SUNDAY INDEPENDENT - Falklands offer to split oil profits

Britain will take up to half the revenues if drilling programme is successful

By Brian Brady, Sunday, 28 February 2010, Independent

Britain and the Falkland Islands have made a deal to split any proceeds from the controversial oil drilling programme in the South Atlantic.

UK ministers have revealed that the Executive Council in Port Stanley had "offered to share some of any future hydrocarbons-related revenues", which could be worth billions of pounds. If a 30-day drilling programme begun by a British firm last week strikes oil, the yield from corporation taxes and royalties in the fields north of the islands alone could be more than £100bn.

A Foreign Office source said the Government had already begun negotiations over the eventual share-out, and had reached an "understanding" that could see the Treasury taking up to half the profits. Officials have pointed to Britain's multimillion-pound programme of support to the islands over almost three decades since the war following Argentina's invasion in 1982.

Argentina, which disputes the British claim to the Falklands, last week asked the United Nations Secretary General, Ban Ki-moon, to bring the UK into talks over the islands' sovereignty. The Foreign Secretary, David Miliband, said British oil exploration in the area was "completely in accordance with international law".

Ministers have been cautious about who would benefit from the bonanza since the potential reserves were first highlighted almost 20 years ago. The Falklands Executive Council offered in 1994 to share any proceeds as a contribution towards the defence of the islands. The islands' ruling executive council later warned that the spectacle of the Treasury taking oil revenue would be "a propaganda gift to the Argentines, who would say it proved that Britain had an exploitative, colonial attitude to the Falklands".

The Liberal Democrat MP Bob Russell said: "They have been sustained since before the Falklands war to the tune of hundreds of millions of pounds from the taxpayer. It is only right that, if they are going to become instant millionaires, they should share that with the UK and with neighbouring British territories such as St Helena and Ascension Island."

Portfolio Update - February 28th 2010

A relatively benign week on the markets but a good month for equities in general. The FTSE 100 rose 76 points to 5,354 on Friday, whilst U.S. stocks finished modestly higher (DOW JONES Industrials 10,325 +4 points) to have their best month since November (DOW +2.6%, NASDAQ +4.2%, S&P 500 +1.5%, FTSE 100 +2.6% for the month)

On Friday, the U.S. Commerce Department reported that GDP grew at a 5.9% the fourth quarter of 2009, the fastest rate since the third quarter of 2003 confirming the the American economy is solidly moving out of recession. This compared with the U.K.’s revised GDP of 0.3%.

The portfolio was hit hard this week by the disappointing news from Nighthawk Energy (HAWK), highlighting the risks and rewards of investing in small cap stocks. Contrarian Investor UK is currently assessing some new ideas for the portfolio with a view to rebalancing to a more diversified portfolio.

Nighthawk Energy (HAWK) – On Tuesday, Nighthawk finally issued a more comprehensive report on the Jolly Ranch shale oil and gas play in the U.S.. The results were poor, with the field still producing little more than 150 barrels per day (BPD) despite promises as the Annual General Meeting (AGM) that production would be closer to 800-1000 by quarter one 2010. The horizontal drilling technique used on some of the wells to extract oil seems to have been relatively unsuccessful meaning that HAWK is looking at the economics of the field based on standard vertical drilling. The company had $18 million of cash and liquid assets left after the fund raising in 2009. Contrarian Investor UK sold his position on the news at 27p, with the stock finishing the week at 25p. A 30% loss was painful given the commitment in time to this company but I am concerned that the “proving up” of the Jolly shale oil field will take the company into late 2010 where cash resources will become stretched and a further fund raising will be necessary. It is also somewhat concerning that private partner Running Foxes, who currently fund 50% of the drilling work, may not have an appetite for continued high investment in Jolly. Although HAWK may decide to sell its Revere or Cisco Springs fields, this stock is now looking very high risk and I disappointed in the results from Jolly Ranch after the strong convictions expressed at the AGM by MD David Bramhill and Steve Tedesco (from partner Running Foxes). At 25p, HAWK may still produce a return for buyers at this level but although it may go to 40p, sub 20p may also be just round the corner for this company which seems to thrive on shareholder disappointment.

Falkland Oil drillers (Desire Petroleum, Falkland Oil and Gas, Borders and Southern) – The Falkland Oil explorers all slipped this week, as the Argentinean government continued to apply political pressure through the Rio Summit and U.N. for the British government to stop further drilling around the Islands. This political pressure has been to date unsuccessful but added to the relative risks of these shares. I continue to hold DES, FOGL and BOR on expectation of results from the Ocean Guardian rig in March despite all the volatility in these companies.

ITV (ITV) – ITV continues it’s move back up and finished at 54p, following a positive outlook from Scottish Television company STV (which was formerly known as SMG). STV chief executive, Rob Woodward, forecast that the national TV ad market was likely to be up between 4 and 8% year on year in April.

GW Pharma (GWP) – Approval for cannabis spray, Sativex, is still expected in Q1 and this remains Contrarian Investor U.K’s largest holding.

Amgen (AMGN) - A quiet week for Amgen with the stock finishing at $56. Further news on osteoporosis drug, Prolia, still awaited in quarter one 2010.

Micron Technology (MU) – The stock moved back over the $9 mark as the outlook for DRAM memory chips continue to improve in the the second half of 2010. 

Political heat rises as Falkland Oil drilling finally starts

Desire Petroleum’s Ocean Guardian Rig finally started drilling in the North Falklands basin last Monday and it only served to bolster Argentinian efforts further to use political pressure to try and disrupt the drilling campaign, but these efforts are considered by many commentators as being unlikely to succeed.

After the disastrous war with the U.K. over the sovereignty of the Falkland Island (Malvinas) in 1982 started by Argentinian president, General Galtieri, things have been relatively quiet in the South Atlantic for the last 28 years. The islands were discovered by the British in 1592, permanently occupied in 1833 and for the last 100 years Argentina has contested ownership of the Islands with the British.

Argentina’s President Cristina Fernández de Kirchner’s has undertaken an anti-corporate campaign of significant proportions, with her latest move being to try to collect more than $6.5 billion in currency reserves to pay down debt and breath live into the flagging economy, after a move to privatise private pensions in 2008. An unpopular fight with farmers over export taxes has made her and her party postions weak in elections due in 2011. Desire Petroleum’s move to drill in the Falklands has been met with much vitriole. The first step was discourage ships sailing to the Falklands by requiring them to get permits if they pass through Argentinean waters - the Falkland Oil drillers have said this will have little impact on the drilling campaign. The Argentine foreign minister, Jorge Taiana, met with Ban Ki-moon, the U.N. secretary general, last week to pressurise the U.N. to agree with the assertion that Britain should be forced to acknowledge sovereignty claims. Taiana also argued that the U.K. does not have the right to exploit resources in the Falklands without first obtaining approval from Argentina.

At the Rio, Latin America summit this week, Hugo Chávez pledged his country's military support for a Falklands war. However, a military move against the U.K. would be suicidal from a political and economic perspective and it would be surprising if the Argentine government is even close to considering this despite the rhetoric in Rio.

If Desire do strike any significant oil during March, then the heat coming from Argentina can only get worse, even if military action is highly unlikely after the disastrous 1982 attack on the Islands. For De Kirchner’s government, added pressure on the U.N. and other organisations about sovereignity is highly popular in her country and it would be a tough sell indeed to her electorate if Desire or any other of the Falklands drillers (Rockhopper Exploration, Falklands Oil and Gas, or Borders and Southern ) “strike it rich” and Argentina was seen to be doing nothing as the U.K. collected the wealth from this "Argentine asset of right". Next year's Presidential election makes the Falklands an easy diversion to the country's own economic problems, just as Galtieri used the Islands back in the 1980's to cover similar but much more serious issues.

For shareholders such as myself, the politics have made it a nervous week on the markets for the Falklands Oil drillers. Despite the Ocean Guardian Rig spud on Monday, share prices have moved down as political risk has clouded the opportunity and talk of a military strike on the rig by Argentinian jet fighters has made investors question the risk/reward of the Falklands drillers. I for one took the opportunity to increase my holding in Desire Petroleum as the rumours rose later in the week. There is significant risk of course, but it is more of a no oil show than a pre-emptive attack by the Argentinian Navy.

