On January 27th, the U.S. Financial Crisis Enquiry Commission delivered its report. It was created to "examine the causes, domestic and global, of the current financial and economic crisis in the United States." The Commission was established as part of the Fraud Enforcement and Recovery Act (Public Law 111-21) passed by Congress and signed by President Obama in May 2009. This independent, 10-member panel was composed of private citizens with experience in areas such as housing, economics, finance, market regulation, banking and consumer protection. Six members of the Commission were appointed by the Democratic leadership of Congress and four by the Republican leadership. The Commission’s statutory instructions set out 22 specific topics for inquiry and called for the examination of the collapse of major financial institutions that failed or would have failed if not for exceptional assistance from the government.
The Commission's findings are available at:
Conclusions: http://c0182732.cdn1.cloudfiles.rackspacecloud.com/fcic_final_report_conclusions.pdf
Full report: http://c0182732.cdn1.cloudfiles.rackspacecloud.com/fcic_final_report_full.pdf
Sunday, February 20, 2011
Pessimism virus infects Rockhopper - great for a Contrarian!
I have been thinking about my Rockhopper (RKH) investment quite a bit recently as the share price continues its rapid decent following the 14/10-3 well result. Following the euphoria of Rockhopper's Sea Lion discovery on May 6th, 2010 not much has gone right for the Falkland Island oil explorers. Desire Petroleum exemplified the issues with wild oscillations in its share price, which inevitably lost most private investors money, and culminating in the disastrous Rachel North 14/15-2 well which was announced as an oil discovery on December 3rd 2010 and then 3 days later, news came it was actually water.
Its easy to fall in love with a share and when it comes to the Falkland Island explorers I do not fall into this camp. I generally have a massive degree of scepticism. Though I was lucky enough to benefit from Rockhopper's Sea Lion discovery, I manage my investments in the Falkland Islands oil explorers on fundamentals not on luck.
So looking at Rockhopper you have to reexamine the facts to be sure that your investment is not just a speculative no hoper.
Rockhopper has:
Note:
Correction: Rockhopper Sea Lion discovery
Its easy to fall in love with a share and when it comes to the Falkland Island explorers I do not fall into this camp. I generally have a massive degree of scepticism. Though I was lucky enough to benefit from Rockhopper's Sea Lion discovery, I manage my investments in the Falkland Islands oil explorers on fundamentals not on luck.
So looking at Rockhopper you have to reexamine the facts to be sure that your investment is not just a speculative no hoper.
Rockhopper has:
- 170 million barrels of oil confirmed reserves following a CPR at Sea Lion (14/10-2) which is commercial on a standalone basis
- Current market capitalisation of £700 million underpinned by Sea Lion find
- Around £200 million in cash for at at least 6 further wells in the North Falkland basin
- Live oil shows found 8km from Sea Lion with 14/10-3 well (though non commercial on a stand alone basis). The well encountered good quality reservoir; hydrocarbons were present; and the sands were charged. (see FT.com note below)
- Given the proximity of the next well 14/10-4 (2 km from Sea Lion) high probability of success
- Full programme of 3D seismics due by second half 2011
Note:
Correction: Rockhopper Sea Lion discovery
Published: February 14 2011 04:47 | Last updated: February 14 2011 04:47
http://www.ft.com/cms/s/0/545dbce6-37e6-11e0-b91a-00144feabdc0.html#ixzz1EXNa0TZT
Saturday’s FT incorrectly stated that Rockhopper’s Sea Lion discovery was uncommercial on a stand-alone basis. Instead Rockhopper’s announcement on Friday referred to a recently drilled exploration well, 14/10-3, which it considered to be uncommercial on a stand-alone basis, despite encountering live oil.
Saturday’s FT incorrectly stated that Rockhopper’s Sea Lion discovery was uncommercial on a stand-alone basis. Instead Rockhopper’s announcement on Friday referred to a recently drilled exploration well, 14/10-3, which it considered to be uncommercial on a stand-alone basis, despite encountering live oil.
Rockhopper Exploration Edison report 14th February 2011
Summary of Edison report on Rockhopper (RKH) 14th February 2011:
Although a significant oil find would have been the optimal outcome from well 14/10-3, two out of three successful wells would be at the upper stretch of exploration odds. This aggressively located exploration well was testing the extent of the Sea Lion fan and located 8km from the Sea Lion discovery. We see some clear positives from the result: the well encountered good quality reservoir; hydrocarbons were present; and the sands were charged. Reservoir development looks encouraging in the northern lobe of the fan and potentially in the newly identified S2 feature. RKH will now focus on drilling a number of appraisal wells on the southern lobe of the Sea Lion feature. We do not believe this result has any impact on the P50 for Sea Lion. The work moves from exploration geology to development geology. The sharp fall in the share price presents an interesting opportunity ahead of the lower risk first appraisal well, located within the Sea Lion Discovery Area.
The long game: Significant work programme ahead
A second CPR could be coming in H211. The timing will allow for data from the current drilling campaign and the additional 3D seismic currently being shot to be incorporated. It leaves time for the work required to model the reservoir distribution across the multiple stacked fans in Sea Lion. The system has an aerial extent of over 50km2, with current seismic showing strong indications of good reservoir packages elsewhere in the fan, which appears to have been confirmed by this well. Rockhopper has indicated that up to six wells may be required to fully appraise the field, and discussions are progressing to agree a new contract consisting of a possible three firm wells and five option extensions.
