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.