U.K. Q4 2009 GDP revised upwards to 0.3% from 0.1%

The Office for National Statistics (ONS) said that British gross domestic product (GDP) grew by 0.3% in the final three months of 2009, revised up from the initial estimate of 0.1% but still below expectations of a 0.4% increase. U.K. GDP decreased 3.3% in 2009, one of the worst recessions in British history. The Q1 2010 data will be watched with interest for confirmation that that the decline in the economy is at an end.

Markets weak on economic worries

Yesterday, the Dow Jones Industrial Average fell 53 points to 10,321, after falling as much as 188 points at its low. The DOW is now down 2.5% for the month. The FTSE 100 index fell 65 points to 5,278. The weakness was driven by poor jobless-claims data from the U.S. which renewed worries about the economic recovery and Moody's potential downgrade of Greece's credit rating. The dollar showed strength early in the U.S. trading session as a safe haven for currency investors but the timing of the stock market reserve coincided with a move back into the Euro as short trades were closed.


Sentiment was not helped by JP Morgan's CEO Jamie Dimon's comments yesterday that he feared that the U.S. economy was heading for a double dip recession.

GW pharma partner Almirall hints at Sativex approval timing of Q1 2010

From pipelinereview.com (February 25th 2010):


Following publication of Spanish company Almirall's 2009 results today:


"The regulatory filing of Sativex® for the treatment of spasticity due to multiple sclerosis was submitted in UK and Spain under the European decentralised procedure, following the announcement of positive results in a phase III study where Sativex® showed relevant improvement in spasticity in multiple sclerosis patients. It is expected that the outcome of the regulatory submission will be known during the first quarter of 2010. Following potential approval in the UK and Spain, submissions for approval would be made in other European countries during 2010 under the mutual recognition procedure. Development of Sativex® for oncological pain in ongoing with results from an ongoing phase II/III study expected mid 2010."


"Silodosin (a licensed product from Recordati for use in the treatment of benign prostatic hyperplasia) was recently approved by the European Comission and we expect the regulatory outcome from Sativex® (used in the treatment of spasticity in multiple sclerosis) during this first quarter of 2010. Pending pricing and reimbursement processes, both products could generate sales in 2010, and could contribute to sustain the base business in the years to come."


"Free Cash Flow has reached € 206,4 mill despite the acquisition of linaclotide European rights (US$ 40 Mill downpayment + US$15 Mill of equity following positive phase III CC data) and milestone payments to GW Pharma (GBP 8 Mill) after the positive Phase III and continued regulatory progress of Sativex®"

Pound drops to 9 month low against Dollar

The possibility of an extension to the U.K.'s asset purchase (quantitative easing) programme and fears of a Hung parliament added to a bearish slant on the British pound. Sterling hit 1.52 against the U.S. Dollar, a 9 month low and an 11 month low against the Japanese Yen. Despite rating agency Moody's saying that Greece's credit rating would be downgraded if the fiscal debt reduction measures were not actioned, the Pound even fell against the Euro. Currency traders are looking for a safe haven, but they seem to be few and far between. Investors have a choice of a debt engorged America or Europe, Japan weighed down with all sorts of problems (ageing population, deflation, debt etc.) or emerging markets with all their intrinsic risks. Maybe gold looks the most solid bet given all this uncertainty. A tough trading environment for currency speculators that's for sure!

PIIGS debt may cause global economy to stumble in 2011

The debt default worries of the PIIGS European economies (Portugal, Ireland, Italy, Greece, Spain) look increasingly to be disregarded by the markets after the worries of last week. In order to safeguard the integrity of the Euro, there is significant political pressure for the more economically strong countries such as Germany to step in to the weaker economies such as Greece. However for politicians like Angela Merkel to sell any bail outs to their electorates is a difficult task. Greece and the other PIIGS countries are seen by French and German voters as having brought their problems on themselves through bloated state pension schemes, poor tax collection, excessive spending and an inability for politicians to tackle powerful unions.

For the Euro to collapse would be embarassing for European leaders and therefore it is unlikely to happen. But the scale of debt rollovers is so large that it may become a huge issue as international bond investors refuse to take on the risk especialy if PIIG polititicians won't take the difficult decisions and cut their budget deficits or raise taxes. Either route may mean that these politicians are voted out of office at the next national election. So these countries are stuck between a rock and a hard place! Without the flexibility to devalue their currencies, which countries like Greece used before the Euro, things are looking bleak for these heavily indebted economies. Suddenly the U.K.'s decision to keep the pound looks good for the British economy especially with the debt being racked up in the recession. Overall I fear that the glut of debt in Europe and the U.S. will come back to haunt the stock markets of the world in late 2010 and 2011, especially when stimulus spending comes to an end in the United States.

Disapointing Nighthawk Energy update from Jolly Ranch project forces sale

Nighthawk Energy (HAWK) announced a further update from its Jolly Ranch shale oil/gas prospect this morning. The market was unimpressed with a 10% fall to 26.75p as the company issued very much a “jam tomorrow” story and this disappointed many short term traders. Although production is expected to ramp up from 150 barrels per day gross (BPD) to 1000 BPD by end 2010, 1000 BPD was originally talked about by end of 2009. It has been clearly stated by MD David Bramhil that Nighthawk is in the game of proving up the Jolly Ranch project not making it a producing asset at this stage. However, solid production flows from the test wells are needed to attract outside interest. The flows from the horizontal drilling seem to have disappointed since the company is now focused on marketing the project on the basis of the economics of vertical wells –“With these assumptions and taking account of all royalties and production taxes, plus applicable regional and federal taxes, the discounted cash flow over the life of the well has been estimated to beUS$4.7 million, providing a rate of return on the cost of the well of 330% on a discounted basis. On this basis, capital expenditure on the well pays back in less than six months”.


HAWK said this morning that $18 million of cash and liquid securities was still available but given the cash burn to date, it is unlikely that funds will be available after the fourth quarter of 2010 at these production rates. I believe a takeover is unlikely until 2011 when more robust production data is available. Although news on the Revere project is still awaited, the risks of HAWK now seem to significant given the longer term “proving up” story on the Jolly Ranch project and the patchy flow rates to date. Regrettably I have decided to “kill a weed” this morning and I have sold my holding in the company at a 30% loss to focus on other more short-medium term opportunities. Such is the way with shares, that it is hard to sell a loser. But my funds are better invested in stocks such as GW Pharmaceuticals (GWP). These small caps can be rich winners, but painful losers! When selling a stock, it is always right to look at what the future gain will be on your asset if you invested it elsewhere, not on what your current loss is.

Glaxo's Avandia diabetes drug drags down share price

Glaxo Smithkline (GSK) fell 2.6% yesterday to finish at £12.03 following reports in the The New York Times that the future of its diabetes drug, Avandia, was a matter of "fierce debate" within the U.S. Food and Drug Administration (FDA) because of ongoing concerns about its side effects on the heart. On Saturday the Senate Finance Committee released a report critical of Avandia and the FDA.

However, the problems should be seen in context. In 2009, Avandia represented only £0.8 billion in global sales compared with the company's £30 billion in global revenue ($44 billion) and it is due to go off patent in 2012.

GSK's strategy to grow its business in emerging markets and maintain diversification by having both a pharmaceutical and consumer segment seems smart. With a forward price/earnings (p/e) of 10 and a dividend yield over 5%, any further weakness below £12 seems a good entry point for a medium term return. 

Desire petroleum suffers from buy on rumour, sell on fact

After rising as high as £1.32, Desire Petroleum (DES) fell back with a bump to finish the day down 4p at £1.13. At 3.30pm the long awaited RNS was released which said that the Ocean Guardian had spudded the well at 14.15 GMT. Further news will be released after the 30 days of drilling. For most traders in this stock, and there are many, 30 days is a long time to wait. Without any news flow DES will inevitably drift for a while until rumours from the rig begin to leak. But Contrarian Investor is a little patient so after closing my position at 128p, I have bought back. This one is too volatile to stay on the sidelines for too long. Nice to see FOGL staying in positive territory. I am sure that further rises are on the way.

