for Thanksgiving. Prior to this news, the U.S. dollar was under heavy pressure during the week as the release of minutes of the last Federal Reserve meeting worried traders of the currency because the decline of the dollar was considered "orderly" suggesting that intervention to strengthen or stabilise the currency was unlikely in the short term. The Greenback has faced multiple pressures as the growing budget deficit, low interest rates and the Carry Trade * have all conspired to weaken the U.S. currency. It is a fact that a tightening of Fed policy to increase interest rates will cut off the opportunity for the Carry Trade and there seems to be an opportunity to be long on the dollar (short term trade) for the following reasons:

1. The uncertainty in the global markets caused by emerging markets bank exposure driving a flight to quality
2. The possibility that recovery in the U.S. economy will happen faster than anticipated will cause the Fed to tighten
3. Pressure from the Chinese to stabilise the decline in the dollar
4. Any government signals that the deficit will be brought under control in the medium term

With the U.S. dollar out of favour a contrarian bet was placed on Wednesday. - short Euro/U.S. dollar from $1.51 and buy U.S. dollar/South African Rand at $7.59. Profits taken this morning at 8am but trades resumed at 11am.



* Carry trade: A strategy in which an investor sells a certain currency with a relatively low interest rate and uses the funds to purchase a diff erent currency yielding a higher interest rate

DUBAI DEBT DEFAULT and US DOLLAR

The one way down bet on the U.S. dollar came abruptly to an end yesterday as the flight to riskier assets was finally questioned by investors. With the announcement of the Dubai debt standstill agreement. After hitting a 14 year low against the Japanese Yen on Thursday, triggered by the release of the Federal Reserve minutes which spoke of an "orderly" decline in the U.S. dollar, traders sold off the green back. However, the slide came to an end last night with the realisation that there were still structural risks in the emerging markets after Dubai told debtors that it would hold paying down debt until 2011. After after an overall 70%+ increase in the MSCI emerging markets from the march lows, the markets responded with a surge in the dollar and a signficant fall in market indicies e.g. FTSE and Nikkei both down over 3% with U.S. market closed for Thanksgiving holiday.

The decision to short the Euro/Dollar and buy US Dollar/South African Rand was vindicated nicely after some initial jitters on Wednesday. After taking profits this morning, these trades have been reestablished on a pull back.