I regularly listen to the following Podcasts available on the Itunes store for free:
S&A Investor radio with Frank Curzio - Weekly show largely U.S. focused but some good guests and Curzio is excellent.
The Disciplined Investor - Weekly show again with a U.S. focus but good market commentary from Andrew Horowitz and interesting guests.
Shame there's no decent U.K. focused share podcasts, unless I've missed something?
Monday, January 31, 2011
Good start to 2011 in U.S. and Contrarian, not so bright for FTSE 100
Despite all the tension in the Middle East, the Dow Jones Industrial Average ended up 68 points, to 11,892 making it a 2.7% rise for the month, its best January since 1997. The FTSE 100 has not been so fortunate, with the index falling 0.6% in January to 5,881. The discrepancy in performance is largely explained by the larger presence of cyclical stocks such as industrial group Caterpillar (CAT) in the DOW. Also the fact that it is a price weighted index (i.e. the higher the price of a stock the greater its weighting within the index) whereas the FTSE 100 is a market cap weighted index is not widely recognised (and hence the U.S. S&P 500 is a better measure of U.S. stock market performance).
The Contrarian Investor UK portfolio suffered again today on the market sell off and unfortunately Imagination Technology (IMG) fell through a stop loss set 10% below buy price. The strong start to the year precipitated by some good gains in Xcite (when it went close to 400p) and Bowleven, have been marred by the Imagination loss (fortunately not a huge position) and a stupidly set stop loss on Sirius Minerals which caught me out and which was only set to control my required margin requirements (daft to do given the volatility of SXX). But still up nicely for the Month so a good start to 2011 but it could have been a lot better. Now for Xcite and Bowleven to come in February!
Will tomorrow bring the long awaited Xcite Energy RNS?
A day of anticipation of an RNS from Xcite Energy relating to the rig contract came to nought. However, no panic here. Disappointing that the share price dropped 8.5p late in the day to £3.62 after holding firm despite the FTSE taking a beating in the morning but I guess some of my fellow private investors are looking for bad news even if there's no hint of one!
Oil prices rose today to their highest in more than two years with WTI Crude for March delivery gaiing 3.2%, at $92.2 a barrel (its highest sine October 2008) and Brent Crude rose to more than $1.50 to as high as $101.08 a barrel. Its all time high is $147 a barrel hit in July 2008 before the financial collapse.
The reason for the oil price hike continues to be Egypt, with 2 million barrels per day passing through the Suez Canal plus a a further 1 million barrels move through the Suez-Mediterranean pipeline.
Oil prices rose today to their highest in more than two years with WTI Crude for March delivery gaiing 3.2%, at $92.2 a barrel (its highest sine October 2008) and Brent Crude rose to more than $1.50 to as high as $101.08 a barrel. Its all time high is $147 a barrel hit in July 2008 before the financial collapse.
Xcite Energy - still no Rowan Norway rig RNS!
The deadline for the Rowan Norway jack up rig is here but no RNS so far!
As a reminder:
If they were extending negotiations I would have thought we would have an RNS by now. Issuing an RNS saying "we have extended by an additional 7 weeks day blah. blah. in order to finalise detailed elements of the contract.". It doesn't smack of the Xcite board of directors that we know. The longer the wait, the more intriguing it gets! Maybe the directors have taken a well deserved break in the Caribbean with their share sale profits and they forgot to tell the PR to send the RNS out??!!!
As a reminder:
4 January 2011
Xcite Energy Limited
("Xcite Energy" or the "Company")
Extension of Letter of Intent for "Rowan Norway" N-Class Jack-up Rig
Xcite Energy announces that its 100% subsidiary, Xcite Energy Resources Limited ("XER"), has entered into an extension to the binding letter of intent ("LOI") with British American Offshore Limited("BAOL"), part of Rowan Companies, Inc. for the N-Class "Rowan Norway" jack-up rig.
The LOI has been extended by mutual consent to 31st January 2011 with no amendment to the existing termination fee payable by XER in the event it does not enter into a definitive agreement by this date.
If they were extending negotiations I would have thought we would have an RNS by now. Issuing an RNS saying "we have extended by an additional 7 weeks day blah. blah. in order to finalise detailed elements of the contract.". It doesn't smack of the Xcite board of directors that we know. The longer the wait, the more intriguing it gets! Maybe the directors have taken a well deserved break in the Caribbean with their share sale profits and they forgot to tell the PR to send the RNS out??!!!
Sunday, January 30, 2011
Portfolio review of the week - 30th January 2011
Rioting in Egypt over the rule of President Hosni Mubarek sent shares down on Friday with the Dow Jones Industrial Average down 166 points, or 1.39%, to 11,823 (the biggest drop since November 16th 2010) The Dow fell 0.4% on the week, its first weekly drop in nine weeks. The FTSE 100 index dropped 1.4% to end at 5,88, a 0.25% drop on the week.
The issues in Egypt drove up oil by 5% to $89 (see previous post: http://contrarianinvestoruk.blogspot.com/2011/01/oil-surges-on-egypt-issues.html) and sentiment in the U.K. wasn't helped by news that a U.K. consumer confidence index dropped eight points in January to -29, the lowest figure since March 2009 and only the sixth time in 35 years it has dropped by so much. Despite the oil price surge, oil stocks were mainly in the red.
The fall in the markets was overdue since after 8 weeks of rises on the U.S. markets, a correction was to be expected and the Egyptian situation was the catalyst for a sell off and profit taking. Further volatility can be expected this week and at times like this opportunities for buying can be excellent as uncertainty and the bears take hold of sentiment. 2011 will be a volatile year in the markets.
The issues in Egypt drove up oil by 5% to $89 (see previous post: http://contrarianinvestoruk.blogspot.com/2011/01/oil-surges-on-egypt-issues.html) and sentiment in the U.K. wasn't helped by news that a U.K. consumer confidence index dropped eight points in January to -29, the lowest figure since March 2009 and only the sixth time in 35 years it has dropped by so much. Despite the oil price surge, oil stocks were mainly in the red.
The fall in the markets was overdue since after 8 weeks of rises on the U.S. markets, a correction was to be expected and the Egyptian situation was the catalyst for a sell off and profit taking. Further volatility can be expected this week and at times like this opportunities for buying can be excellent as uncertainty and the bears take hold of sentiment. 2011 will be a volatile year in the markets.
There has only been once change in the portfolio this week with the addition of Namibian copper miner, Weatherly International (WTI) (see post - http://contrarianinvestoruk.blogspot.com/2011/01/weatherly-international-namibian-copper.html).
Xcite Energy (XEL): It was good to see Xcite rising on Thursday and Friday after drifting for some many weeks following the oilbarrel.com presentation, finishing at £3.71. Given the market environment at the tail end of last week and general negative oil company sentiment it was reassuring to see a rise. There has been lots of rumours doing the rounds about Xcite this week, with FT Alphaville claiming that it was in takeover talks. The deadline for the rig signing is tomorrow and I am surprised they have left it to the wire. Director of Business Development, Charles Lucas-Clements said at the Oilbarrel conference that investors should not be worried and that the deal would be done but why wait until the 31st? Although I have dismissed the takeover rumours as just that, rumours, it does seem strange and as Lucas-Clements said at Oilbarrel, "don't sell you will see this share double or triple". Perhaps he was referring to February 2011 not a later date on a bid? I guess we'll find out soon enough! Hopefully an RNS tomorrow morning to explain what's happening. Even if a takeover is nonsense then news that they have got the Rowan Stavanger, instead of Rowan Norway, until Talisman Norway need it would be fabulous as production timings would be accelerated. If the Competent Person's report is due in February it would also be good to get an update on progress.
Bowleven (BLVN) - Wild oscillations in the share price this week with the price dropping to 330p on Thursday before rebounding to finish at 355p. News that JP Morgan had offloaded some of their stake and a feeling that this seller was out of the way took the pressure off. I am still surprised that the share price has dropped quite so much with so much good news from Cameroon but market sentiment is not as rosy as it was a few weeks ago.
Rockhopper (RKH) - Little change as the rumour mill starts on progress at the 14/10-3 exploration well. News likely later in the week. Frankly there's so much rubbish on the bulletin boards on RKH I can't even face ploughing through them!
Sirius Exploration (SXX) - A sharp sell off this week after the news from the North Dakota exploration drill (see post - http://contrarianinvestoruk.blogspot.com/2011/01/todays-sirius-minerals-action-is-par.html). The shares dropped 17% to 17.25p. I continue to hold for the reason's cited in the post above.
Imagination technology (IMG) - A 4% drop this week to 368p on no news. I continue to hold but may be one to cull this week as now close to 10% below my buy point.
Angel Mining (ANGM) - We still await the news of the dore shipment for the Nalunaq mine which was promised in January. Time running out? - news on Monday perhaps or another delay?
Weatherly International- a Namibian copper company with plenty of potential
Weatherly International (WTI) has been on my watch list for quite a while now and last week it was added to the Contrarian Investor UK portfolio on the market sell off precipitated by the Egyptian crisis. WTI is not an easy company to research with a complicated history and varied assets some in production others in development. It certainly is a turnaround story having come back from the brink in 2009 during the global financial crisis when its shares dropped to a couple of pence after being close to 30p in 2007. It has a full portfolio of assets, some already in production, so there is no exploration risk.
Background and assets
AIM listed, Weatherly International (WTI), was founded in 2005 by Australian Rod Webster (current Chief Exec).
In 2006 Weatherley bought the insolvent assets of Ongopolo, a Namibian copper producer, with the objective of turning around the performance of its mining and smelting operations. However, by 2008 a global collapse in copper prices meant the project was uneconomic despite production of 2645 tonnes of copper and the mines were mothballed or shut in October of that year with production ceasing in December 2008. Focus moved to the smelter which was subsequently converted to a stand-alone tolling business.
Weatherly has the following major mining interests in Namibia:
Copper assets :Working Otjihase, Matchless, Development: Tschudi open pit, Tsumeb West, Tsumeb Tailings
Zinc assets: Berg Aukas
It also has Manganese assets in Burkina Faso with partner Wadi but this has been put on hold due to licence and railway issues.
The existing licences and resources are sufficient to sustain a copper mining business capable of 20,000 tonnes per annum at an average industry cost of production for the next ten years. Mining was restarted in July 2010 at the Otjihase (3.2 million tonnes at 1.6% JORC) and Matchless mines (0.7 million tonnes at 1.8% JORC) (Central Operations) and full production is expected by the Second Quarter of 2011.
About Namibia
Namibia is a country in southern Africa whose western border is the Atlantic Ocean with a population of just over 2 million. It shares land borders with Angola and Zambia to the north, Botswana to the east and South Africa to the south and east. It gained independence from South Africa on 21 March 1990 following the Namibian War of Independence. Its capital and largest city is Windhoek. For an African country it is considered a stable, democratic country.
Funding
In mid 2010 a $7 million fund raising was complete with Louis Dreyfus Commodities Suisse S.A. Later in the year, the smelter (Kombat) was sold for $3.3million to Grove Export, contributing to a $9 million profit. In November 2010, the company raised further £4.4 million with a placing at 5p.Weatherly also has the benefit of $140 million of carried forward tax losses to offset agains future profits.
Major shareholders
Dundee Precious Metals 7.56%
Bank Windhoek 6.34%
RAB Special Situations Master 5.86%
Webster, Rod J 5.11% (Chief Exec. of Weatherley)
Gartmore Investment 4.73% (reduced following a disposal on January 12th)
Martinick, Dr Wolf G 3.60% (Chairman of Weatherly)
Ezenet 3.42%
Third party deals
In 2009 DPM (Dundee Precious Metals) subscribed for over 40 million shares in Weatherley at 3p per share for £2m, the company also signed a LOI (letter of Intent) with East China Mineral Exploration and Development Bureau (ECE) where they would subscribe for a 50.1% stake in WTI for £16 million. This latter deal with ECE was cancelled in 2010 when the Smelter assets were sold to DPM.
In July 2010, Weatherly signed a Memorandum of Understanding (MOU) with East China Mineral (ECE) to establish a joint venture company (ECE 65%, WTI 25%, WTI S/H 10%) to pursue development of Berg Aukas Lead/Zinc project in Namibia and set up a new UK company, China Africa Resource (CAR). In September, WTI signed a legally binding Implementation Agreement with ECE, whereby ECE will provide funding of £4.8 million for the transfer of the Berg Aukas mine to CAR. Weatherly will distribute 10% of its 35% shareholding in CAR to its shareholders as a dividend in specie.
The company entered into an off take agreement with Louis Dreyfus Commodities Metals in mid January 2011 for around 10% of total production to effectively de risk the initial start up phase. The forward sales contract entered is for 975 tonnes of copper to be delivered progressively over an 18 month period at a fixed price of $9,260 per tonne (current copper price is $9,489/tonne). Concentrate production is expected to commence in mid February and the first delivery under the forward sale contract is scheduled for the end of April.
Future development
The Tschudi open pit already already has enviromental approval. Production estimated at 11,000 tonnes of copper by 2013.