Upward move in DRAM memory chip looking positive for Micron Technology

Micron Technology (MU) opened above the $9 mark today as isuppli forecasted that  Global DRAM sales are expected to rise 40 percent this year, ending three consecutive years of decline.DRAM chips are used mainly in PC's. Global revenue was forecast to rise for dynamic random access memory (DRAM) chip sales this year to $31.9 billion, up from $22.7 billion last year (+40.5%) and 45% up from 2008 levels. Volume and price per chip are expected to continue rising through 2010.Unlike past trends in the highly cyclical industry, iSuppli believes the current upcycle will not be followed by rapid declines in revenue and price growth in following quarters.

No stopping stampede for Falkland Island Oil shares

The Falkland Oil drillers continued to power ahead this morning as the Ocean Guardian Rig starts drilling on the Liz field: Desire Petroleum (DES) 129p +10%, Rockhopper (RKH) 76.75p +10%, Falkland Oil and Gas (FOGL)159p +5.3%, Borders and Southern (BOR) 69p +2.2%. The North Falklands basin drillers, Desire and Rockhopper are getting the majority of the action given the relative rates of news flow from the Northern and Southern basins.

News flow from Desire Petroleum and Nighthawk Energy

Desire Petroleum (DES) began drilling on its prospect in the Falkland Islands this morning. It would be surprising not to get an RNS updating shareholders during this week. Falkland Oil and Gas (FOGL) and BHP's announcement on hiring of a deep water rig for their South Falklands prospects should also be due any week now.

The key seismic and production information from the Jolly Ranch and Revere projects is expected from Nighthawk Energy (HAWK) this week. Should either be a highly exciting or demoralising news release for HAWK shareholders!

Portfolio Update - February 21st 2010

The market’s had a good week, with most of the major indices up 3% or so. Sentiment seems to have turned positive over the last 2 weeks after the negativity early in February. One of Contrarian Investor UK’s principles to maintain adequate diversification is being broken this week as my portfolio is too heavily weighted towards GW Pharma and the Falkland Islands Oil companies.  But the “binary bet” on the success of GW’s Sativex cannabis spray for Multiple Sclerosis is far too tempting a target. The previous application for the drug was rejected because of inadequate clinical trial data. This was addressed with an additional phase III clinical and the new application made for a European licence in the summer of 2009 looks very strong.  I have used Contract’s For Difference (CFDs) to limit the downside risk to 20% or so, but approval should move GW Pharma up at least 50-60%. As for the Falklands Oil drillers, all the hype and TV/press coverage is just too tempting to exploit and again the upward move on these shares will be so significant that a guaranteed stop loss using a CFD seems a sensible trade, albeit a gamble. “Fortune favours the brave”.

Coal of Africa (CZA) – Significant upward move in this share price this week on no news from 130p range to a high of 153p. Positions closed despite long term conviction in this stock, especially as Vele mine approval was finally given this month.  This strategy appeared to have paid off on Friday with CZA falling as much as 5% at one point. I will watch for a potential re-entry point if the positive market sentiment turns for the worse.

GW Pharma (GWP) – Still no news on the Sativex European approval but given the timings of the Decentralised approval process (DCP) for drugs in Europe it would be expected that news is not far off.  Have increased position once again at 87p.

Falklands Islands Oil (Falkland Oil and Gas –FOGL, Desire Petroleum – DES, Borders and Southern Petroleum BOR) – Its been an exciting week for the Falklands Oil stocks as Argentina issued a decree that any vessel passing through its waters would need a permit to visit the Falklands which made investors somewhat nervous. On Friday, the Ocean Guardian Rig, contracted by Desire Petroleum arrived on the Liz field in the North Falklands basin and is due to spud this afternoon. I took the opportunity to top up my holding in Desire Petroleum despite some reservations about my significant exposure to the Falklands Oil sector. The risks are significant but the geology of the Falklands basin and oil finds in the previous drilling campaign by Shell/Lasmo gives more than hope that oil will be found in economic quantities. If the Ocean Guardian Rig does strike it rich then I would expectd Desire’s share price to be closer to £20 than 1 so the risk/reward ratio still looks enticing despite the strong run up in the Falkland Island Oil shares. Falkland Oil and Gas and Borders and Southern Petroleum have been relatively benign for a couple of weeks now, so a rise in these Southern Basin stocks would be expected on any news from the Northern Basin drilling campaign.
Nighthawk Energy (HAWK) - Nice move back up from 27p to just over 30p as the company announced the appointment of a new non-exec. director. News on Jolly Ranch should be imminent and therefore I am hopeful of a solid move towards 40p in the next week.

ITV (ITV) – A move up from below 50p to 53p as news on potential government approval of Product Placement on UK TV came through. Position still in deficit but given TV market revenue rebound in both January and February, outlook looks positive.

Amgen (AMGN) – News was received this week that an opinion on the FDA application for Prolia (denosumab) would be received by end July. I have trimmed by position a little this week because of a shift in the portfolio to GWP and the Falkland’s shares but will look to top up in the next few weeks.

Intel (INTC) - Position closed at $21.7, following a good rise in the semiconductor stocks this week. I like Intel long term but it trades within a range of $19-$22 so a move to the upper end triggered a sale.

Micron (MU) – The worst performing stock in the portfolio but Micron continues to rebound from its lows close to $8 to finish Friday at $8.9. Holding

FDA decision on Amgen's Prolia by end July 2010

The U.S. Food and Drug Administration (FDA) has accepted Amgen's (AMGN) application for its osteoporosis drug Prolia (denosumab) and will make its approval decision by July 25, the company said on Friday.The FDA asked Amgen last October to provide additional information before it would proceed with its review and the company submitted its response in late January. A European decision on Prolia approval is expected in the first half of 2010.

Desire's Ocean Guardian Rig arrives on Liz field

Channel 4 news web site has just published a story that the Ocean Guardian rig drilling for Desire Petroleum has arrived at the Liz field in the UK exclusion zone off the Falklands Islands.   Position topped up at 110p.

PRODUCT PLACEMENT AND IMPACT ON ITV REVENUES

Paid for product placement on TV is currently outlawed in the UK and as recently as March 2009, Andy Burnham, the Secretary of State at the time, showed no signs this was going to change. He stated he had “very serious concerns” about the relaxation of product placement laws because it was “blurring the boundaries between advertising and editorial.”. Six months on, the new Secretary of State, Ben Bradshaw, is expected to make an announcement this week at the Royal Television Society which will pave the way for relaxation of the rules on commercial television. A consultation is expected to take place over the next three months with changes, if they are to occur, being implemented next year. A change in the rules has the support of the Conservatives and the Liberal Democrats so even a change in Government next year is unlikely to affect the outcome of the consultation.

Currently producers of UK TV programmes are allowed to include “real” products as props in the production of television programmes. As a result an industry that has grown out of this need in which placement agencies are paid by advertisers to arrange for their brands to be placed into TV programmes by providing the product as a free prop to production companies. This saves the producers money as they don’t have to buy the products they need and, for the client, they get some “free” exposure for their placed product. However, due to the rules preventing undue prominence of products in programmes, the exposure brands get is normally small, uncontrolled and incidental. This, in itself, is not a problem as the money invested by the brand is usually a relatively modest fee paid to the placement agency, in return for what can be potentially high profile media exposure.

What might happen?
At this point no one knows what the Government policy will be on this matter as they seem set to take a significant u-turn in the space of just six months. It seems, however, increasingly likely that some form of paid for placement will be allowed on commercial TV from some time next year. In other words, brands will be able to pay for the right for their product to be featured in the programme, in return for a certain set of contracted rights and benefits from the producer of the programme. This has divided the commercial television broadcasters with ITV keen to see the rules relaxed, whilst the likes of Channel 4 and many of the others less enthusiastic. ITV are the broadcaster and the producer in many cases, while the others are largely just broadcasters who are commissioning the programmes for the independent producers - it’s more difficult for them to see the commercial benefits.