Financials
The company currently has a market capitalisation of £68 million with 535 million shares in issue. Debt is £4.6 million (as of 2010) with cash of $14.7 million (£9.2 million). The company Chairman (Martinick) and Webster (Chief Exec) own 46.6 shares, 8.7% of the company.
SWOT
Strengths
Producing copper assets at Otjihase (3.2 million tonnes at 1.6% JORC) and Matchless mines (0.7 million tonnes at 1.8% JORC) with minimum 5 year mine life
Copper price strong at close to $9500 per tonne
Low cost of production $3,258 per tonne at Otjihase and Matchless
No exploration risk
$140 million of losses able to offset future production
Good institutional shareholder base e.g. Gartmore and Blackrock
Namibian government large shareholder which may derisk licences etc.
Weaknesses
Success geared to copper price
Activity focused on one country - Namibia (but low risk for Africa)
Blighted history
AIM listed so volatile
Opportunities
Investors in Weatherley will get shares in CAR (China Africa Resource) when CAR is floated in AIM in Spring 2011- Weatherly will distribute 10% of its 35% shareholding in CAR to its shareholders as a dividend in specie.
Good development pipeline e.g. Berg Aukas, Tschudi open pit
Continued weakening of dollar boosts commodity prices priced in U.S. dollars
Threats
Delay in listing of China Africa Resources
Namibian political situation (considered low risk)
Delays in production ramp up at Otjihase and Matchless copper mines
Further fund raising (low risk due to forward selling contract with Louis Dreyfus Commodities Metals
Collapse in copper demand and price e.g. China
Outlook
If every falls into place during Q1 2011, things look very positive for Weatherly given its undemanding rating and low market capitalisation of just £68 million. With full scale production from Otjihase and Matchless of over 4000 tonnes in 2011 and close to 8000 tonnes in 2012 plus some interesting development projects such as Tschudi coming on stream in 2013 . So this should be a year to put its past mistakes behind it and look forward to 2012 and 2013. If we conservatively assume net profit of $4,500 per tonne of copper in 2012 and production of 7500 tonnes, that would make earnings of $34 million (£21.5 million).
The usual risks of investing in Africa have been reduced by Rod Webster's excellent work in getting the Namibian government to have a large shareholding and thus incentive for future success.
NOTE FOR THIS POST:
I may well have missed a pertinent fact for WTI. Please comment here or contact me directly to correct any errors or inform me of any additions. It's a complicated but compelling story. Thanks!
Background and assets
AIM listed, Weatherly International (WTI), was founded in 2005 by Australian Rod Webster (current Chief Exec).
In 2006 Weatherley bought the insolvent assets of Ongopolo, a Namibian copper producer, with the objective of turning around the performance of its mining and smelting operations. However, by 2008 a global collapse in copper prices meant the project was uneconomic despite production of 2645 tonnes of copper and the mines were mothballed or shut in October of that year with production ceasing in December 2008. Focus moved to the smelter which was subsequently converted to a stand-alone tolling business.
Weatherly has the following major mining interests in Namibia:
Copper assets :Working Otjihase, Matchless, Development: Tschudi open pit, Tsumeb West, Tsumeb Tailings
Zinc assets: Berg Aukas
It also has Manganese assets in Burkina Faso with partner Wadi but this has been put on hold due to licence and railway issues.
The existing licences and resources are sufficient to sustain a copper mining business capable of 20,000 tonnes per annum at an average industry cost of production for the next ten years. Mining was restarted in July 2010 at the Otjihase (3.2 million tonnes at 1.6% JORC) and Matchless mines (0.7 million tonnes at 1.8% JORC) (Central Operations) and full production is expected by the Second Quarter of 2011.
About Namibia
Namibia is a country in southern Africa whose western border is the Atlantic Ocean with a population of just over 2 million. It shares land borders with Angola and Zambia to the north, Botswana to the east and South Africa to the south and east. It gained independence from South Africa on 21 March 1990 following the Namibian War of Independence. Its capital and largest city is Windhoek. For an African country it is considered a stable, democratic country.
Funding
In mid 2010 a $7 million fund raising was complete with Louis Dreyfus Commodities Suisse S.A. Later in the year, the smelter (Kombat) was sold for $3.3million to Grove Export, contributing to a $9 million profit. In November 2010, the company raised further £4.4 million with a placing at 5p.Weatherly also has the benefit of $140 million of carried forward tax losses to offset agains future profits.
Major shareholders
Dundee Precious Metals 7.56%
Bank Windhoek 6.34%
RAB Special Situations Master 5.86%
Webster, Rod J 5.11% (Chief Exec. of Weatherley)
Gartmore Investment 4.73% (reduced following a disposal on January 12th)
Martinick, Dr Wolf G 3.60% (Chairman of Weatherly)
Ezenet 3.42%
Third party deals
In 2009 DPM (Dundee Precious Metals) subscribed for over 40 million shares in Weatherley at 3p per share for £2m, the company also signed a LOI (letter of Intent) with East China Mineral Exploration and Development Bureau (ECE) where they would subscribe for a 50.1% stake in WTI for £16 million. This latter deal with ECE was cancelled in 2010 when the Smelter assets were sold to DPM.
In July 2010, Weatherly signed a Memorandum of Understanding (MOU) with East China Mineral (ECE) to establish a joint venture company (ECE 65%, WTI 25%, WTI S/H 10%) to pursue development of Berg Aukas Lead/Zinc project in Namibia and set up a new UK company, China Africa Resource (CAR). In September, WTI signed a legally binding Implementation Agreement with ECE, whereby ECE will provide funding of £4.8 million for the transfer of the Berg Aukas mine to CAR. Weatherly will distribute 10% of its 35% shareholding in CAR to its shareholders as a dividend in specie.
The company entered into an off take agreement with Louis Dreyfus Commodities Metals in mid January 2011 for around 10% of total production to effectively de risk the initial start up phase. The forward sales contract entered is for 975 tonnes of copper to be delivered progressively over an 18 month period at a fixed price of $9,260 per tonne (current copper price is $9,489/tonne). Concentrate production is expected to commence in mid February and the first delivery under the forward sale contract is scheduled for the end of April.
Future development
The Tschudi open pit already already has enviromental approval. Production estimated at 11,000 tonnes of copper by 2013.
Financials
The company currently has a market capitalisation of £68 million with 535 million shares in issue. Debt is £4.6 million (as of 2010) with cash of $14.7 million (£9.2 million). The company Chairman (Martinick) and Webster (Chief Exec) own 46.6 shares, 8.7% of the company.
SWOT
Strengths
Producing copper assets at Otjihase (3.2 million tonnes at 1.6% JORC) and Matchless mines (0.7 million tonnes at 1.8% JORC) with minimum 5 year mine life
Copper price strong at close to $9500 per tonne
Low cost of production $3,258 per tonne at Otjihase and Matchless
No exploration risk
$140 million of losses able to offset future production
Good institutional shareholder base e.g. Gartmore and Blackrock
Namibian government large shareholder which may derisk licences etc.
Weaknesses
Success geared to copper price
Activity focused on one country - Namibia (but low risk for Africa)
Blighted history
AIM listed so volatile
Opportunities
Investors in Weatherley will get shares in CAR (China Africa Resource) when CAR is floated in AIM in Spring 2011- Weatherly will distribute 10% of its 35% shareholding in CAR to its shareholders as a dividend in specie.
Good development pipeline e.g. Berg Aukas, Tschudi open pit
Continued weakening of dollar boosts commodity prices priced in U.S. dollars
Threats
Delay in listing of China Africa Resources
Namibian political situation (considered low risk)
Delays in production ramp up at Otjihase and Matchless copper mines
Further fund raising (low risk due to forward selling contract with Louis Dreyfus Commodities Metals
Collapse in copper demand and price e.g. China
Outlook
If every falls into place during Q1 2011, things look very positive for Weatherly given its undemanding rating and low market capitalisation of just £68 million. With full scale production from Otjihase and Matchless of over 4000 tonnes in 2011 and close to 8000 tonnes in 2012 plus some interesting development projects such as Tschudi coming on stream in 2013 . So this should be a year to put its past mistakes behind it and look forward to 2012 and 2013. If we conservatively assume net profit of $4,500 per tonne of copper in 2012 and production of 7500 tonnes, that would make earnings of $34 million (£21.5 million).
The usual risks of investing in Africa have been reduced by Rod Webster's excellent work in getting the Namibian government to have a large shareholding and thus incentive for future success.
NOTE FOR THIS POST:
I may well have missed a pertinent fact for WTI. Please comment here or contact me directly to correct any errors or inform me of any additions. It's a complicated but compelling story. Thanks!
Friday, January 28, 2011
Oil surges on Egypt issues
Oil futures had their biggest one day increase since September 30th 2009 as the riots in Egypt raised concern that protests would spread to the rest of the Middle East and disrupt the supply of oil particularly through the Suez Canal. Opec tried to calm nerves with suggestions that it could increase output to offset any supply issues through the Canal.
After falling to a 2 month low earlier in the week, March delivery crude futures were up to $89 (a rise of $3.85 or 4.8%).
After falling to a 2 month low earlier in the week, March delivery crude futures were up to $89 (a rise of $3.85 or 4.8%).
Hosni Mubarek is refusing to resign as President of Egypt but he has dismissed his cabinet in an attempt to move public opinion in his favour.
Is the big pharma drug model broken for good?
Is the traditional "big pharma"pharmaceutical company model broken? Certainly in terms of shareholder returns excluding dividends, their share price performance has been woeful.
GlaxoSmithkline (GSK) (formed from the merger of Glaxo Wellcome of the U.K. and Smithkline Beecham of the U.S. in 2000) has seen its share price fall from around £21 at its inception to its current £11.43 (a decline of 46%). U.S. giant Pfizer (PFE) which has been on an acquisition spree over the last 10 years or so with the purchase of Warner Lambert in 2000, Pharmacia in 2003 and more recently Wyeth in 2009 has also had a torrid time. Prior to the acquisition of the Warner Lambert business (owner of the cholesterol blockbuster Lipitor (atorvastatin) in 2000 its shares were over $46, they now stand at $18.15 ( a decline of 61%). Astra Zeneca (AZN) (formed from the merger of U.K. Zeneca and Sweden's Astra in 1999) has seen its shares oscillate between £29 and £35 for the last decade, and they now sell for £30.42, £5 less than in 2001.
Astra's 2010 revenue was flat at $33.6 billion and earnings per share (EPS) rose by 5% to $6.71 driven by cost cutting. But Quarter four revenue was down 3%. Growth in emerging markets is helping to offset patent expiry issues in the short term but there is more to come and cost cutting in areas such as sales has helped to drive profitability. To keep shareholders happy, the company increased the dividend by 11%,
and having bought back $2.2 billion of its shares in 2010 the company is targeting $4bn of share repurchases in 2011 to help drive the earnings per share growth into positive territory.
Pfizer has not had much better luck. Its acquisition of Pharmacia UpJohn (formed from the merger of U.S. Upjohn and Swedish Pharmacia in 1995) for $60 billion in an all share deal went badly wrong when two of its key blockbuster arthritis drugs called COX2 inhibitors were found to be associated with potentially serious side effects relating to increaed risk of heart attack and stroke. After an FDA review in 2005, Celebrex (celecoxib) had its labelling amended and second generation COX2 Bextra (valdecoxib) was withdrawn from sale. Bextra sales were expected to be in excess of $2 billon per year. In mid 2006, Pfizer made the decision to increase its reliance on the riskier prescription pharmaceutical business by selling its over-the-counter medicine business (including Listerine, Benylin, Sudafed) to Johnson & Johnson (McNeil). On a positive note it achieved a good price of $16 billion compared with sales of $3.7 billion as it was the one of the last crown jewel over-the-counter global businesses. J&J triumphed against other bidders such as GSK, Novartis and Reckitt Benckiser. The purchase (merger) with fellow U.S group, Wyeth (formerly American Home products which was due to merge with Warner Lambert in 2000 before Pfizer acquired Warner Lambert) is seen predominantly as a cost saving marriage, although Wyeth's vaccine and consumer health business help to diversify the group back from traditional prescription products.
Investors in pharmaceuticals have traditionally been income seeking through the high dividend yields they offer e.g. Astra 5.5%, Pfizer 4.3%, GSK 5.8%. As has been illustrated by the commentary, capital growth has certainly not been delivered. The series of mega-mergers has clearly failed to deliver shareholder value despite all the promises of increased R&D productivity and cost cutting. Tougher regulation and increasing R&D costs have not helped the sector as has increased pressure from ever more nimble generics companies e.g. Teva, Sandoz (owned by Swiss Pharma Novartis). Despite spending more and more on research, pipelines look anaemic.
Part of the reason for the R&D problems is that centralisation has stifled creativity and innovation. Also easier molecular drug targets have been found and exploited. Biotechnology looks more fruitful but this is not without its problems and traditional pharmaceuticals companies have had to resort to takeovers to exploit this area in general e.g. Roche's takeover of Genentech in 2009. Although science continues to advance at an incredible pace, for example, the Human Genome project (HGP) was completed in 2003 after 13 years of work, the profit potential of these developments has yet to be truly felt by the pharmaceutical companies. New areas of science are themselves beset with issues such as how to test these new molecules on human subjects, particularly those that change the human gene to prevent or cure disease such as cancer. No doubt these problems and challenges will be solved but they will take time, maybe even decades before we see biological drugs which can prevent an at risk individual contracting a certain disease. If it could be cracked, the profit potential is incredible.