The Arguments in favour of relaxation are;
• Product placement already exists in Film and imported US TV programmes which are broadcast, unedited, in the UK. Viewers are used to it and it levels the playing field for UK producers
• Content broadcast online is not regulated and product placement is common place in dramas such as Kate Modern and Sophia’s Diary
• Real products lend credibility to programmes; it makes the programmes more “real”
• Product placement in programmes gives credibility to brands
• It can help change consumer behaviour by allowing advertisers to demonstrate how they want their products to be used e.g. new mobile phone functions
• Media exposure can be easily measured and priced
• Advertisers who fund TV shows will be able to include their products

The Arguments against are;
• It will blur the lines between editorial and advertising causing viewer confusion and/or cynicism
• Editorial integrity will be compromised by the demands of the advertisers who have their products placed
• The use of the product is not controlled so that clients run the risk of inappropriate use of their product or it being placed in a bad light e.g. brake failure on a car, skin issues from cosmetics etc
• You might be able to put a price on exposure but if it’s subliminal how do advertisers put a value on its effectiveness?
• Paid products placed in programmes could be ambushed by brands who sponsor the programme unless safeguards are put in place
• Logistically and contractually complex to deliver
• A marginal commercial benefit for significant editorial compromises

Figures of £100 million in product placement revenues have been banded around, but this seems to be a long term goal. If this iniative is allowed, this is good news for ITV revenues and therefore shareholders though the actual effect on the bottom line may not be felt to a great extent for many years.

2/3 of S&P 500 companies have beaten on top line

This morning I was listening to the the excellent and highly recommended S&A Investor Radio Podcast by Frank Curzio (available for free from the Itunes store). Frank interviewed head of research for TheStreet.com's Action Alerts portfolio (Jim Cramer's Charitable portolion), Stephanie Link, and she cited the statistic that 2/3 of companies that had reported so far in the S&P 500 had beaten on revenues. This is an interesting statistic since it indicates that perhaps economic recovery in the U.S. is better than expected as the hypothesis has been that aggressive cost cutting has grown bottom line profits but the sales revenues were still weak due to low economic activity.The U.S. economy looks to be set for good growth in the next 6 months, helped by the continued stimulus package.The continued deficit issues make the back end of 2010 and 2011 much more hazy.

Although I have been selling down portfolio positions over the last week to bank some profits in stocks such as Coal of Africa (CZA), Intel (INTC) and Amgen (AMGN), any significant weakess in the markets is very much seen as a buying opportunity for favoured names. Certainly a trading market, not a buy and hold by any means!

Coal of Africa positioned offloaded on share price strength

The holding in South African miner Coal of Africa was sold yesterday as the price surged to £1.53. The price is off nearly 5% today to £1.46 as commodity prices have been under pressure as the U.S. dollar has risen on the news that the Fed has tightened the discount window for emergency funds. CZA rose from around £1.30 earlier in the week and moved to a year high (marginally higher than the Vele mine approval news day). Although it is considered a great long term play, a 15% rise on no news is seen as a selling opportunity particularly given the U.S. and UK markets have shown a strong rally since early February. Overall Contrarian Investor has been trimming holdings on the market strength.

U.S. Federal Reserve in surprise increase in emergency loan rate

The FTSE 100 was recently up 8 points and Dow Futures were off 50 points on the news that the U.S. Federal Reserve was to begin lifting its benchmark lending rate earlier than previously thought. The Fed announced last night that it would lift the rate it charges banks for emergency loans by a quarter percentage point from 0.5% to 0.75%. It is considered unlikely that the more important Fed Funds rate will rise anytime soon as economic recovery is still weak.

Intel strength gives sale opportunity

Intel (INTC) closed at $20.7, +0.29 (1.2%) last night which gave an opportunity to close the position accumulated from the $19 level. The range bound nature of this semiconductor stock makes other opportunities more enticing in the current market. Any move back below $19.5 would give a re-entry point.

Markets recover strongly as positive sentiment returns

The Dow Jones Industrial Average ended with a 169 point gain, up 1.7%, at 10,268, the Nasdaq Composite Index rose 1.4% to 2,214 whilst the FTSE 100 gained 76 points to 5,244.

The Dow's strongest component by far was Bank of America Corp.(BAC ) whose shares rose nearly 5% after it reported "significant gains" in the number of modified mortgages it handles through the government's Home Affordable Modification Program. Also, it reported better payment performance on its credit card loans last month.Sentiment was further helped in the financial sector by better than expected earnings from Barclays (BARC) which drove a 6.8% to £2.94 in the U.K., whilst its American depositary shares soared 13.7%.

The dollar fell as investors took on risk as fears about the impact of the potential default of Greece on the wider European economy ebbed. That helped the prices of commodity related stocks. Gold ended $29.80 an ounce higher at $1,119.80 an ounce whilst oil rose $3 to $77 a barrel after going below $70 less than 2 weeks ago.

Tensions escalate over Falkland Islands oil

Falkland Battle Lines Form Over Jurassic Oil Search  

Tuesday, 16 February 2010 14:14 - "Falkland Battle Lines Form Over Jurassic Oil Search"

Argentina is driving up exploration costs for U.K. oil companies seeking to drill near the disputed Falkland Islands, escalating tensions over the remote South Atlantic archipelago that led the two countries to war in 1982.

Argentina is forbidding vessels that stop at the Falklands to load cargoes at its ports for the 8,000-mile return journey to Europe. That’s likely to increase costs, Mark Jenkins, a director at shipbroker Simpson Spence & Young Ltd. said in an interview. Voyages “will be more expensive,” he said.

Argentina summoned U.K. embassy officials to issue its “most energetic protest against the imminent start of drilling” near the Falklands, known in Argentina as Las Malvinas, on Feb. 2. London-based Desire Petroleum Plc, which plans to start drilling offshore the islands this month, fell 4.68 percent in two days after Argentina said Feb. 11 it had refused to let the Thor Leader cargo ship leave a river port.

“The government wants to signal that anyone who is collaborating with the Malvinas on any projects won’t be welcome to Argentina,” Federico Thomsen, 53, who heads political and economic researcher E.F. Thomsen in Buenos Aires, said in a Feb. 15 telephone interview. “It would be better for Argentina to try to integrate and participate more in global trade.”

First Exploration
Desire will start the first exploratory drilling in Falkland Island waters since 1998, when companies including Royal Dutch Shell Plc abandoned the search because they didn’t discover enough oil. Companies including Melbourne-based BHP Billiton Ltd. and Falkland Oil & Gas Ltd., based in London, also plan to start drilling, using the Ocean Guardian rig.

The Ocean Guardian is scheduled to arrive at the Falklands on Feb. 17 at 2p.m., according to Bloomberg ship-tracking data. The rig is being towed by the 73-meter long Maersk Traveller, a tug ship owned by Copenhagen-based AP Moller Maersk - A/S.

“The oil price in ‘98 was $10 a barrel and is now $70-75 a barrel,” Sam Moody, managing director of London-based Rockhopper Exploration Plc, which is leasing the Ocean Guardian after Desire, said in an interview. “We believe we need about 50 million barrels at an oil price of $50 to break even.”

Desire’s Liz prospect has estimated resources of between 45 million and 783 million barrels, according to a report by Senergy Ltd., which specializes in appraisal for oil explorers, released in September 2009 and commissioned by Desire.

Thor Leader
Argentina blocked the Thor Leader from leaving a Techint Group plant after it traveled to the Falkland Islands without Argentine government permission. The company said the ship contained steel pipe that was destined for ports in the Mediterranean, without giving more precise information on the final destination.

A discovery of commercial quantities of oil may cause the share price of Desire to surge as much as 90 percent, Nick Copeman, 39, an analyst with London-based Oriel Securities, said in a Feb. 9 telephone interview.

Desire shares rose 2.25 to 107.5 pounds at 12:38 p.m. in London trading while Rockhopper rose 2 percent to 64.5 pounds and Falkland Oil & Gas shares rose 2.1 percent 156 pounds.

Argentina has repeatedly protested efforts to explore for energy deposits off the islands. In 2007, then President Nestor Kirchner voided a 1995 oil and gas exploration agreement with the U.K. that had been suspended for five years.

‘Sovereign Rights’
“The Foreign Ministry reiterates its sovereign rights over the Malvinas Islands, South Georgia and the South Sandwich Islands and the sea surrounding them, which form a part of its national territory,” Argentina’s Foreign Ministry said Feb. 2. Argentina’s objections won’t affect the islands’ oil licensing or any other policies, said Emma Edwards, a member of the archipelago’s eight-member assembly. “Argentina can continue protesting, but it doesn’t matter,” Edwards, 38, said in a Feb. 4 telephone interview from Port Stanley, the capital. “They’ve been doing this forever.”

There’s no point in Argentina continuing to call on international bodies such as the United Nations and the Organization of American States to press its claims, said Carlos Escude, 61, a foreign policy advisor to Argentina’s Foreign Ministry in 1991 and 1992. Neither has the power to make the U.K. change its stance.

“There is no future in pursuing those options,” Escude said in a Feb. 9 interview from Buenos Aires.

The U.K. government reiterated the Falkland Islands’ right to pursue oil and gas exploration. “We are absolutely clear this is a legitimate business in Falkland Islands waters,” a Foreign and Commonwealth Office spokesman said by e-mail. “Argentine reaction is a matter for the Argentine government. Argentina is an important partner for the U.K.”

Windswept Islands
The development of an oil industry would enable the windswept islands, which now depend on sheep farming and fishing, to diversify its economy, according to Edwards. Some 4,200 people live there, with about 1,700 of them based at the Mount Pleasant military complex.

Oil around the Falklands lies within Jurassic or Triassic layers under the seabed, dating back more than 145 million years. These are deeper than most of the world’s offshore discoveries, according to New York-based Bernstein Research, an investment research company.

Crude oil futures traded at $74.94 a barrel on the New York Mercantile Exchange at 9:31 a.m. London time today. Prices have doubled in the past year.

The price of oil is not the main reason for the lack of success in 1998, Moody said. “The world is a different place and there’s been a huge leap forward in seismic technologies.”

BHP Partnership
A partnership between BHP Billiton and Falkland Oil & Gas is seeking a second rig to drill in another offshore area, Tim Bushell, 50, chief executive of Falklands Oil & Gas, said in a Jan. 29 interview from London. Ruben Yogarajah, a BHP spokesperson in London, declined to comment. BHP and Falkland O&G’s Toroa prospect has estimated prospective resources from 380 million to 2.9 billion barrels, Falkland said Nov. 26.

Drilling and exploration in Argentine-controlled waters near the islands is due to start in the second half of the year, according to a Buenos Aires-based spokesman for the Argentine unit of Repsol-YPF SA, who declined to be named because of company policy.

The search will be conducted by a partnership between YPF, as the Argentine arm of Repsol is called, Petroleo Brasileiro SA and Argentina-based Pan American Energy LLC, which is 60 percent owned by BP PLC, while the remaining shares are owned by Argentina’s Bridas Group.

By Rodrigo Orihuela, Morwenna Coniam and Eliana Raszewski. Source: Bloomberg

New Edison research report highlights opportunities for Nighthawk Energy

Edison Investment Research Limited has published a report on Nighthawk Energy (HAWK). Although HAWK is a research client of Edison, the information gives some interesting insights on the company’s prospects and has a 12 month price target of 95p per share ($488m) with potential upside depending on news of £2 per share. This morning HAWK’s share price moved above 29p for the first time in several weeks as anticipation of forthcoming news on Jolly Ranch gathers pace. As this is a substantial holding for Contrarian Investor, this news is particularly pertinent for the portfolio. The undemanding current market capitalisation appears to indicate that the opportunity for significant share price appreciation should not be underestimated if Jolly Ranch and Revere deliver anything close to expectations.



Some highlights from the report:
“The most important in terms of potential scale is the shale oil play, Jolly Ranch, in eastern Colorado. This is broadly analogous to the Bakken plays in Montana and North Dakota and is a potential company maker. In 2009 Schlumberger estimated the P50 oil-in-place fir around 2/3 of the Jolly Ranch project at 1.46 billion barrels of oil equivalent gross. There is the potential for positive news flow in 2010 reflecting the drilling programme, 3d seismic surveys and an anticipated upward trend in production from nominal levels in 2009 to possibly over 1000 barrels a day gross in the coming months. The Revere waterflood project in Kansas/Missouri could also see significant production gains in the 2010 driven by development activity,”


“We see scope for a pre-tax profit of £0.5m on sales revenues of $3.1 m based on an average production rate of 140 boe/d. There is inevitably a degree of uncertainty about the outlook for 2011 and 2012 but we believe Nighthawk should be comfortably profitable at the EBITDA and probably the pre-tax levels based on our production forecasts.”


“As of end of January 2010 we believe the cash balance was about $17m which is adequate to comfortably finance the current development programme”


“We believe the key items of news in 2010 will relate to rising production, particularly at Jolly Ranch. With this in mind, it is likely that there will be regular updates on production probably at the end of each quarter. Near term in late February and March, we also believe that there will be news surrounding the following issues: Jolly Ranch seismic survey results along with potential new drilling targets, Jolly Ranch operational update, Revere operational update including the status of production and resources at Xenia”


“Currently we believe production is running at about 360boe/d gross or approaching 200boe/d net. A sharp increase in production is anticipated in the coming months. This reflects intensifying well test and development work at Jolly Ranch and Revere. We believe that it is possible that gross production across the JV could be running at about 1,250boe/d by end of 2010 and perhaps 1800boe/d by late 2011.”


“Jolly ranch has the potential to be a highly lucrative project. The pre-tax netback could be in the region of $50/bbl after allowing for royalty payments, severance costs and the cost of logistics and lifting. Assuming a cost per vertical well of $1m and production per well of 100b/d, the pre-tax payback period would be 200 days. Allowing for state and federal tax the payback would be 333 days. “


“WTI (West Texas Intermediate) oil would probably have to fall below $35/bbl before a prospective Jolly Ranch project would hit approximate fully accounted break even. On a variable cost basis, break-even might be around $25/bbl.”


“Assuming a similar success rate to that achieved historically (Revere - on the Devon and Buchanan properties), it would not be surprising to see production up to 300bpe/d gross by end 2010 and perhaps 400boe/d by end 2011.


“Since July 2009, Nighthawk has traded between 27p and 48p/share. Trading at around 36p in the second week of January 2010,Nighthawk was up by about 33% from a depressed base at the end of 2008. This was a major underperformance compared with the approximate 122% gain in the AIM Oil and Gas Price index over the same period. The weak performance over the past year or so, we believe, largely reflects heavy cash calls combined with disappointment at the pace of bringing production on stream and defining the reserve base. Oilfield development however, is a time consuming and costly task even in a favourable operating environment and requires patience. Given that production will probably gain momentum in the coming months, investor perceptions could turn considerably more positive during 2010. Ultimately we believe that a decisive change in perceptions will require evidence of a substantial reserve base, as indicated earlier. When this happens or arguably somewhat before, the larger independents are likely to become increasingly interested in Nighthawk/RFP or in particular assets owned by the joint venture. “


“Nighthawk’s current market cap of about £91m is in large part under pinned by the Cisco Springs project plus the investment portfolio alone. The independently assessed 2p reserves of 24mmboe, along with the installed production and logistical infrastructure, should be worth at least $5/boe based on sector data. Allowing another £2m for the portfolio and the implied valuation for the other projects is a mere £12m”.
Source: Edison Investment Feb 15th 2010

Falkland Oil and Gas announce deal on Ocean Guardian Rig

This morning Falkland Oil and Gas (FOGL) announced that it has reached an agreement with
Desire Petroleum (DES) to contract the Ocean Guardian rig to drill the first ever exploration well in the East Falklands Basin on the Toroa prospect, which it expects will be within the first half of 2010.. 
 