Big pharma needs to change to really deliver shareholder value. Forget the mega mergers (which have destroyed value in most cases). Companies like Novartis and GSK are ahead of the game with derisking their prescription businesses by moving into emerging markets, developing generic or over the counter divisions i.e. diversification. But even they are not going far enough. Development of a true biotechnology focus seems key in the new world. Reorganising R&D to drive true innovation rather than me-too's is also vital. I wonder how many CEO's in big pharma would be around if they were measured and remunerated on earnings per share growth (excluding share buy backs)? It is interesting that if you compare shareholder returns for an industry at polar opposite end of the spectrum such as tobacco but with similar high dividend yields, the differentials are astonishing. For example, British American Tobacco (BAT) has grown its share price from £3 to £23 since 2000. Household products company, Reckitt Benckiser (RB.) has grown its price from £8 in 2000 to £34. Enough said.
(NB. Historical earnings per share is not available but share price is used for illustrative purposes)
(NB. Historical earnings per share is not available but share price is used for illustrative purposes)
Xcite, lack of rig news
Interesting that no news on rig contract for Rowan Norway so far with deadline on Monday to avoid break fee of $4 million. Bit of speculation but could be either a) some big issue with fee or contract which has created a stumbling block and delay b) Xcite negotiating with Talisman to take early delivery of Rowan Stavanger until they need it then use Norway c) Xcite are in takeover talks and rig tied up in negotiation d) they've found another rig from another supplier
Option A seems unlikely after so many months! Intriguing indeed!
Big buyer still in background who picked up shares all day. Wonder who?
Option A seems unlikely after so many months! Intriguing indeed!
Big buyer still in background who picked up shares all day. Wonder who?
Weatherly International purchase
With a 6 percent fall today on Weatherley International (WTI) I have taken the opportunity to buy into this interesting Namibian copper play. It's been on my watch list for a while and the drop looks Market Maker driven (on general market sentiment) as the sell volume hasn't been excessive.
Momentum continues on Xcite
Xcite Energy (XEL) has had another good start, currently up 10p to 376p. Some nice buys going through, some in 25 and 50k blocks.
Rig news is due imminently, either today or Monday with rig signing deadline set for January 31st.
Going to be action packed few days. Rockhopper well results just around the corner (probably mid next week but maybe sooner) and Angel Mining due to make announcement on 1st shipment of gold dore by end of the month (barring any further delays of course!).
Rig news is due imminently, either today or Monday with rig signing deadline set for January 31st.
Going to be action packed few days. Rockhopper well results just around the corner (probably mid next week but maybe sooner) and Angel Mining due to make announcement on 1st shipment of gold dore by end of the month (barring any further delays of course!).
Thursday, January 27, 2011
Portfolio has good day on little news but plenty of rumours
The majority of the Contrarian Investor UK portfolio was well up today. The strongest performer was Xcite Energy with a 3.5% gain, but Rockhopper (+2.7%) and Bowleven (+2.8% after being as high as 5% up in the morning) all had a good day after the falls of earlier in the week. Speculation was the order of the day - Xcite takeover rumours surfaced again (seems unlikely until the field reserves have been confirmed by the Competent Persons Report), with Bowleven it was that the background seller was gone (JP Morgan) after an RNS confirmed a sale of shares by JPM over the last 6 weeks.
For Sirius Minerals it was good to see a recovery in the share price in the afternoon to move from down 5% to close up 5%. Seemed to be purely on sentiment changing that North Dakota was at its end game.
Xcite seemed exceptionally strong at the close and I have moved some funds from Bowleven to Xcite since this seems to be the most likely to move strongly upward in coming days. Interesting to note that there were two 41,000 share buys during the day, but only at a small premium to the prevailing price.
It should also be an interesting day tomorrow and Monday/Tuesday for Rockhopper given their latest well is close to reaching a potential hydrocarbon depth. It rose as much as +15p today before settling +9.5p. Again it was down first thing.
Nice investing day for a change. You would have thought the stock market ws doomed after the last week on many of the holdings!
For Sirius Minerals it was good to see a recovery in the share price in the afternoon to move from down 5% to close up 5%. Seemed to be purely on sentiment changing that North Dakota was at its end game.
Xcite seemed exceptionally strong at the close and I have moved some funds from Bowleven to Xcite since this seems to be the most likely to move strongly upward in coming days. Interesting to note that there were two 41,000 share buys during the day, but only at a small premium to the prevailing price.
It should also be an interesting day tomorrow and Monday/Tuesday for Rockhopper given their latest well is close to reaching a potential hydrocarbon depth. It rose as much as +15p today before settling +9.5p. Again it was down first thing.
Nice investing day for a change. You would have thought the stock market ws doomed after the last week on many of the holdings!
FT Alphaville Xcite bid rumour
NH
NH
Probably complete garbage and with only 715,000 shares traded the market seems to agree.
Bowleven out of doldrums too
Sense has returned at last to Bowleven (BLVN), up 5% with good volume after the days of big falls from the 400p zone. An RNS just before 9 confirmed the main reason for this fall. Major shareholder, JP Morgan, have been selling shares over the last 6 weeks. They now own just below 10% of the company, down 1% of so. Will be interesting to see if this is it or whether their stake continues to go down. The market seems to think the seller is out of the anyway.
I guess that Heritage Oil's gas, rather than oil find, in Iraq and subsequent 30% drop also knocked confidence in the small cap oil/gas sector. We know that Bowleven has oil and plenty of it. This is no Heritage.
I guess that Heritage Oil's gas, rather than oil find, in Iraq and subsequent 30% drop also knocked confidence in the small cap oil/gas sector. We know that Bowleven has oil and plenty of it. This is no Heritage.
Xcite looking good on Level 2
Steady buying of Xcite Energy this morning, just ticked up to +7p, despite the wide spread with good depth on the buy side and offer slowing rising. Seems the Market Makers don't know which way this is going - up? Volume rubbish so far.
Xcite's Lucas-Clements talking at Offshore summit on 1st February
This would be an interesting presentation to see Charles Lucas-Clements in action.
Offshore Production Technology Summit 2011
31st January - 1st February 2011
Lancaster London Hotel, London, UK
Maximising growth through innovation
31st January - 1st February 2011
Lancaster London Hotel, London, UK
Maximising growth through innovation
Case Study: Xcite Energy - Pre-production planning and development of an offshore heavy oil field
Understanding the unique nature of the venture
Assessing the technologies involved:
Horizontal well technology
Separation technology
Charles Lucas-Clements, Director of Strategy and Business Development, Xcite Energy ResourcesUnited Kingdom
Understanding the unique nature of the venture
Assessing the technologies involved:
Horizontal well technology
Separation technology
Charles Lucas-Clements, Director of Strategy and Business Development, Xcite Energy ResourcesUnited Kingdom
Wednesday, January 26, 2011
Bad week continues so its case of waiting for the turn
Late December and early January seemed to be days of endless gains on the portfolio. Bowleven (BLVN) and Xcite Energy (XEL) both showed strong moves up on positive news. Now things have come to a grinding halt and I'm seeing day after day of steady (and not so steady) declines. Every stock in the portfolio was negative again today (Sirius, Bowleven, Xcite, Sirius, Rockhopper) bar one (Imagination tech). Bowleven was looking particularly sick this morning with a 5% fall soon after the market open, but reason prevailed and it recovered to close down 3p, at 348p. Yesterday the fall in the oil stocks was precipitated by the falling oil price and there is certainly a sector rotation out of oil at the moment with prospects of rising inventories and OPEC threatening to increase production. Today, market sentiment just seemed to be against AIM and the small cap sector.
It's a case of just sitting it out when you have weeks like this. The stocks are solid, the research has been done, the news flow has been checked now buyers need to come back. Earnings out of the U.S. continue to be strong which should support the markets.
Still patiently waiting for the anticipated news flow from most of the stocks in the portfolio.
It's a case of just sitting it out when you have weeks like this. The stocks are solid, the research has been done, the news flow has been checked now buyers need to come back. Earnings out of the U.S. continue to be strong which should support the markets.
Still patiently waiting for the anticipated news flow from most of the stocks in the portfolio.
DOW JONES moves over 12,000 for the first time since mid 2008
The Dow Jones Industrial Average has finally breached the 12,000 mark for the first time since June 25, 2008 driven by strong new home sales were the highest since April 2010 when tax credits artificially boosted sales. The FTSE 100 is also in good form up 75 to 5,992.
Bowleven knocked again
Bowleven (BLVN) down another 5% at the open and a hair's breath from the placing price of £3.27 achieved on 26th November. Seems to be finding its feet a little now but the sudden drop in the last week has been amazing.
Tuesday, January 25, 2011
Oil at 2 month low
March futures for WTI (West Texas Intermediate) Crude Oil fell $1.68 to $86.19, the lowest since the end of November 2010.
Saudi Arabia’s oil minister, Ali al-Naimi, said that OPEC (Organistion of the Petroleum Exporting Countries) could raise output plus JP Morgan said in a broker note that additional supply was expected from the North Sea during 2011. The price was also pressurised by a stronger dollar - a strong dollar drives down commodity prices since they are sold in U.S. dollars.
Saudi Arabia’s oil minister, Ali al-Naimi, said that OPEC (Organistion of the Petroleum Exporting Countries) could raise output plus JP Morgan said in a broker note that additional supply was expected from the North Sea during 2011. The price was also pressurised by a stronger dollar - a strong dollar drives down commodity prices since they are sold in U.S. dollars.
The falling oil price probably didn't help matters in the U.K. oil shares together with the poor GDP figures. Though oil could continue to be week for the next few weeks on rising inventories, the outlook is for it to stay in the $85-95 range.
Nice turnaround on Sirius but Bowleven weak
Great to see the shorters and derampers stung on Sirius Minerals (SXX) with the price closing up on the day after the steep falls earlier in the day (up 3% at 17.75p). 17p seems a good support level for the next news flow.
Bowleven (BLVN) was less fortunate with it falling over 5% to 351p. Market maker tree shake no, but seems like someone was taking advantage of the bad GDP news. Makes me wonder if an RNS is due sooner than we think. Though uncomfortable I bought some more at 350p. Little overcooked on this one but the fundamentals are strong purely on the oil they've discovered already. Feels like Xcite Energy (XEL) before the flow test results, but still disconcerting with this size of investment. Will be interesting day tomorrow to see if finally we can have a blue day. A test of the investor on this stock today and I'm holding my nerve for now. Stupid, we'll see!!
Bowleven (BLVN) was less fortunate with it falling over 5% to 351p. Market maker tree shake no, but seems like someone was taking advantage of the bad GDP news. Makes me wonder if an RNS is due sooner than we think. Though uncomfortable I bought some more at 350p. Little overcooked on this one but the fundamentals are strong purely on the oil they've discovered already. Feels like Xcite Energy (XEL) before the flow test results, but still disconcerting with this size of investment. Will be interesting day tomorrow to see if finally we can have a blue day. A test of the investor on this stock today and I'm holding my nerve for now. Stupid, we'll see!!
Why Contrarian Investor UK bothers?
I was talking to one of my investment club contacts today and I hear there's been some posts on the iii.co.uk bulletin questioning the motives behind this blog. Ramping, plagarising etc. etc. - pretty distasteful stuff!
If I was writing purely to "ramp" my portfolio then there would be better and less time consuming ways to do it. For example, like other offenders, I could create multiple usernames on the bulletin boards and plug away. I like to think there is some reason arguments for my supposed "ramps". Plus I cover stocks and subjects that I do not even own e.g. recent posts on Irish banking collapse, Google, Apple etc. I do look at the content of bulletin boards for additional information but if I "copy" anything I will always reference the author.
I write the Contrarian Investor on an anonymous basis purely to protect my interests in my job. It is not because I wish to hide behind posts which are ill considered, non-sensical and full of errors. I make a couple of pounds a day from Google Adsense and nothing more. None of the stocks I talk about dramatically rise after I compose a post, so my supposed "ramps" don't work! Though I think Buffett is an amazing investor, I consider myself in the Z list compared with the greats. Always learning from mistakes, and there's always something to learn in this game no matter the number of years.
The reason I write Contrarian Investor UK is because:
1. I love the workings of the stock market and I am fascinated by its herd psychology
2. There are very few places to find information on small cap UK stocks apart from the bulletin boards and there's some good stuff there but a lot of dross too.
3. Unlike the U.S. there are few good U.K. stock blogs with informative content
4. I want to share my knowledge of the stocks I invest in and the significant research I do on them
5. Finally I enjoy writing and it helps me to confirm my investing decisions
I gave up Contrarian Investor UK last July because work was too busy and commuting too long. But I missed the buzz of writing a blog even though it is a constant drain on my free time. Often I think, should I bother. But the odd email of positive support gives me the will to battle on. If the guys on the bulletin boards think I am doing a bad job and they can do better then so be it, perhaps they should start their own blog. I have been very pleased with the traffic to the site this month, 23,000 page views visitors and counting so I guess someone's interested??
If I was writing purely to "ramp" my portfolio then there would be better and less time consuming ways to do it. For example, like other offenders, I could create multiple usernames on the bulletin boards and plug away. I like to think there is some reason arguments for my supposed "ramps". Plus I cover stocks and subjects that I do not even own e.g. recent posts on Irish banking collapse, Google, Apple etc. I do look at the content of bulletin boards for additional information but if I "copy" anything I will always reference the author.
I write the Contrarian Investor on an anonymous basis purely to protect my interests in my job. It is not because I wish to hide behind posts which are ill considered, non-sensical and full of errors. I make a couple of pounds a day from Google Adsense and nothing more. None of the stocks I talk about dramatically rise after I compose a post, so my supposed "ramps" don't work! Though I think Buffett is an amazing investor, I consider myself in the Z list compared with the greats. Always learning from mistakes, and there's always something to learn in this game no matter the number of years.
The reason I write Contrarian Investor UK is because:
1. I love the workings of the stock market and I am fascinated by its herd psychology
2. There are very few places to find information on small cap UK stocks apart from the bulletin boards and there's some good stuff there but a lot of dross too.
3. Unlike the U.S. there are few good U.K. stock blogs with informative content
4. I want to share my knowledge of the stocks I invest in and the significant research I do on them
5. Finally I enjoy writing and it helps me to confirm my investing decisions
I gave up Contrarian Investor UK last July because work was too busy and commuting too long. But I missed the buzz of writing a blog even though it is a constant drain on my free time. Often I think, should I bother. But the odd email of positive support gives me the will to battle on. If the guys on the bulletin boards think I am doing a bad job and they can do better then so be it, perhaps they should start their own blog. I have been very pleased with the traffic to the site this month, 23,000 page views visitors and counting so I guess someone's interested??
Rough day today on bad U.K. GDP news
Its been a big red day across the board for the portfolio for the second day. The main reason was the unexpected news that the U.K.’s GDP (Gross Domestic Product) shrank in the final quarter of 2010 by 0.5%, compared with growth expectations of at least 0.2%. This was caused by weak services and construction, though manufacturing continued to be strong.
So we have a heady cocktail of rising inflation (4.8% RPI) and weakening growth which makes life very interesting for the Bank Of England (BOE). If they increase interest rates above 0.5% they risk curtailing growth even more especially with the raft of austerity measures and tax increases (e.g. VAT recently increased to 20%). BOE Governor, Mervyn King, said tonight that families faced the biggest squeeze on household income for 90 years. The government blamed the bad weather in December for the fall in economic output. The news probably puts the brakes on interest rate increases for the foreseeable future which should be good news for the U.K. stock market in 2011, unless a double dip recession does rear it's ugly head ahead. This will happen if quarter one GDP falls (a recession is technically two quarters of economic contraction).
On a stock specific note, Sirius Minerals (SXX) continued its downward trajectory, falling below 16p during the morning but it has now stabilised at 16.5p (down 3.5%). It is unclear for the reason for the big fall this morning.It may have been shorters or just an excess of sellers. I’m sure market makers also had a role to play to “panic the weak”.
Bowleven (BLVN) is suffering with a 5% fall to 352p. As for the reason for this big drop, no idea! Perhaps it’s a leak from Cameroon that the extended drilling has come to nothing, but nothing to confirm either way. Looking at level 2, certainly a big seller in the background and not enough buyers to mop up the excess supply. Not a market maker tree shake since not a dramatic fall, a gradual tick down as selling pressure built through the day.
Imagination Tech (IMG) has like Bowleven had a bad day, but has now recovered to 11p down 3.2% despite a story on Apple insider (http://www.appleinsider.com/articles/11/01/24/production_of_apples_ipad_2_to_begin_in_february_iphone_5_in_may_report.html) that production for IPAD 2 will start in February for an April launch
with Iphone 5 due in June both with the persistant rumour that these devices both will have IMG chips.
At least Xcite (XEL) has held nicely firm despite the overall market weakness, currently down 0.5p to 363-367p.
On a stock specific note, Sirius Minerals (SXX) continued its downward trajectory, falling below 16p during the morning but it has now stabilised at 16.5p (down 3.5%). It is unclear for the reason for the big fall this morning.It may have been shorters or just an excess of sellers. I’m sure market makers also had a role to play to “panic the weak”.
Bowleven (BLVN) is suffering with a 5% fall to 352p. As for the reason for this big drop, no idea! Perhaps it’s a leak from Cameroon that the extended drilling has come to nothing, but nothing to confirm either way. Looking at level 2, certainly a big seller in the background and not enough buyers to mop up the excess supply. Not a market maker tree shake since not a dramatic fall, a gradual tick down as selling pressure built through the day.
Imagination Tech (IMG) has like Bowleven had a bad day, but has now recovered to 11p down 3.2% despite a story on Apple insider (http://www.appleinsider.com/articles/11/01/24/production_of_apples_ipad_2_to_begin_in_february_iphone_5_in_may_report.html) that production for IPAD 2 will start in February for an April launch
with Iphone 5 due in June both with the persistant rumour that these devices both will have IMG chips.
At least Xcite (XEL) has held nicely firm despite the overall market weakness, currently down 0.5p to 363-367p.
Monday, January 24, 2011
Today's Sirius Minerals action is par for the course for an AIM stock
If you trade in stocks on AIM (Alternative Investment Market) you need to accept that unlike investing in a FTSE 100 company, swings in the share price of over 10% in a day aren't an uncommon phenomenon. AIM stocks tend to have a large private investor base which can mean a lot of trading in and out on news flow, market makers setting the price and relatively low liquidity (because the number of sellers to buyers and vice versa can quickly move out of equilibrium) resulting in big price spikes up or down.
A wonderful illustration was Sirius Minerals (SXX) today. After rising 10% on Thursday and Friday, an RNS was released this morning with the analytical results from the North Dakota potash drill which has been awaited with great anticipation for the last 6 weeks. First thing the price moved up again to 22p, but it was downhill all the way to 17.25p, a fall of 17%. The shares have had a great run over the last couple of months, from the 8p level in early December (and even lower earlier in 2010) so there are undoubtedly many investors who have made 300%+ gains. So expectation for this latest North Dakota RNS was sky high. There has been talk of this potash reserve being worth $1 billion etc. etc. - i.e. massive hype and expectation. So when the RNS finally came out, the news was relatively underwhelming and probably raised more questions than it answered. Many private investors were probably anticipating confirmation of a massive potash find there and then. So then the sell off started and gathered pace throughout the day.
Was the North Dakota RNS really so bad? The drill results released today were from the first drill with more to follow over the next couple of months. The depth of the Potash looks positive (over 30 feet) but the concentration looks to have raised concerns. It is interesting that Sirius management chose to release the results early since previous communication had confirmed mid-February as the period when the results from the analytical analysis of the seams would be available. The question is why release the results early when although they weren't bad, they weren't overwhelmingly positive either? Perhaps the board believe future news flow over the coming weeks will drive the share price much higher e.g. progress at York Potash or further updates after the Memorandum of Understanding (MOU) with with Sino-Agri Mining Industry Co. Ltd (a division of China’s second largest fertilizer distributor), to develop Sirius’s property overlying the Adavale Basin in Queensland, Australia. It was probably no accident that the York Potash deal was announced last week to take the pressure off news in North Dakota.
I was annoyed that one of my positions closed on a guaranteed stop at 18p today, especially as I don't usually use stops on AIM stocks. But I still have two significant positions running. I believe that North Dakota still holds strong promise (the company has only done one exploratory drill), there is the potential for a transformational deal with the Chinese in Australia, York Potash seems a sound acquisition and there was a fairly large director buy last week at 17p. Sirius seems to be serious about becoming a major global potash producer and step by step they seem to be moving in the right direction. Global potash use is forecast to grow strongly in coming years so the demand side of the equation doesn't seem to be an issue.
It's volatile and frightening at times to be in these AIM stocks but that's half the fun of it. If you do the homework on fundamentals, then the volatility shouldn't faze you as an investor. Although Sirius is not a "done deal" like Xcite Energy (XEL), it would be surprising if the share price wasn't a lot higher in 2012.
A wonderful illustration was Sirius Minerals (SXX) today. After rising 10% on Thursday and Friday, an RNS was released this morning with the analytical results from the North Dakota potash drill which has been awaited with great anticipation for the last 6 weeks. First thing the price moved up again to 22p, but it was downhill all the way to 17.25p, a fall of 17%. The shares have had a great run over the last couple of months, from the 8p level in early December (and even lower earlier in 2010) so there are undoubtedly many investors who have made 300%+ gains. So expectation for this latest North Dakota RNS was sky high. There has been talk of this potash reserve being worth $1 billion etc. etc. - i.e. massive hype and expectation. So when the RNS finally came out, the news was relatively underwhelming and probably raised more questions than it answered. Many private investors were probably anticipating confirmation of a massive potash find there and then. So then the sell off started and gathered pace throughout the day.
Was the North Dakota RNS really so bad? The drill results released today were from the first drill with more to follow over the next couple of months. The depth of the Potash looks positive (over 30 feet) but the concentration looks to have raised concerns. It is interesting that Sirius management chose to release the results early since previous communication had confirmed mid-February as the period when the results from the analytical analysis of the seams would be available. The question is why release the results early when although they weren't bad, they weren't overwhelmingly positive either? Perhaps the board believe future news flow over the coming weeks will drive the share price much higher e.g. progress at York Potash or further updates after the Memorandum of Understanding (MOU) with with Sino-Agri Mining Industry Co. Ltd (a division of China’s second largest fertilizer distributor), to develop Sirius’s property overlying the Adavale Basin in Queensland, Australia. It was probably no accident that the York Potash deal was announced last week to take the pressure off news in North Dakota.
I was annoyed that one of my positions closed on a guaranteed stop at 18p today, especially as I don't usually use stops on AIM stocks. But I still have two significant positions running. I believe that North Dakota still holds strong promise (the company has only done one exploratory drill), there is the potential for a transformational deal with the Chinese in Australia, York Potash seems a sound acquisition and there was a fairly large director buy last week at 17p. Sirius seems to be serious about becoming a major global potash producer and step by step they seem to be moving in the right direction. Global potash use is forecast to grow strongly in coming years so the demand side of the equation doesn't seem to be an issue.
It's volatile and frightening at times to be in these AIM stocks but that's half the fun of it. If you do the homework on fundamentals, then the volatility shouldn't faze you as an investor. Although Sirius is not a "done deal" like Xcite Energy (XEL), it would be surprising if the share price wasn't a lot higher in 2012.
Potentially exciting week of news on portfolio
Lots of potential news due any day on the Contrarian Investor portfolio. As a reminder:
1. Angel Mining (ANGM) - 1st gold pour and shipment from Greenland's Nanulaq mine
2. Xcite Energy (XEL) - Signing of agreement for Rowan Norway jack up rig
3. Rockhopper (RKH) - news from 14/10-3 well on its PL032 licence in the North Falkland Basin
4. Bowleven (BLVN) - update from Cameroon Sapele 1 well.
Plus early to mid-February
1. Xcite Energy (XEL)- upgrade of resources to reserves on Bentley (200 million Plus)
2. Sirius Minerals (SXX) - update from Queensland Australia seismics and Sino-Agri Chinese deal
3. Imagination Technology (IMG) - confirmation from Apple on IPAD2 and Iphone 5 spec
1. Angel Mining (ANGM) - 1st gold pour and shipment from Greenland's Nanulaq mine
2. Xcite Energy (XEL) - Signing of agreement for Rowan Norway jack up rig
3. Rockhopper (RKH) - news from 14/10-3 well on its PL032 licence in the North Falkland Basin
4. Bowleven (BLVN) - update from Cameroon Sapele 1 well.
Plus early to mid-February
1. Xcite Energy (XEL)- upgrade of resources to reserves on Bentley (200 million Plus)
2. Sirius Minerals (SXX) - update from Queensland Australia seismics and Sino-Agri Chinese deal
3. Imagination Technology (IMG) - confirmation from Apple on IPAD2 and Iphone 5 spec
Final tree shake on Xcite?
Looks like the foolish are bailing out of Xcite into Xtract energy (XTR) this morning. Lots of bulletin board posts about Xtract but I think I'll stay put in Xcite.
Why would I move my precious £'s out of Xcite when they have a 200 million barrel field in the North Sea (possibly up to 500 million barrels) which will go into production this year at a rate of 60,000 barrels per day! Whereas with Xtract Energy you are not going to get close to this for years. Plus it's not a core holding for Walter Energy (who recently acquired Western Coal, the previous owners of Xtract) since they are a coking coal specialist. I would bet on a divestment rather than a big investment by Walter.
Mad, but what does Contrarian Investor uk know! Classic "pump and dump", be careful out there!