Bloomberg story on Falklands Oil

Bloomberg television are running a story this morning on Falkland Oil. With the Ocean Guardian rig due to arrive in the next day or so in the Falklands, the publicity machine for stocks such as Desire Petroleum is gathering steam. Will be an interesting week for holdings, Desire, Falkland Oil and Gas and Borders and Southern Petroleum.

Reckitt Benckiser - certainly not a good time to rush into buying!

Background 
U.K. based Reckitt Benckiser (RB.) was formed from the merger of British company Reckitt and Colman and Dutch Benckiser in December 1999. Bart Becht became CEO of this new company and has been credited for its transformation, focusing on core brands and margin enhancement. He adopted a consumer marketing mindset and increased spend in advertising, focused investment on 17 global power brands (e.g. Finish, Airwick, Nurofen, Gaviscon) and product innovation. 40% of Reckitt Benckiser's 2007 revenues came from products launched within the previous three years. Although traditionally known as a household products company because of brands like dishwasher detergent, Finish, the company now has a relatively large over-the-counter (OTC) medicines business (including brands such as Lemsip, Gaviscon and Senokot) as well as a small, but profitable prescription pharmaceutical division.

In October 2005, Reckitt’s bought the OTC business of Boots Healthcare International (part of the Boots Group), for close to £2 billion, beating of competition from other companies such as GlaxoSmithkline and Novartis. Boots Healthcare International’s portfolio included some strong brands, notably the pain killer Nurofen, Strepsils sore throat lozenges; and the anti-acne brand Clearasil. In January 2008, the company acquired Adams Respiratory Therapeutics, Inc., a U.S. company, for $2.3bn: predominantly for its Mucinex cough business which the company now plans to expand beyond the U.S. where it has a significant share of the market.

Results
Since the formation of Reckitt Benckiser, the financial results delivered have been tremendous. Reckitt’s share’s have risen consistently since 1999 from around £4 to close to £34. Becht’s focus on delivering strong share holder returns have made him one of the best paid CEO’s in the World. The Boots OTC acquisition in 2005 proved to be a master stroke since the company has managed to drive significant growth in the core brands such as Nurofen through innovation e.g. Nurofen Express, cost cutting and a focus on superior marketing.

Reckitt Benckiser continued to deliver strong results last year with underlying sales for 2009 rising 8% year on year. Operating margins rose 1% point to 24.4%. However, the European business only delivered 1% growth to £867 million whilst emerging markets grew 19% to £388 million. The company has set targets in 2010 for net revenue growth of 5% and for operating profit growth of 10%. The company had net cash of £220 million.

Bear Points
Generic competition for Suboxone
In 2009, Reckitt Benckiser's pharmaceutical business grew 66% to £194 million but Becht declined to give 2010 guidance for the division at last week's results due to the uncertain timing of generic competition for its high growth Suboxone (buprenorphine and naloxone) heroin substitute in the US. The product lost “orphan drug” protection in the U.S. in October 2009, although it has recently gained protection in Europe for another 6 years.. In Europe sales are driven by Subutex (buprenorphine) a similar product but lacking the overdose protection of Suboxone. Suboxone in the US now accounts for 18% of group operating profits and around 10 percent of group profits. In the U.S. the drug accounts for half of the pharmaceutical divisions earnings and the North American operation represents two-thirds of total pharma sales.

If a generic version of Suboxone launches in the U.S. sales are expected to decline 80-90% as pricing pressure intensifies. A generic version of Subutex was launched in October 2009 in the U.S. by Roxane (part of Boehringer pharmaceuticals) but this has had relatively limited impact because Suboxone constitutes the majority of U.S. sales currently. The threat of generic Subuxone remains a significant driver of Reckitt’s earnings uncertainty in 2010. To date there has been no application to the Food and Drug Administration (FDA) for a generic copy and the indication for the drug is relatively niche for many generics companies to get involved with. In addition, Reckitt’s may decide to strike a deal with a generic manufacturer to exclusively licence the drug,keeping others competitors at bay for up to a year and holding up prices. The if and when of generic competition remain the $64,000 questions for the company. If generics can be held off then the highly profitable Suboxone business can be kept afloat. The fact that pharmaceuticals account for 10% of group earnings should not be underestimated if generic Suboxone becomes an unwelcome reality for Reckitt Benckiser. It should be noted that other similar companies in the consumer good sector do not have this uncertainty to contend with since they do not have this prescription market exposure.

Retail environment and private label 
The global recession of the last 18 months has tempted consumers to buy cheaper private or own label products as finances have been stretched in many households. Up to this recession there was an intrinsic fear for many shoppers of being seen with cheaper “copies” in their shopping trolleys but the allure of expensive retail brands seem to have diminished and it is not expected that this trend will reverse as private label has shown strong growth. Supermarkets such as Tesco in the U.K. and Walmart in the U.S. have worked hard to improve the quality of their own offerings. A trend in consumers trading down to cheaper products is likely to curtail the growth of Reckitt’s products and this was certainly seen in Europe in 2009 where growth was limited despite significant product innovation.


Pressure from retailers to increase their margins is also intensifying. Large mass market retailers are "encouraging" further investment in in-store brand support or squeezing additional trade margin out of suppliers. Although Reckitt's has strong brands and the customer infrastructure to resist these pressures, maintaining margin is increasingly difficult if the competition decide to capitulate to these demands.

Reducing scope for cost cutting
Reckitt’s “Project Squeeze” to drive gross margin on its product has been effective in driving profitability over the last decade. However the scope for further margin improvement seems unlikely given pressures on raw material costs and the evaporation of further savings from the integration of both Adams and Boots Healthcare International.

Likelihood of acquisition
Reckitt’s healthy cash position and decelerating growth in developed markets makes an acqisition for the company more likely than ever. The company has publicly stated it has an appetite to build its presence in healthcare. However, obvious candidates apart from UK based SSL International (owners of Scholl and Durex) are thin on the ground, particularly in the over-the-counter market. An acquisition of SSL is likely to be expensive and therefore it is felt unlikely to be a target, especially as it has a fragmented portfolio of many brands acquired during the 1990’s. Other targets in the healthcare space are owned by multinationals such as Novartis, J&J and GSK who have not announced intentions to divest assets. A consumer products or household company may be an easier buy but again assets for sale will be premium priced. Given the growth outlook, it seems likely that Reckitt’s will acquire but perhaps at an unpalatable price for investors.

Bull points
Reckitt Benckiser remains a well run company with senior management objectives aligned behind investor’s objectives – namely strong earnings per share growth over the short and long term. Its focus on investing heavily behind their core brands have paid dividends and the emerging markets remain a significant target for future growth. It has a culture of innovation and differentiation and this remains core to the company’s future momentum. The company has a strong balance sheet, cash flow generation and has yield of around 3% which is likely to increase.

The forward price/earnings of Reckitt’s is undemanding at around 16 times 2010 earnings. This is in line with competitors like Procter and Gamble and Unilever.

Summary
Following the 2009 results, several analysts upgraded Reckitt Benckiser and the consensus amongst brokers is either buy or strong buy. Thus expectations are high for continued delivery of strong growth. For Contrarian Investor this gives an opportunity since when expectations are so consistently high, any slip up at all by the company will hit the shares hard. The entry of a generic competitor to Subuxone in the U.S. potentially gives the catalyst for a downward re-rating of this share. At £33.13, there may be still some upward momentum to go if the markets continue to rally especially given the undemanding rating assuming that generic Suboxone competition does not hit in 2010 . However, a short position looks tempting if the shares move beyond £35 in the near future. Watching and waiting for an opportunity to take advantage of a fall. Reckitt Benckiser is an extremely well run business but the environment in which it is operating is getting tougher and the company's healthcare exposure gives it access to a high margin market but with it regulatory and generic risks.