Why would I move my precious £'s out of Xcite when they have a 200 million barrel field in the North Sea (possibly up to 500 million barrels) which will go into production this year at a rate of 60,000 barrels per day! Whereas with Xtract Energy you are not going to get close to this for years. Plus it's not a core holding for Walter Energy (who recently acquired Western Coal, the previous owners of Xtract) since they are a coking coal specialist. I would bet on a divestment rather than a big investment by Walter.
Mad, but what does Contrarian Investor uk know! Classic "pump and dump", be careful out there!
Portfolio getting a pasting this morning
After some nice gains on Friday driven by Xcite, Bowleven and Sirius, all are down this morning. Sirius is down around 11 percent today after the North Dakota results were no more than in line with expectations and profit takers have moved in selling on the news. Profit now gone on Sirius but I've promised myself I'll avoid trading this one too much since it's more of a medium term play i.e. turn off the computer and check the price in 6 months rather than buying in and out on RNS releases. Angel Mining is up at least. At last! Still waiting on Xcite which has drifted down a couple of pence. Patience will be rewarded .
I couldn't resist buying into Rockhopper (RKH) in a small way this morning. Drilling news due in next week or so in the North Falklands basin. Was hoping for 350p, but at 360p a reasonable entry point. A gamble but only a bit on the table and nothing wrong with a bit of adrenaline!
I couldn't resist buying into Rockhopper (RKH) in a small way this morning. Drilling news due in next week or so in the North Falklands basin. Was hoping for 350p, but at 360p a reasonable entry point. A gamble but only a bit on the table and nothing wrong with a bit of adrenaline!
Sirius Minerals confirms North Dakota potash discovery
Sirius Minerals (sxx) issued an RNS this morning which confirmed that analytical testing had confirmed high quality potash at their North Dakota exploratory drill. Not having a degree in geology, the details of the news are difficult to interpret but it seems the potash layer discovered is sufficiently large to make this is a significant commercial find. More later on this story.
Sunday, January 23, 2011
Xcite CEO Richard Smith at Oil and Gas Outlook Conference north sea Jan 31st
Richard Smith (CEO of Xcite Energy) will be presenting at the Oil and Gas Outlook North Sea 2011 conference, The Marcliffe, Aberdeen.
Conference Day Two – Thursday 31 March 2011 - North Sea opportunities of the future
NEW FRONTIERS FOR EXPLORATION
9.40am
Will heavy oil become a major area for development in the North Sea?
What are the prospects for developing the North Sea’s heavy oil reserves?
What are the specific considerations for heavy oil in the North Sea?
› Mr Richard Smith,
CEO and Director, Xcite Energy
http://www.terrapinn.com/2011/northsea/Programme_5936.stm
Conference Day Two – Thursday 31 March 2011 - North Sea opportunities of the future
NEW FRONTIERS FOR EXPLORATION
9.40am
Will heavy oil become a major area for development in the North Sea?
What are the prospects for developing the North Sea’s heavy oil reserves?
What are the specific considerations for heavy oil in the North Sea?
› Mr Richard Smith,
CEO and Director, Xcite Energy
http://www.terrapinn.com/2011/northsea/Programme_5936.stm
Saturday, January 22, 2011
Xcite rumour dispelled - Rowan Stavanger goes to Talisman
A form 8-K SEC release from Rowan companies yesterday confirms that the Rowan Stavanger is going to Talisman Norway. Looks like Rowan Norway for Xcite assuming all agreed by 31st January with delivery June 2011. Another solid possibility is that Xcite is talking to Talisman (who have operations in the UK North Sea) about using the Rowan Stavanger until the Rowan Norway is available in June 2011.
http://secwatch.com/rdc/8k/events-or-changes-between-quar/2011/1/21/7522190?source=rss
In terms of the funding of the Rowan Norway, in the event that cash is needed to pay for it (other collateral could potentially be used), there should be sufficient money left from the SEDA (Standby Equity Distribution Agreement) arrangement where the company gets cash in exchange for the issue of shares to Yorkville Advisors - the YA Global Master SPV Ltd. From the December 17th RNS, "Xcite Energy (LON:XEL, TSX-V:XEL) has increased its existing Standby Equity Distribution Agreement (SEDA) by £20 million.The company can now raise up to £60 million through the equity line facility.". Alternatively money could be obtained from the Bentley Alliance (BP, Transocean, ADTI, AMEC, Fugro) without needing to resort to alternatives such as a placing. BP have already put in £4 million (see previous post on Alliance - http://contrarianinvestoruk.blogspot.com/2011/01/xcite-energy-should-prove-highly.html). I would guess that the company could also get a loan if necessary on the oil in place resource estimate, which will be converted to reserves in place in February or March. Either way, no big discounted placing.
http://secwatch.com/rdc/8k/events-or-changes-between-quar/2011/1/21/7522190?source=rss
In terms of the funding of the Rowan Norway, in the event that cash is needed to pay for it (other collateral could potentially be used), there should be sufficient money left from the SEDA (Standby Equity Distribution Agreement) arrangement where the company gets cash in exchange for the issue of shares to Yorkville Advisors - the YA Global Master SPV Ltd. From the December 17th RNS, "Xcite Energy (LON:XEL, TSX-V:XEL) has increased its existing Standby Equity Distribution Agreement (SEDA) by £20 million.The company can now raise up to £60 million through the equity line facility.". Alternatively money could be obtained from the Bentley Alliance (BP, Transocean, ADTI, AMEC, Fugro) without needing to resort to alternatives such as a placing. BP have already put in £4 million (see previous post on Alliance - http://contrarianinvestoruk.blogspot.com/2011/01/xcite-energy-should-prove-highly.html). I would guess that the company could also get a loan if necessary on the oil in place resource estimate, which will be converted to reserves in place in February or March. Either way, no big discounted placing.
Rowan Stavanger | * | N-Class | 400 | 35,000 | 2011 | North Sea | Talisman Norway | Low 300s | August 2011 | Rig is under construction with delivery expected in January 2011. Rig received an LOI for approximately 90 to 120 days for accommodation work in the Norwegian Sector of the North Sea.Commencement date is expected to occur between May and August 2011 upon receipt of Norwegian regulatory approval. |
Rowan Norway | * | N-Class | 400 | 35,000 | 2011 | UK North Sea | Xcite Energy | Low 250s | June 2012 | Rig is under construction with delivery expected in June 2011. Received LOI for approximately 240 days. LOI provides for a termination fee of $4 million payable by the customer in the event it does not enter into the drilling contract by January 31 , 2011. Customer is required to provide security in the amount of $30 million for the first 120 days of the contract term by January 31 , 2011. Customer is also required to provide additional security in the amount of $30 million for the second 120 days of the contract term by January 31, 2011. Customer may reduce the contract term to 120 days, in which event it will be required to increase the security from $30 million to $33.6 million and day rate is increased to low 280s . |
Irish people left picking up the pieces after banking disaster
One of my favourite books on the financial sector is Andrew Ross Sorkin's "Too big to fail". Sorkin's book analyses the financial crisis post Lehman Brothers from a U.S. perspective. I have been reading Shane Ross's, "The Bankers: How the Banks Brought Ireland to Its Knees" over the last couple of weeks. Ross looks specifically at the factors behind the collapse of the Irish banking sector.
After being staggered by the sheer greed of some of the leading bankers on Wall Street which led ultimately to the Federal Reserve bail out known as TARP (Toxic Asset Relief Programme), I am even more sickened by the situation in Ireland where the Irish population has been blighted by an IMF/EU bailout. Ireland's Fianna Fáil party seemed to have overseen an unprecedented period of over lax regulation over the banking system. What's more cosy relationships with property developers helped foster a drive for over generous tax breaks which benefitted a few wealthy individuals in the commercial and residential property market. The likes of Allied Irish bank and Bank of Ireland paid their management teams huge bonuses by pumping up profits by investing in the real estate sector. Of course when the Collateralised debt obligation (CDO) and sub-prime mortgage disaster started in the U.S. in 2007 the whole game in Ireland fell apart with the major banks collapsing with huge debts and having to be bailed out by the Irish tax payer.
In late November, Ireland finally agreed to a 85 billion euro bail out from the European Union and IMF which has coincided with a severe austerity package with pay cuts for government staff and tax increases. Irish property prices have collapsed near to 50% in the last 2 years after being pumped up on steroids during the "Celtic Tiger" boom years. It is a sorry tale that ordinary Irish people have been left to pick up the pieces of so much corruption and mismanagement. I am almost relieved that the U.K. situation with the banks seems almost benign compared with across the Irish sea. The Irish have a right to be very angry indeed.
After being staggered by the sheer greed of some of the leading bankers on Wall Street which led ultimately to the Federal Reserve bail out known as TARP (Toxic Asset Relief Programme), I am even more sickened by the situation in Ireland where the Irish population has been blighted by an IMF/EU bailout. Ireland's Fianna Fáil party seemed to have overseen an unprecedented period of over lax regulation over the banking system. What's more cosy relationships with property developers helped foster a drive for over generous tax breaks which benefitted a few wealthy individuals in the commercial and residential property market. The likes of Allied Irish bank and Bank of Ireland paid their management teams huge bonuses by pumping up profits by investing in the real estate sector. Of course when the Collateralised debt obligation (CDO) and sub-prime mortgage disaster started in the U.S. in 2007 the whole game in Ireland fell apart with the major banks collapsing with huge debts and having to be bailed out by the Irish tax payer.
In late November, Ireland finally agreed to a 85 billion euro bail out from the European Union and IMF which has coincided with a severe austerity package with pay cuts for government staff and tax increases. Irish property prices have collapsed near to 50% in the last 2 years after being pumped up on steroids during the "Celtic Tiger" boom years. It is a sorry tale that ordinary Irish people have been left to pick up the pieces of so much corruption and mismanagement. I am almost relieved that the U.K. situation with the banks seems almost benign compared with across the Irish sea. The Irish have a right to be very angry indeed.
Portfolio review of the week - 22nd January 2011
A great deal of volatility in the market to contend with this week but this threw up some good top-up opportunities, particularly in Bowleven (BLVN) and Sirius Minerals (SXX).
Xcite Energy (XEL): After testing 350p early in the week on low volumes, Xcite had a positive move on Thursday and Friday to finish at 368p. There seems to be a very consistent retrace pattern with this company, with the share price dropping by small amounts for several days before stabilising and then starting a move up, presumably instigated by the market makers. Still looking forward to the rig contract signing news and which one by January 31st - Rowan Norway or Rowan Stavanger. The company have signed a Letter of Intent on the Norway but given a cancellation of a contract with BP on the Stavanger which is already built (Norway would not be ready until October), this could offer great opportunities to start production far earlier in the Bentley field. All conjecture of course, but sounds like a credible alternative. Nice rumour anyway. (POST POST NOTE: See http://contrarianinvestoruk.blogspot.com/2011/01/xcite-rumour-dispelled-rowan-stavanger.html). I'm looking forward to a very profitable few weeks on Xcite - the share price should be a lot higher than £3.68 on a field of at least 200 million barrels.
Sirius Minerals (SXX): A major announcement this week with the purchase of NE England potash company, York Potash for £25 million in shares and a management restructuring with Chris Fraser (York's founder) taking over as Sirius's new CEO and MD.
A JORC Exploration Target of between 3.3 and 6 Billion tonnes of 67% to 94% polyhalite and 330 to 400 million tonnes of 35%-40% potassium chloride has been established for the currently contracted area within the York Potash Project. This estimate establishes the project as having one of the world's largest deposits of polyhalite at mineable depth.
The shares have had a good run this week, rising 4p or 24% to 20.75p on the York Potash and director buys. I took the opportunity to buy more on the fall during Thursday, since significant news from the company's North Dakota exploration project is expected mid-February which will make 20p look like a bargain. It is amazing to think that Sirius was 3p or so in August 2010.
Bowleven (BLVN) - Finally a rise in Bowleven's shares on Friday with a 3% increase to 380p. All week the shares have been drifting down as investors wait for further updates from the Sapele 1 well in Cameroon. Early Friday, with the share price down again, I took the plunge and bought more shares. With estimates of oil in place already at 65 to 430 million barrels in the Deep Omicron, mean 217 million barrels this company has great prospects for the future.
Imagination technology (IMG) - I have initiated a position this week on the rumours that the Ipad 2 and Iphone 5 will use IMG chips. Unfortunately this is showing a loss currently but Goldman Sachs issued a broker note this week with a £6 target, currently the shares are £3.84.
Angel Mining (ANGM): A poor week for Angel with the share price drifting down to 5.75p. News of the first gold production from the company's Nanulaq mine is due this month (and hopefully it is positive) as well as an update on progress of preparing the Black Angel zinc/lead mine also in Greenland. "To minimise transport and refining costs, the Company will only ship doré once it has produced an optimal quantity. The first shipment of doré for refining is expected to take place in January 2011" RNS 15th December. Did a couple of buys and sells on this one, but still holding a position at 5.8p.