Portfolio Update - February 13th 2010

Falklands Oil stocks (Desire Petroleum DES, Falklands Oil and Gas FOGL, Borders and Southern BOR) - Plenty of controversy in the Falkland Islands this week, with The Thor Leader,a ship carrying pipes made by the Techint group in Argentina being stopped in the southern port of Campana because of allegations by the Argentinian government that it was "illegally" supplying drilling equipment to the Falklands.Techint, the world's biggest producer of seamless steel tubing for the oil industry, denied that the equipment was even bound for the Falklands and said it was going to clients in the Mediterranean. The share prices of DES, FOGL and BOR slid on the news but not alarmingly and were more hurt by the strengthening dollar's impact on the price of oil. The Ocean Guardian rig should arrive in the Falklands next week all being well. Continuing to hold all these stocks and anticipating significant volatility as drilling starts for Desire Petroleum.

Coal of Africa (CZA) - Again broadly flat this week at 130p. No news but an interesting interview with Arcellor Mital in Mining weekly which own a stake in CZA and have been touted as being in the game to take over the company - CEO Nonkululeko Nyembezi-Heita said on Wednesday that the group was redoubling its efforts to secure control of additional iron-ore. The decision was aligned to a group strategy of lowering costs through resource ownership rather than to any security of supply concerns, as there was sufficient domestic capacity available for purchase. "We are not concerned about accessing iron-ore, we are concerned about having control over than iron-ore," she explained, adding that the same was true for coal, which underpinned its decision to invest in Coal of Africa.The company requires 10-million tons of iron-ore yearly to meet its annual nameplate steelmaking capacity of 8-million tons. It is currently able to source more than 9-million of that need on favourable terms, paying market-related prices for the balance. However, if it were to grow its capacity, the company would aim to do so in a way that it matched any steelmaking expansion, with an expansion of its upstream resources. "We are now redoubling efforts to be self-sufficient in iron-ore and coal," Nyembezi-Heita explained, adding that the group's loss of participation rights in Sishen South meant that a new approach would have to be pursued. She indicated that the company was ready to partner with BEE explorers in pursuing new iron-ore opportunities in South Africa. Similarly, it would be keen to participate in projects able to produce hard coking coal. At full capacity, the group would consume about 1,8-million of coal yearly.

Nighthawk Energy (HAWK) - Having broken through the 30p mark last week, HAWK is oscillating between 27p and 30p as further news from the Jolly Ranch project is eagerly awaited by investors. The announcement that Lloyds sold a tranche of their holding is the reason for the downward pressure in recent weeks, and hopefully this overhang of stock is now cleared. Positive news from the company's shale oil project is now needed.

ITV (ITV) - ITV closed down around 50p this week as BSkyB finally placed a 10% holding in the market. The position is now down around 10% from the but price. However, the clearance of the uncertainty about the Sky scale now opens the door for a potential take over of this company sometime in the next 12 months as revenues recover.

GW Pharma (GWP) - Little movement this week as news on the Decentralised Procedures for the EU registration of Sativex is still awaited. This is Contrarian Investor's largest holding given the odds of a successful approval seem signficantly higher than a rejection given the strong clinical trial results in multiple sclerosis patients.

Amgen (AMGN) - Despite another positive clinical trial for osteoporosis drug, Prolia, Amgen slipped this week to close around $56 as the pharma sector as a whole was unloved by investors. Holding for news on EU Prolia approval.

Micron Technology (MU) - Micron stock remained at around the $8.5 level as it announced an acquisition of Numonyx for $1.2 billion in stock (see previous article from earlier in the week). Holding

Intel (INTC) - A rise in Intel to around $20.5 on Friday gave an opportunity to sell some of the position bought at $19.

Micron Tech buys fellow memory chip maker Numonyx

Micron Technology (MU) announced last night that it had agreed to buy NOR flash memory chip maker Numonyx Holdings for $1.27 billion in Micron stock. Micron will issue 140 million shares to the holders of Numonyx (Numonyx is owned 45% by Intel, 49% by STM and 6% by Francisco Partners). Micron will also issue the holders up to an additional 10 million shares depending on the price of MU shares over the 20 trading days ending two days before the deal closes.The deal is expected to close in 3-6 months. Micron expects the deal to be positive to the company on free-cash flow and non-GAAP earnings beginning in fiscal year 2011.

Positive results from Amgen's Prolia in head to head clinical study

Amgen (AMGN) announced after the close last night that a third pivotal phase III clinical trial in 1,900 patients showed that osteoporosis drug, Prolia (denosumab) works better than Novartis's Zometa to delay and reduce the risk of fractures and other bone complications in men with advanced prostate cancer. The shares rose nearly 3% after hours to $59. The company said that the trial met all its primary and secondary goals and that full results would be announced at a medical meeting in June.
The latest clinical trial results make European approval even more likely for Prolia and give the company additional data to submit to the FDA following their request in October 2009 for supplementary information. Given Prolia could be a $3 billion plus drug by 2013, the trial news are an excellent boost for Amgen.

SKY reduces stake in ITV by 10% at 48.5p putting potential floor on price

Last night, BSkyB announced that it would not fight a court ruling ordering it to reduce its stake in ITV, from 17.9 per cent to below 7.5 per cent.for apparently being anti-competitive. The stake was bought to block a takever of ITV by Virgin Media in 2006, a decision much criticised and ultimately referred to the Competition Commission in 2007 by the government. Morgan Stanley sold approximately 10.4 per cent of its stake, or 404 million shares at 48.5p, raising about £196 million. ITV closed last night at 51.3p, down 2.3%. Sky bought a 17.9 per cent stake for £940 million in 2006, writing down the value by £801 million to 20p a share over the past two years.


The book building exercise by Morgan Stanley should reduce the uncertainty hanging over the ITV share price and may ultimately open the door for a future predator. At 51.p, ITV is now down over 10% from my buy point and may be under further pressure today with 10% stake sale being sold for 48.5p. However, downward momentum should now be stemmed. Today's share price action will be interesting and for those not invested in ITV may be a good time to wade into the company.

UK dividends on downward path

Dividends payments by U.K. companies reduced by 15% in 2009, with financial cutting their payments by half as the banking sector collapsed. The yield is now estimated to be 3.4% for the UK FTSE All share for 2010. Oil companies (BP and Shell), tobacco stocks (Imperial and BAT), and pharma (GSK, Astra) dominate the top FTSE 100 dividend payers.

DRAM chip price outlook less rosy for second half 2010

S&P cut their rating Micron Technology (MU) on Friday to Hold from Buy, citing reduced expecations for DRAM memory chip prices in 2010. They reduced earnings per share (EPS) forecast for the August 2010 fiscal year to 76 cents, from 84 cents, and cut their target price to $11, from $13. S&P said “Although we think healthy PC demand will continue to support memory demand and shipments this year, we are cutting back our second half DRAM revenue estimates based on our view of increasing supply from leading competitors and lower ASPs."

Micron finished Friday at $8.70, having slide from close to $11 in the last 2 weeks as worries grow about a potential ramp up in DRAM producton from Samsung. The position in Micron is around a $1 down from its buy point, but will hold for now.

Tech earnings results point to recovery not false dawn

Strong earnings from the large technology bell weathers in the U.S., - Microsoft (MSFT), Intel (INTC), Cisco (CSCO), Google (GOOG) and Amazon (AMZN) have so far failed to drive the bears back into hibernation.

Despite the fact that Cisco Systems posted great results for its January quarter, and provided April quarter guidance that significantly exceeded analyst expectations, the news failed to rejuvenate the U.S. NASDAQ at the back end of last week . CEO John Chambers, traditionally regarded as having a very conservative view on his markets, sounded very positive about Cisco's prospects going into 2010. He said the company was seeing a broad-based recovery across all geographies and product sectors and that it was seeing a continued improvement in business spending..  Chambers said. “Our outstanding Q2 results exceeded our expectations and we believe they provide a clear indication that we are entering the second phase of the economic recovery. During the quarter we saw dramatic across the board acceleration and sequential improvement in our business in almost all areas,”. So if Chambers is telling the markets that things are improving for Cisco, then maybe its time to take note given the company's position in so many core areas of IT spending.