Overall a good week for the portfolio, with Sirius being the star. I reckon Xcite should be the big mover next week, followed perhaps by Angel on some Nanulaq mine news. The Contrarian Investor UK portfolio has had a nice start to 2011, with a profit edging towards £7000 already because of gains on Bowleven and Xcite earlier in January.
Xcite Energy (XEL): After testing 350p early in the week on low volumes, Xcite had a positive move on Thursday and Friday to finish at 368p. There seems to be a very consistent retrace pattern with this company, with the share price dropping by small amounts for several days before stabilising and then starting a move up, presumably instigated by the market makers. Still looking forward to the rig contract signing news and which one by January 31st - Rowan Norway or Rowan Stavanger. The company have signed a Letter of Intent on the Norway but given a cancellation of a contract with BP on the Stavanger which is already built (Norway would not be ready until October), this could offer great opportunities to start production far earlier in the Bentley field. All conjecture of course, but sounds like a credible alternative. Nice rumour anyway. (POST POST NOTE: See http://contrarianinvestoruk.blogspot.com/2011/01/xcite-rumour-dispelled-rowan-stavanger.html). I'm looking forward to a very profitable few weeks on Xcite - the share price should be a lot higher than £3.68 on a field of at least 200 million barrels.
Sirius Minerals (SXX): A major announcement this week with the purchase of NE England potash company, York Potash for £25 million in shares and a management restructuring with Chris Fraser (York's founder) taking over as Sirius's new CEO and MD.
A JORC Exploration Target of between 3.3 and 6 Billion tonnes of 67% to 94% polyhalite and 330 to 400 million tonnes of 35%-40% potassium chloride has been established for the currently contracted area within the York Potash Project. This estimate establishes the project as having one of the world's largest deposits of polyhalite at mineable depth.
The shares have had a good run this week, rising 4p or 24% to 20.75p on the York Potash and director buys. I took the opportunity to buy more on the fall during Thursday, since significant news from the company's North Dakota exploration project is expected mid-February which will make 20p look like a bargain. It is amazing to think that Sirius was 3p or so in August 2010.
Bowleven (BLVN) - Finally a rise in Bowleven's shares on Friday with a 3% increase to 380p. All week the shares have been drifting down as investors wait for further updates from the Sapele 1 well in Cameroon. Early Friday, with the share price down again, I took the plunge and bought more shares. With estimates of oil in place already at 65 to 430 million barrels in the Deep Omicron, mean 217 million barrels this company has great prospects for the future.
Imagination technology (IMG) - I have initiated a position this week on the rumours that the Ipad 2 and Iphone 5 will use IMG chips. Unfortunately this is showing a loss currently but Goldman Sachs issued a broker note this week with a £6 target, currently the shares are £3.84.
Angel Mining (ANGM): A poor week for Angel with the share price drifting down to 5.75p. News of the first gold production from the company's Nanulaq mine is due this month (and hopefully it is positive) as well as an update on progress of preparing the Black Angel zinc/lead mine also in Greenland. "To minimise transport and refining costs, the Company will only ship doré once it has produced an optimal quantity. The first shipment of doré for refining is expected to take place in January 2011" RNS 15th December. Did a couple of buys and sells on this one, but still holding a position at 5.8p.
Overall a good week for the portfolio, with Sirius being the star. I reckon Xcite should be the big mover next week, followed perhaps by Angel on some Nanulaq mine news. The Contrarian Investor UK portfolio has had a nice start to 2011, with a profit edging towards £7000 already because of gains on Bowleven and Xcite earlier in January.
Friday, January 21, 2011
Google blows out earnings and Larry Page takes over as CEO
Accompanying the very strong Q4 2010 results after the Wall Street closing bell last night it was announced that Larry Page will take over Google's CEO position from Eric Schmidt in April. Co-founder Sergey Brin will focus on strategic projects and Google said, and ex-CEO Schmidt becomes executive chairman.
The continued strength of the internet advertising space was confirmed by the company's 4th quarter 2010 earnings report. Net income rose to $2.54 billion ($7.81 a share), from $1.97 billion ( $6.13), 12 months before. Revenue came in at $6.37 billion, or $8.75 s share versus expectations of $6 billion and $8.06 a share. The shares finished at $635, up $8.
The continued strength of the internet advertising space was confirmed by the company's 4th quarter 2010 earnings report. Net income rose to $2.54 billion ($7.81 a share), from $1.97 billion ( $6.13), 12 months before. Revenue came in at $6.37 billion, or $8.75 s share versus expectations of $6 billion and $8.06 a share. The shares finished at $635, up $8.
Google's core Adwords business seems to be in good health and new businesses such as online display ads and mobile finally seem to be adding to the company's profit momentum and providing some diversification away from pay per click online ads.
So on the corporate earnings front the big U.S. tech players are delivering the goods. Corporate America seems strong, less so "man in main street".
So on the corporate earnings front the big U.S. tech players are delivering the goods. Corporate America seems strong, less so "man in main street".
Thursday, January 20, 2011
FTSE 100 gets a good pasting after China worries
The FTSE 100 fell 109 points today to close at 5,868 on fears that that the Chinese government will be forced to increase interest rates to dampen growth in an economy growing at over 10% in the last quarter of 2010. This meant bad news for commodity stocks on concerns on a fall off of Chinese demand.
Bay day for parts of the portfolio (Sirius, Bowleven, Imagination Tech) as technology and oil stocks were hit hard. On the positive side, Angel mining stayed flat after a weak start and largest holding Xcite finished the day up 7.5p (after rising as much as 16p) in the early afternoon.
Rising commodity prices are beginning to take their toll on some sectors. EasyJet (EZJ) dropped16%, the most in 6 1/2 years, after it said its first-half loss may double after increasing fuel costs due to the high oil price rose and poor weather caused flights to be canceled. Pretax losses for the six months to March 31 will be around £160 million compared with £78.7 million a year earlier. Associated British Foods (ABF) and Dominoes Pizza (DOM), dropped 3% and 6% respectively on fears of the impact of rising food ingredient prices. Prices of many commodities continue to rocket to multi year highs due to bad weather, speculation and the effect of the falling dollar (as many of these commodities are sold in US dollars). Ultimately, this may feed through to rising retail inflation and rising interest rates which will curtail economic growth.
As I predicted in my forecast for 2011, the year would be choppy with many opportunities to buy on corrections and many opportunities to sell on market peaks (see my post on the FTSE and DOW for 2011 http://contrarianinvestoruk.blogspot.com/2011/01/prediction-for-ftse-100-and-dow.html)
Bay day for parts of the portfolio (Sirius, Bowleven, Imagination Tech) as technology and oil stocks were hit hard. On the positive side, Angel mining stayed flat after a weak start and largest holding Xcite finished the day up 7.5p (after rising as much as 16p) in the early afternoon.
Rising commodity prices are beginning to take their toll on some sectors. EasyJet (EZJ) dropped16%, the most in 6 1/2 years, after it said its first-half loss may double after increasing fuel costs due to the high oil price rose and poor weather caused flights to be canceled. Pretax losses for the six months to March 31 will be around £160 million compared with £78.7 million a year earlier. Associated British Foods (ABF) and Dominoes Pizza (DOM), dropped 3% and 6% respectively on fears of the impact of rising food ingredient prices. Prices of many commodities continue to rocket to multi year highs due to bad weather, speculation and the effect of the falling dollar (as many of these commodities are sold in US dollars). Ultimately, this may feed through to rising retail inflation and rising interest rates which will curtail economic growth.
As I predicted in my forecast for 2011, the year would be choppy with many opportunities to buy on corrections and many opportunities to sell on market peaks (see my post on the FTSE and DOW for 2011 http://contrarianinvestoruk.blogspot.com/2011/01/prediction-for-ftse-100-and-dow.html)
At last we have lift off on Xcite!
Price now ticking up strongly on Xcite Energy. Up 15p to 369p. Very tight spread for a change (1p). Looks like oilbarrel presentation has had the desired effect or realisation that news is just around the corner, especially on rig situation.
Google results after the close will point to strength of online ad recovery
Google (GOOG) will post its fourth-quarter results after the closing bell today. Interesting because like Apple it is one of the tech bell weathers on the Nasdaq stock exchange
Analysts expect revenues of $6.1 billion for the quarter (versus $5 billion a year ago) and earnings of $8.06 a share (versus $6.79 a year ago).
Analysts expect revenues of $6.1 billion for the quarter (versus $5 billion a year ago) and earnings of $8.06 a share (versus $6.79 a year ago).
Investors will be watching for:
1. Growth in mobile advertising
2. Whether YouTube and other acquisitions are starting to contribute to earnings e.g. DoubleClick
3. Whether costs are being held in check or whether job hiring continues to grow
4. Growth in Adwords.
The stock currently trades at $630, on a forward price/earnings (p/e) of 18.
Sirius Minerals Investor presentation January 17th 2011
The link to Sirius Minerals (SXX) investor presentation is:
http://www.siriusminerals.com/wp-content/uploads/2011/01/Sirius-Minerals-Investor-Presentation-17-Jan-2011.pdf
http://www.siriusminerals.com/wp-content/uploads/2011/01/Sirius-Minerals-Investor-Presentation-17-Jan-2011.pdf
Xcite Energy Oilbarrel presentation YouTube link
Here's the YOUTUBE link to last week's presentation by Charles Lucas Clements (Dir. of Strategy and Business Development) at the Oilbarrel conference in London.
http://www.youtube.com/watch?v=L4mGoRte104
At the 9-10 minute mark, very interesting that he talks about the potential of the share price doubling or trebling is a "fairly safe bet". A bold statement from a Director of a company.
http://www.youtube.com/watch?v=L4mGoRte104
At the 9-10 minute mark, very interesting that he talks about the potential of the share price doubling or trebling is a "fairly safe bet". A bold statement from a Director of a company.
Wednesday, January 19, 2011
Xcite due a bounce today
I may be sticking my neck out but I believe today will be the start of a strong move up. Level 2 looks good. The market makers tested down to 355p, but they'll try to move it back to 400p on the offer over the next few days. But if good rig news comes in over the next week then of course it's a different game. Xcite boredom may be over!
Post post note 10.30am:
Doh! Reminder to myself, don't try and become a crystal ball gazer. Focus on fundamentals and the share price will take care of itself! Feels like pre flow test where nerve was tested on constant share price pressure. But as gramacho's analysis posted yesterday showed we have a North Sea field investment which is worth more than £3.50 a share. Who know if it's £6 or £10 but I will stake my reputation that its not £3. If it goes below £3 then Contrarian will close this blog up!
Post post note 10.30am:
Doh! Reminder to myself, don't try and become a crystal ball gazer. Focus on fundamentals and the share price will take care of itself! Feels like pre flow test where nerve was tested on constant share price pressure. But as gramacho's analysis posted yesterday showed we have a North Sea field investment which is worth more than £3.50 a share. Who know if it's £6 or £10 but I will stake my reputation that its not £3. If it goes below £3 then Contrarian will close this blog up!
Apple really is an incredible money making machine
Apple (APPL) released its fourth quarter 2010 results last night. It generated revenues of $27 billion, with profits of $ 6billion. 7.3 million Ipads were sold during the quarter. Incredibly it now has cash of $60 billion, up $10 billion on the quarter (that's $64 a share). Even with Steve Jobs out of the day to day running of the company this is an incredible company. It was unbelievable that I picked up Apple not long after the Lehman Brothers collapse in September 2008 for not much more than $80 (today it stands at $344). Just underscores the theory of buying quality stocks when fear is maximum. With Iphone 5 and Ipad2 not far away the success will no doubt continue, but at $344 I won't be buying the stock no matter how much I love the company and its products.
Tuesday, January 18, 2011
Potential Xcite valuation
I am posting Gramacho's excellent post below from the iii.co.uk Xcite bulletin board which has a thorough analysis of the potential valuation of the company. Great piece of work!
I dare say following Oilbarrel you are all suffering a bit of post meeting minutes fatigue by now. This post attempts to provide insights from what was said in relation to guideline reserves and potential value. It contains quite a bit of info and analysis so you might want to read it a couple of times. The following is IMO and of course is based on publically available information.
BENTLEY VALUE BASED ON M&A ACTIVITY
Although C L-C did say there is room to double or triple the share price just in Bentley alone, i.e. excluding the exploration upside, he did not directly say this would be in the next 12 months. He made a joke about a 2 – 3 fold increase being adequate after 800% and 700% increases in 2009 and 2010. He also talked about “moving down the line” in the next 12-18 months.
I have no doubt there will be a significant increase in sp in 2011 as contingent resources in the core area of the field are moved into the 2P category. The example in Slide 5 of the presentation shows XEL valued at $4.65/bbl based on a sp of £3.80 and the guideline estimate of 200 mmbbl contingent resources. C L-C used Sinochem’s purchase of a 40% stake in Statoil’s Peregrino heavy oil field (13 API) in 2010 as an example of what Bentley’s reserves could be valued at. The deal was estimated by analysts to be worth over $15/bbl to Statoil.
Whenever anyone mentions valuing reserves at $ X/bbl and then goes on to use this figure to value an asset or company it is important to realise that there is a huge simplification in doing so. Clearly 200 mm bbl reserves that have a full production facility in place are worth more than 200 mm bbl reserves that require $2 Bn to be spent on facilities before the reserves can be accessed. (This is where a DCF analysis with good quality cost input provides more insight into forward value.)
So what’s the story with Peregrino? The field will be developed with wellhead platforms and an FPSO to process and store the crude. A key point here is that the 1 Bn Euro FPSO is being leased by Statoil (from Maersk). This makes a $/bbl bid figure less dependent on the timing of the bid within the construction phase than if the FPSO was being purchased and being paid for. Sinochem will pay for their WI share of the FPSO contract costs via lease payments commencing on production start up (there will be a mob fee too). In other words, from Sinochem’s perspective, a large component of the total development costs, the FPSO, is yet to be spent even though the deal was done in the year prior to startup. Nevertheless Peregrino was still worth more than $15/bbl to it.
So would the Bentley field also be worth $15/bbl to Sinochem or another NOC and when would that be the case? There are a number of aspects to consider.
Firstly is the size of Bentley reserves of similar strategic significance to Sinochem and other NOCs as Peregrino? If Bentley P50 is in the range 200 – 225 mm bbl then its reserves would be about half those currently attributed to Peregrino. Its relative importance would then depend on whether the deal with Statoil contained rights to purchase Statoil’s 60% production stream from Peregrino. Statoil has large downstream interests and has announced refining projects in Brazil and is a leader in upgrading heavy oil. Hence it is likely Statoil believes it can add value to its Peregrino crude and it would be reasonable to assume it has elected to retain control of its share, particularly as there was no mention of Sinochem rights to purchase Statoil liftings in the coverage of the deal. Without this Sinochem would have rights to 120 – 240 mm bbl crude (field total reserves range is 300 – 600 mm bbl).
XEL on the other hand has no downstream interests. Rights to all the 200+ bbl of Bentley crude would put Bentley on par with Peregrino. However there is an agreement with BP that it markets the crude. The agreement incentivises BP to minimise the discount to Brent so whether this agreement would prevent an NOC structuring a deal to secure XELs share of production is uncertain.
Hence Bentley has the potential to rank alongside Peregrino from an NOCs security of supply perspective but existing commercial arrangements may or may not restrict its potential to do so.
BTW the above discussion is based on the assumption that the Peregrino figures refer to P50 (2P) reserve estimates. In my experience when a field’s reserves numbers are discussed and when analysts estimate production profiles to value a field they are based on the proven + probable reserves. XEL has also made this assumption as shown in slide 5 of the Oilbarrel presentation.
Secondly does a comparison of the fiscal regimes between Brazil and the UK support the view that a strategic UK asset in the development phase could also command $15/bbl? The answer is yes.
The three main elements of the Brazil fiscal regime are Royalty (10%), Special Participation Tax and CT (34%). SPT is a tiered tax with multiple rates at various production levels and varies by year until year 4+. Peregrino will plateau at about 100 k bbl/d. It turns out that the marginal rate of tax at this rate and down to 83 k bbl/d is 50-55%. In addition there are other indirect taxes that can increase the state take.
In contrast in the UK there is no Royalty and CT is 30%. Although there is a 20% Supplementary CT charge, a large element of SCT relief was granted to promote the development of heavy oil fields. My calcs suggest Bentley would pay very little SCT during the first 6 years of full field production by which time almost 60% of the reserves would have been produced taking into account the FPS production. Hence a marginal rate of tax of only 30% is applied to over half of the reserves.
The third aspect is whether development costs would prohibit Sinochem et al from offering $15/bbl for Bentley. A comparison of development costs between Bentley and Peregrino is tricky without access to proprietary cost information and it is easier to assess this by reference to a project economic model. As inferred earlier in this post a DCF model has been set up for a nominal 200 mmbbl case. Cost and profile input is quick look with a view to not being overly optimistic. (It could be more sophisticated but that can wait until an updated CPR is released. In the meantime it draws on the 2009 CPR info and experience.)
NOCs have the financial latitude to base acquisitions on a lower discount rate than the 10% commonly used by oil majors and independents. Goldman Sachs noted that the Peregrino deal was one of the most aggressive to date and estimated it was based on a discount rate of about 6% whereas many NOC deals are done at a 7 or 8% discount rate.
The model is summarised below, figures in brackets are the 2009 CPR 166 mm bbl case.
Reserves: 200 mmbbl (166)
Peak Rate: 60 k bbl/d (64)
Full Cycle Capex: $3.0 Bn ($2.7 Bn note not clear if 2009 CPR includes FPS costs)
Main Production Phase Capex: $2.7 Bn excluding P&A costs
Opex: $3.0 Bn ($2.2 Bn)
Field Life: 19 yrs (15 yrs)
And economics are as follows:
Brent Oil price: $80/bbl flat real ($80/bbl flat real)
Bentley discount 12%
NPV10 1/1/12 $2283MM ... “This will be a $2Bn company” ($1535MM)
NPV10 1/1/12 $11.5/bbl ($9.3/bbl)
I believe the CPR pre-dates the introduction of the heavy oil supplementary tax allowance in June 09 so this explains the higher NPV10 in $/bbl terms for my model. Also it is not clear if the CPR is full cycle or main development only.
The Bentley NPV6 is $3410MM or $17.8/bbl which is slightly higher than the $15.4/bbl ascribed to the Sinochem Peregrino purchase (slide 5 Oilbarrel presentation) and sugges Bentley could indeed support a bid based on $15/bbl. (DCF calculations assume NOC does not need to pay finance interest costs.) Note the above NPV10 is equivalent to a sp of 930p and the NPV6 is equivalent to a sp of 1390p.
This is all well and good but it assumes XEL receives a competitive bid from an NOC for the entire 100% W.I. The NOC would then have to commit to become the field operator, with the organisational impact that would have, rather than be a non operating partner. This might be a barrier.
What if such a bid is not forthcoming? XEL would then need to consider how to get the development funded. E-type01 has raised the question of financing. He is obsessed with finance. Do you think this is because the HP company repossessed his Ford Granada lol!
BENTLEY VALUE UNDER RETENTION OPTIONS
There are several options to obtain funding in the industry e.g.
1) Issuing Equity
2) Reserves Based Lending
3) Project Finance, bank loans to be repaid from future project production
4) Farming down working interest in return for funding
1) Issuing Equity
Option 1 does not look attractive because it would involve a mega placement and massive dilution. At a current sp of about 360p XEL is valued at about $960 MM which is almost half the $2300 MM value associated with the 200 mm bbl “sale of field” case. This case requires about $2700 MM funding for the main development. Even without taking into account the discount that would be required for a placing, over 450 MM shares would need to be issued to raise this amount. The success case NPV 10 would equate to only about 245p/sh with over 600 MM shares in circulation.
2) Reserves Based Lending
In examining the other options it is important to realise that, despite its market cap, XEL is a minnow at the extreme end of the spectrum. Reserve based lending is based on production from existing wells providing the assurance to lenders that the loan can be serviced. XEL has no other assets in production to use as collateral so Option 2 does not look feasible.
3) Project Finance via Bank Loans
There will be a few wells in production following the FSP. These could amount to about 20 mm bbl proved developed reserves and hopefully 100++ mm bbl proved undeveloped reserves. Slide 4 Oilbarrel presentation indicates XEL believe the low case (roughly equivalent to proved reserves) will be 120+ mmbbl in the pre-FSP reserves assessment. Following the FSP there will be additional reserves proven by a well in Bentley East (aka Prospect A in the 2009 CPR).
Banks try to take as little risk as possible and much prefer to lend on the basis of proved reserves (1P) rather than proved and probable reserves (2P). After all there is an equal probability that ultimate reserves will be lower or higher than a 2P estimate whereas there is a 90% probability that ultimate reserves will be equal to or higher than the proved reserves estimate. The feasibility of Option 3 is therefore very dependent on the economics of the 1P reserves case.
This was examined by building a case in which the facilities are built for 200 mm bbl recovery but the reservoir only produces 130 mm bbl. Development capex for the main development is about $2450 MM (some wells omitted being uneconomic in this downside scenario). This case yielded an NPV10 of about $1000 MM i.e. it remains economic. Moreover it generates $3430 MM cash flow, i.e. 1.4x the capital requirement. Surplus cash would pay off a staged loan equal to the capex in 9 yrs at an 8% interest rate, cumulative production being about 100 MM bbl at this point.
From the above, project finance may well be feasible. TBH I do not know what level of coverage banks feel they need to be comfortable with offering project finance. They would obviously want to look at other scenarios such as low oil price, capex over run etc. XEL are obviously well aware of this and no doubt the FSP has been planned to provide sufficient confidence to facilitate project financing of the subsequent main development. Nevertheless one should realise the scale of the financing required is very large, a world scale investment is needed. The more conservative lenders will consider the risks to be quite high, because XEL has no other assets, and the risks would probably need to be spread over multiple lenders.
This route to field development produces an NPV10 of $1880 MM which equates to an sp of 770p.
4) Farming Out W.I. in Return for Funding
Finally there is Option 4. It is interesting to look at how a similar style of deal to that of Peregrino might look from the perspective of both XEL holders and an NOC.
If an NOC were to pay XELs dev costs for the main phase of development in return for a 50% equity stake this would amount to a cash injection of about $1.35 Bn for 100 MM bbl reserves i.e. the price paid would be $13.5/bbl. TBH I am not sure how to model the tax implications of this but the XEL valuation is currently modelled by assuming zero capex expenditure for the main phase. This generates an NPV10 of about $1800 MM with an equivalent sp of 740p. The deal could be sweetened to pay for FSP back costs to simulate a deal nearer to $15/bbl. As modelled this transaction is not as tax effective as it could be because there is no development capex to reduce taxable income and hence reduce the supplementary charge. If a more tax efficient deal were structured the sp equivalent would be north of 740p.
From an NOC perspective this deal appears attractive. It generates an NPV10 of $350 MM and an NPV6 of $820 MM. This is partly because the NOC is credited with the tax relief afforded by 100% of the field capex set against revenue from 50% of the field production. As mentioned above transferring some of this tax efficiency to XEL would improve the value from an XEL shareholder perspective whilst still retaining sufficient value from an NOC perspective.
CONCLUSIONS
1) Bentley Field economics, based on a development of the guideline 200 MM bbl 2P reserves outcome, are sufficiently attractive to support a valuation of greater than $15/bbl for takeover purposes. However this is a limited scenario that would require an NOC to bid with the intention of acquiring 100% W.I. and operating the field. In this outcome, if the bid was based on a 6% discount rate, XEL would be worth about 1390p/share (about 10% less on a FD basis) or 1215p if a bid was based on $15/bbl.
Since this outcome appears to be significantly more advantageous to XEL shareholders than other options involving retention of the field such a bid is likely only to come if a competitive bidding environment can be established.
2) If an attractive bid for the entire field did not transpire then XEL could develop the field and repay a financing loan with an assumed 8% interest rate even under the downside scenario investigated (Brent $80 flat real, Bentley 12% discount, facilities built for 2P reserves of 200 MMbbl but downside reservoir performance produces 1P reserves of 130 MMbbl)
The 2P reserves would generate an NPV10 equivalent to an sp of 770p.
3) The field could also be developed if XEL was able to obtain a carry of its development costs in return for farming down to a 50% W.I. This was modelled in a manner that was somewhat inefficient for tax purposes but nevertheless generated an NPV equivalent to an sp of 740p. The NOC pays $13.5/bbl for its 50% stake.
4) This analysis suggests XEL has multiple options going forward to secure more value for shareholders. The options investigated suggest the share price could double in the next 18 months.
5) Substantial upside exists from Bentley EOR, additional exploration prospects in Dornoch sands and Jurassic sands and possibly further structural upside outside the Bentley core area.
6) All of the above would explain the very high degree of confidence exhibited by the BOD members at Oilbarrel.
Having completed this analysis I am very pleased to retain my investment in XEL. IMO the outlook is excellent with the opportunity of a really good return at a lower risk than many other AIM oil companies.
I would caution that this is all IMO so DYOR. If there are any accountants on the BB it would be useful to hear your thoughts about the tax implications of a Peregrino type deal in which XEL is carried or paid their development costs in return for a stake in Bentley.
Regards and GLA,
Gramacho
Source: http://www.iii.co.uk/investment/detail/?display=discussion&code=cotn:XEL.L&it=le&action=detail&id=7635097&prevpost=7634963&nextpost=7635152
I dare say following Oilbarrel you are all suffering a bit of post meeting minutes fatigue by now. This post attempts to provide insights from what was said in relation to guideline reserves and potential value. It contains quite a bit of info and analysis so you might want to read it a couple of times. The following is IMO and of course is based on publically available information.
BENTLEY VALUE BASED ON M&A ACTIVITY
Although C L-C did say there is room to double or triple the share price just in Bentley alone, i.e. excluding the exploration upside, he did not directly say this would be in the next 12 months. He made a joke about a 2 – 3 fold increase being adequate after 800% and 700% increases in 2009 and 2010. He also talked about “moving down the line” in the next 12-18 months.