Though risk aversion is increasing, the outlook for the global economy seems to be improving, particularly for the technology sector. Signficant weakness in the Nasdaq, should be seen as buying opportunity for the best in breed stocks including Microsoft, Intel and Cisco.

Portfolio Review of the week - February 6th 2010

A tough week for the Contrarian Investor UK portfolio this week as global markets fell heavily on sovereign debt concerns in countries such as Greece. The DOW Jones Industrials briefly fell as low as 9850 yesterday before staging a strong recovery in the last hour of trading to finish higher and back over the 10,000 level. Unfortunately, some long bets on the DOW were closed out at the lows , which was frustrating given the rebound. As I talk about shortly, the investment thesis for the holdings in the portfolio are robust and news flow is expected for most of the holdings in the coming weeks which should be a catalyst for share price appreciation. A sell off in the market that we have seen in the last 2 weeks is a positive development given we are now back in the “good value” zone after the rises in January looked unsustainable and stretched the prices of many stocks. The portfolio is now positioned for any change to a more positive sentiment.



Coal of Africa (CZA) – Finally the news that has been awaited for the last 4 months came through with the South African Government granting the new mining order for the Vele coking coal project. Although the share price initially responded well with a 23% one day rise to 148p, the large falls in global stock markets throughout the latter part of the week and rumours that fellow Coal stock, GCM, were selling down their holding meant that CZA finished the week at 133p, barely unchanged. Based on fundamentals CZA looks very solid – rising prices for metallurgical and thermal coal, increasing production coming on stream from Mooiplaats and now Vele, the acquisition of NuCoal brings on stream further capacity, good off take agreements with the likes of Arcellor Mittal (who own a stake in Coal of Africa). Continuing to hold.


GW Pharma (GWP) - Remarkably robust given the overall market picture, with a small fall to 87p. Sativex Cannabis spray regulatory approval in Europe in final stages. News expected in Q1 2010.


Falkland Islands Oil Shares (Falklands Oil and Gas (FOGL), Desire Petroleum (DES), Borders and Southern Petroleum (BOR) ) - A strengthening in the U.S. dollar this week due to fears about debt default in Portgual, Spain, Italy and Greece sent commodities into free fall this week with WTI Crude Oil dipping below $70 on Friday (after being above $80 in January). In addition, posturing by the Argentininian government about the ownership of the Falklands added to the general uncertainty. The Ocean Guardian Rig hired by Desire Petroleum is due to arrive in the Falklands in the next week or so with drilling due to start mid-February. News from Falklands Oil and Gas (which has a farm in deal with BHP Billiton) on a potential sharing of Ocean Guardian is expected in the next couple of weeks with further news on a deep water rig needed to drill in the deeper waters of the South Falklands basin also on the horizon. Despite heavy falls in the Falklands Islands shares this week, with the rush out of oil stocks and riskier assets, imminent news from the drilling campaign should drive prices higher.


ITV (ITV) – TV company, ITV dropped to 53p this week on the general market weakness. The outlook for TV revenues is solid in 2010 and the management team of Crozier and Norman is looking to streamline the business and review the ongoing strategy of the business. Holding.


Nighthawk Energy (HAWK) – HAWK broke through the long term resistance of 30p this week on the weakness in the oil price and now stands at lows last seen during the March 2009 lows at 27p. Despite reasonably positive news from the Jolly Ranch project last week, and confirmation that substantial news on the field would be released this week, the shares continue to take a tumble. The fundamental investment thesis for HAWK, namely the Jolly Ranch and Revere prospects is unchanged. Though Contrarian Investor UK is disappointed in the short term performance, I will continue to hold as news flow does not support this continued erosion in the share price.


Amgen (AMGN) - The stock price fell from close to $60 earlier in the week to finish at $57.5 as sentiment on pharma stocks was not helped by disappointing results from Pfizer (PFE) and Astra Zeneca (AZN). News on osteoporosis drug, Prolia, is expected in Q1 or early Q2. Holding.


Intel (INTC) and Micron (MU) – Semi conductor stocks took a hammering early in the week with Micron falling close to $8 and Intel dipping below $19. Despite the short term weakness, long term fundamentals look positive for chips consumption in both the consumer and business enterprise segments.

Further falls on markets as gloom about Greek, Spanish, Portugese debt persist

The Dow Jones Industrials fell as much as 180 pts today, with the index currently down around 130 pts to 9,875. Long positions on DOW fell through stop losses at 9,850 rounding off a very poor week for Contrarian Investor. The scale of the falls have surprised me and although weakness was expected after the early January euphoria the S&P 500 falling through 1,050 in the space of a week exposed the volatility and unpredictibility of this market. Given the earnings outlook for this year, many shares seem to represent good value.

U.S. employment data casts further shadow on the market

The U.S. non-farm payrolls employment dropped by 20,000 in January, compared with an expected increase of 15,000. But the unemployment rate unexpectedly moved lower to 9.7%, compared with expectations of 10%. The Dow industrials was recently down 31 pts to 9972 after the news which highlights the fragility of the U.S. labour market and potential weakness of the economic recovery.
 On significant weakness in oil stocks, position increased in Nighthawk Energy at 27p, which fell 7% on the day. Overall the portfolio has suffered steep falls this week, particularly in speculative stocks.

Sovereign debt worries hammer stocks

Debt default worries for Greece, Portugal, and Spain sent stock markets round the world into a tail spin, with the Dow industrials down 2.61% (268 pts) to 10,002. Commodities fell heavily with oil falling 4% to $73 and gold also down 4% or $46 to $1064 as the dollar strengthened with a flight back to safe haven currencies.

After seeing Coal of Africa (CZA) gain over 20% in one day on the Vele mine approval, the stock price has given back its gains over the last 2 days and now stands barely higher at 130p, having risen to as high as 148p. Contrarian Investor was caught out on this one, and though tempted to take some profits on the Vele news, held out for a sell close to 170p. As they say, "A profit, is never a profit until you've banked it!". However, prospects for CZA look very solid with Mooiplatts ramping up production and Vele mine on start up.

A contrarian buy on the Dow Industrials initiated last night with the U.S. unemployment data due at 1.30pm UK time.

Threats from Argentina take shine off Falkland Islands Oil stocks

Fears of a possible blockade of Desire Petroleum's (DES) Ocean Guardian Rig on its route down to the Falkland Islands by Argentinian Civilian vessels sent Falkland Island oil explorers down this morning. The British Ambassador was summoned by the Argentinian Government yesterday so they could convey their opposition to drilling and which the British Government has strongly refuted and reaffirmed the U.K.'s rights over the Islands. Despite the political posturing it is unlikely that military action will be taken. However, the news yet again confirms that the Falkland Island drilling is not for widows or orphans, but that's what makes these stocks so interesting! As they say "you've got to be in it to win it!".

Doubts about Recentin and ex dividend hits Astra Zeneca

Astra Zeneca (AZN) was down over 3% this morning to £28.32 as concerns about whether its bowel cancer drug, Recentin (cediranib) in a head to head phase III clinical against Roche's Avastin would be positive when results are released in the first half of 2010 (Horizon III trial). The stock also went ex-dividend today. Recentin failed a final stage clinical in lung cancer in 2008 and focus is now on colo-rectal cancer.

Contrarian Investor believes a good entry point for AZN would be around the £25 mark.

Coal of Africa comes good with 23% one day gain due to Vele mine approval

Coal of africa (CZA) rose 23% today, with a 28p rise to 147p as confirmation came through that the key Vele mining project has been granted an unconditional mining order (NOMR).CZA currently holds an 80% interest and has an agreement in place to acquire the remaining 20%.


The company has also been granted a conditional NOMR for the Holfontein coal project near the middle of Sasol's Secunda coal production area.The Holfontein NOMR is conditional on delivery of certain documents to the DMR.


This  news fully endorses the decision to invest back in November and Contrarian Investor still sees upside in the price to around £1.80-2.00 in the short term. Holding postions for now. Great news and a significant upside to the portfolio.