I have no doubt there will be a significant increase in sp in 2011 as contingent resources in the core area of the field are moved into the 2P category. The example in Slide 5 of the presentation shows XEL valued at $4.65/bbl based on a sp of £3.80 and the guideline estimate of 200 mmbbl contingent resources. C L-C used Sinochem’s purchase of a 40% stake in Statoil’s Peregrino heavy oil field (13 API) in 2010 as an example of what Bentley’s reserves could be valued at. The deal was estimated by analysts to be worth over $15/bbl to Statoil.
Whenever anyone mentions valuing reserves at $ X/bbl and then goes on to use this figure to value an asset or company it is important to realise that there is a huge simplification in doing so. Clearly 200 mm bbl reserves that have a full production facility in place are worth more than 200 mm bbl reserves that require $2 Bn to be spent on facilities before the reserves can be accessed. (This is where a DCF analysis with good quality cost input provides more insight into forward value.)
So what’s the story with Peregrino? The field will be developed with wellhead platforms and an FPSO to process and store the crude. A key point here is that the 1 Bn Euro FPSO is being leased by Statoil (from Maersk). This makes a $/bbl bid figure less dependent on the timing of the bid within the construction phase than if the FPSO was being purchased and being paid for. Sinochem will pay for their WI share of the FPSO contract costs via lease payments commencing on production start up (there will be a mob fee too). In other words, from Sinochem’s perspective, a large component of the total development costs, the FPSO, is yet to be spent even though the deal was done in the year prior to startup. Nevertheless Peregrino was still worth more than $15/bbl to it.
So would the Bentley field also be worth $15/bbl to Sinochem or another NOC and when would that be the case? There are a number of aspects to consider.
Firstly is the size of Bentley reserves of similar strategic significance to Sinochem and other NOCs as Peregrino? If Bentley P50 is in the range 200 – 225 mm bbl then its reserves would be about half those currently attributed to Peregrino. Its relative importance would then depend on whether the deal with Statoil contained rights to purchase Statoil’s 60% production stream from Peregrino. Statoil has large downstream interests and has announced refining projects in Brazil and is a leader in upgrading heavy oil. Hence it is likely Statoil believes it can add value to its Peregrino crude and it would be reasonable to assume it has elected to retain control of its share, particularly as there was no mention of Sinochem rights to purchase Statoil liftings in the coverage of the deal. Without this Sinochem would have rights to 120 – 240 mm bbl crude (field total reserves range is 300 – 600 mm bbl).
XEL on the other hand has no downstream interests. Rights to all the 200+ bbl of Bentley crude would put Bentley on par with Peregrino. However there is an agreement with BP that it markets the crude. The agreement incentivises BP to minimise the discount to Brent so whether this agreement would prevent an NOC structuring a deal to secure XELs share of production is uncertain.
Hence Bentley has the potential to rank alongside Peregrino from an NOCs security of supply perspective but existing commercial arrangements may or may not restrict its potential to do so.
BTW the above discussion is based on the assumption that the Peregrino figures refer to P50 (2P) reserve estimates. In my experience when a field’s reserves numbers are discussed and when analysts estimate production profiles to value a field they are based on the proven + probable reserves. XEL has also made this assumption as shown in slide 5 of the Oilbarrel presentation.
Secondly does a comparison of the fiscal regimes between Brazil and the UK support the view that a strategic UK asset in the development phase could also command $15/bbl? The answer is yes.
The three main elements of the Brazil fiscal regime are Royalty (10%), Special Participation Tax and CT (34%). SPT is a tiered tax with multiple rates at various production levels and varies by year until year 4+. Peregrino will plateau at about 100 k bbl/d. It turns out that the marginal rate of tax at this rate and down to 83 k bbl/d is 50-55%. In addition there are other indirect taxes that can increase the state take.
In contrast in the UK there is no Royalty and CT is 30%. Although there is a 20% Supplementary CT charge, a large element of SCT relief was granted to promote the development of heavy oil fields. My calcs suggest Bentley would pay very little SCT during the first 6 years of full field production by which time almost 60% of the reserves would have been produced taking into account the FPS production. Hence a marginal rate of tax of only 30% is applied to over half of the reserves.
The third aspect is whether development costs would prohibit Sinochem et al from offering $15/bbl for Bentley. A comparison of development costs between Bentley and Peregrino is tricky without access to proprietary cost information and it is easier to assess this by reference to a project economic model. As inferred earlier in this post a DCF model has been set up for a nominal 200 mmbbl case. Cost and profile input is quick look with a view to not being overly optimistic. (It could be more sophisticated but that can wait until an updated CPR is released. In the meantime it draws on the 2009 CPR info and experience.)
NOCs have the financial latitude to base acquisitions on a lower discount rate than the 10% commonly used by oil majors and independents. Goldman Sachs noted that the Peregrino deal was one of the most aggressive to date and estimated it was based on a discount rate of about 6% whereas many NOC deals are done at a 7 or 8% discount rate.
The model is summarised below, figures in brackets are the 2009 CPR 166 mm bbl case.
Reserves: 200 mmbbl (166)
Peak Rate: 60 k bbl/d (64)
Full Cycle Capex: $3.0 Bn ($2.7 Bn note not clear if 2009 CPR includes FPS costs)
Main Production Phase Capex: $2.7 Bn excluding P&A costs
Opex: $3.0 Bn ($2.2 Bn)
Field Life: 19 yrs (15 yrs)
And economics are as follows:
Brent Oil price: $80/bbl flat real ($80/bbl flat real)
Bentley discount 12%
NPV10 1/1/12 $2283MM ... “This will be a $2Bn company” ($1535MM)
NPV10 1/1/12 $11.5/bbl ($9.3/bbl)
I believe the CPR pre-dates the introduction of the heavy oil supplementary tax allowance in June 09 so this explains the higher NPV10 in $/bbl terms for my model. Also it is not clear if the CPR is full cycle or main development only.
The Bentley NPV6 is $3410MM or $17.8/bbl which is slightly higher than the $15.4/bbl ascribed to the Sinochem Peregrino purchase (slide 5 Oilbarrel presentation) and sugges Bentley could indeed support a bid based on $15/bbl. (DCF calculations assume NOC does not need to pay finance interest costs.) Note the above NPV10 is equivalent to a sp of 930p and the NPV6 is equivalent to a sp of 1390p.
This is all well and good but it assumes XEL receives a competitive bid from an NOC for the entire 100% W.I. The NOC would then have to commit to become the field operator, with the organisational impact that would have, rather than be a non operating partner. This might be a barrier.
What if such a bid is not forthcoming? XEL would then need to consider how to get the development funded. E-type01 has raised the question of financing. He is obsessed with finance. Do you think this is because the HP company repossessed his Ford Granada lol!
BENTLEY VALUE UNDER RETENTION OPTIONS
There are several options to obtain funding in the industry e.g.
1) Issuing Equity
2) Reserves Based Lending
3) Project Finance, bank loans to be repaid from future project production
4) Farming down working interest in return for funding
1) Issuing Equity
Option 1 does not look attractive because it would involve a mega placement and massive dilution. At a current sp of about 360p XEL is valued at about $960 MM which is almost half the $2300 MM value associated with the 200 mm bbl “sale of field” case. This case requires about $2700 MM funding for the main development. Even without taking into account the discount that would be required for a placing, over 450 MM shares would need to be issued to raise this amount. The success case NPV 10 would equate to only about 245p/sh with over 600 MM shares in circulation.
2) Reserves Based Lending
In examining the other options it is important to realise that, despite its market cap, XEL is a minnow at the extreme end of the spectrum. Reserve based lending is based on production from existing wells providing the assurance to lenders that the loan can be serviced. XEL has no other assets in production to use as collateral so Option 2 does not look feasible.
3) Project Finance via Bank Loans
There will be a few wells in production following the FSP. These could amount to about 20 mm bbl proved developed reserves and hopefully 100++ mm bbl proved undeveloped reserves. Slide 4 Oilbarrel presentation indicates XEL believe the low case (roughly equivalent to proved reserves) will be 120+ mmbbl in the pre-FSP reserves assessment. Following the FSP there will be additional reserves proven by a well in Bentley East (aka Prospect A in the 2009 CPR).
Banks try to take as little risk as possible and much prefer to lend on the basis of proved reserves (1P) rather than proved and probable reserves (2P). After all there is an equal probability that ultimate reserves will be lower or higher than a 2P estimate whereas there is a 90% probability that ultimate reserves will be equal to or higher than the proved reserves estimate. The feasibility of Option 3 is therefore very dependent on the economics of the 1P reserves case.
This was examined by building a case in which the facilities are built for 200 mm bbl recovery but the reservoir only produces 130 mm bbl. Development capex for the main development is about $2450 MM (some wells omitted being uneconomic in this downside scenario). This case yielded an NPV10 of about $1000 MM i.e. it remains economic. Moreover it generates $3430 MM cash flow, i.e. 1.4x the capital requirement. Surplus cash would pay off a staged loan equal to the capex in 9 yrs at an 8% interest rate, cumulative production being about 100 MM bbl at this point.
From the above, project finance may well be feasible. TBH I do not know what level of coverage banks feel they need to be comfortable with offering project finance. They would obviously want to look at other scenarios such as low oil price, capex over run etc. XEL are obviously well aware of this and no doubt the FSP has been planned to provide sufficient confidence to facilitate project financing of the subsequent main development. Nevertheless one should realise the scale of the financing required is very large, a world scale investment is needed. The more conservative lenders will consider the risks to be quite high, because XEL has no other assets, and the risks would probably need to be spread over multiple lenders.
This route to field development produces an NPV10 of $1880 MM which equates to an sp of 770p.
4) Farming Out W.I. in Return for Funding
Finally there is Option 4. It is interesting to look at how a similar style of deal to that of Peregrino might look from the perspective of both XEL holders and an NOC.
If an NOC were to pay XELs dev costs for the main phase of development in return for a 50% equity stake this would amount to a cash injection of about $1.35 Bn for 100 MM bbl reserves i.e. the price paid would be $13.5/bbl. TBH I am not sure how to model the tax implications of this but the XEL valuation is currently modelled by assuming zero capex expenditure for the main phase. This generates an NPV10 of about $1800 MM with an equivalent sp of 740p. The deal could be sweetened to pay for FSP back costs to simulate a deal nearer to $15/bbl. As modelled this transaction is not as tax effective as it could be because there is no development capex to reduce taxable income and hence reduce the supplementary charge. If a more tax efficient deal were structured the sp equivalent would be north of 740p.
From an NOC perspective this deal appears attractive. It generates an NPV10 of $350 MM and an NPV6 of $820 MM. This is partly because the NOC is credited with the tax relief afforded by 100% of the field capex set against revenue from 50% of the field production. As mentioned above transferring some of this tax efficiency to XEL would improve the value from an XEL shareholder perspective whilst still retaining sufficient value from an NOC perspective.
CONCLUSIONS
1) Bentley Field economics, based on a development of the guideline 200 MM bbl 2P reserves outcome, are sufficiently attractive to support a valuation of greater than $15/bbl for takeover purposes. However this is a limited scenario that would require an NOC to bid with the intention of acquiring 100% W.I. and operating the field. In this outcome, if the bid was based on a 6% discount rate, XEL would be worth about 1390p/share (about 10% less on a FD basis) or 1215p if a bid was based on $15/bbl.
Since this outcome appears to be significantly more advantageous to XEL shareholders than other options involving retention of the field such a bid is likely only to come if a competitive bidding environment can be established.
2) If an attractive bid for the entire field did not transpire then XEL could develop the field and repay a financing loan with an assumed 8% interest rate even under the downside scenario investigated (Brent $80 flat real, Bentley 12% discount, facilities built for 2P reserves of 200 MMbbl but downside reservoir performance produces 1P reserves of 130 MMbbl)
The 2P reserves would generate an NPV10 equivalent to an sp of 770p.
3) The field could also be developed if XEL was able to obtain a carry of its development costs in return for farming down to a 50% W.I. This was modelled in a manner that was somewhat inefficient for tax purposes but nevertheless generated an NPV equivalent to an sp of 740p. The NOC pays $13.5/bbl for its 50% stake.
4) This analysis suggests XEL has multiple options going forward to secure more value for shareholders. The options investigated suggest the share price could double in the next 18 months.
5) Substantial upside exists from Bentley EOR, additional exploration prospects in Dornoch sands and Jurassic sands and possibly further structural upside outside the Bentley core area.
6) All of the above would explain the very high degree of confidence exhibited by the BOD members at Oilbarrel.
Having completed this analysis I am very pleased to retain my investment in XEL. IMO the outlook is excellent with the opportunity of a really good return at a lower risk than many other AIM oil companies.
I would caution that this is all IMO so DYOR. If there are any accountants on the BB it would be useful to hear your thoughts about the tax implications of a Peregrino type deal in which XEL is carried or paid their development costs in return for a stake in Bentley.
Regards and GLA,
Gramacho
Source: http://www.iii.co.uk/investment/detail/?display=discussion&code=cotn:XEL.L&it=le&action=detail&id=7635097&prevpost=7634963&nextpost=7635152
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