Valuation: Covered by existing find, with exploration upside
The current EV is c $701m. Using an $8/boe value for a commercial discovery (the RPS Energy CPR uses $17/boe) would suggest the market is pricing in net reserves of 87mmbbls. RKH believes that Sea Lion is commercial as a standalone discovery. While there are some concerns about a waxy crude, associated gas could be used for power and heat for an FPSO and we do not believe this will prove to be a major issue. Borders & Southern has made similar indications around its acreage, suggesting that a 100mmbbl find would be commercial. As the RKH acreage is in significantly shallower water, drilling and operating costs are likely to be lower.
Note: Net cash = $374 million (estimated post November placing)
Although a significant oil find would have been the optimal outcome from well 14/10-3, two out of three successful wells would be at the upper stretch of exploration odds. This aggressively located exploration well was testing the extent of the Sea Lion fan and located 8km from the Sea Lion discovery. We see some clear positives from the result: the well encountered good quality reservoir; hydrocarbons were present; and the sands were charged. Reservoir development looks encouraging in the northern lobe of the fan and potentially in the newly identified S2 feature. RKH will now focus on drilling a number of appraisal wells on the southern lobe of the Sea Lion feature. We do not believe this result has any impact on the P50 for Sea Lion. The work moves from exploration geology to development geology. The sharp fall in the share price presents an interesting opportunity ahead of the lower risk first appraisal well, located within the Sea Lion Discovery Area.
The long game: Significant work programme ahead
A second CPR could be coming in H211. The timing will allow for data from the current drilling campaign and the additional 3D seismic currently being shot to be incorporated. It leaves time for the work required to model the reservoir distribution across the multiple stacked fans in Sea Lion. The system has an aerial extent of over 50km2, with current seismic showing strong indications of good reservoir packages elsewhere in the fan, which appears to have been confirmed by this well. Rockhopper has indicated that up to six wells may be required to fully appraise the field, and discussions are progressing to agree a new contract consisting of a possible three firm wells and five option extensions.
Valuation: Covered by existing find, with exploration upside
The current EV is c $701m. Using an $8/boe value for a commercial discovery (the RPS Energy CPR uses $17/boe) would suggest the market is pricing in net reserves of 87mmbbls. RKH believes that Sea Lion is commercial as a standalone discovery. While there are some concerns about a waxy crude, associated gas could be used for power and heat for an FPSO and we do not believe this will prove to be a major issue. Borders & Southern has made similar indications around its acreage, suggesting that a 100mmbbl find would be commercial. As the RKH acreage is in significantly shallower water, drilling and operating costs are likely to be lower.
Note: Net cash = $374 million (estimated post November placing)
UK biotech and pharma heads into troubled waters
Early in 2010, Anglo Swedish group AstraZeneca (AZN) announced that it was closing its UK Research and Development centre in Loughborough by the end of 2011 with the loss of up to 1800 jobs. In January, U.S. based Pfizer (PFE) announced the closure of the Sandwich research facility with the loss of 1300 jobs. The excuse has been the continued consolidation of research facilities and the loss of incentives to operate in the U.K. versus other developed markets.
It is true that a series of drug price cuts in the U.K. under the last Labour government under the PPRS (Pharmaceutical Profit Regulation Scheme) to try and offset the rising drugs bill, has given less incentive to spend millions of pounds on facilities such as Sandwich, and more incentive to use low cost operations in places like India or those with higher tax breaks such as the United States. As I wrote in a previous Contrarian Investor UK post, "Is the big pharma model broken for good?, the major pharmaceutical companies are beset by rising drug development costs, yet with a less productive research system than ever and large numbers of big selling products going off patent (http://contrarianinvestoruk.blogspot.com/2011/01/is-big-pharma-drug-model-broken-for.html).
U.K. biotech is not fairing much better. Many of the hoped for stars of the industry have had major drug failures over the last few years highlighting the fact that as few as 16% of new drugs ever make it through clinical trials. Those companies with just one or two development products have significant risks. There are plenty of home grown examples to illustrate this point.
The most infamous is probably British Biotech, a company founded in 1986 and once close to membership of the FTSE 100. Peter McCullagh was ditched as Chief Executive in 1998 when a whistleblower, Andew Millar, alleged that investors were deceived with an over-optimistic view of its cancer drugs.
Its key product marimastat was touted as the "cure for cancer", but ultimately failed in clinical studies and Millar alleged that bad data was concealed. Co-founder, Brian Richards (now Sir Brian), went on to be Chairman of Alizyme, which would ultimately have it own problems. In May 2006, British Biotech's shares peaked at just shy of £33 valuing it at £1.3 billion, when the company merged with Vernalis in 2003, it was worth around £50 million.
Alizyme (AZN) had several promising compounds in late stage development for obesity (cetilistat), ulcerative colitis (Colal-Pred) and irritable bowel syndrome (renzapride). It ultimately went into receivership at the end of 2009 when all its products failed late stage clinical trials. It was particularly unlucky for Alizyme given the drugs had passed through earlier stage clinical trials having reached their end points successfully and about 50% of drugs fail phase III testing. It was floated on AIM in 1996 and moved to the full list in 2000, before it folded in 2009.
Antisoma (ASM) once a promising company focused on anti-cancer drugs, has seen all of them fail human testing. A few years ago, Antisoma was trading close to 50p, now it is 3p! Antisoma's last hope, AS1413 in leukaemia recently had disappointing results after its lead product AS1404 for lung cancer (in partnership with Novartis) bombed in phase III trials. Its has £23 million of cash left but little else.
Ark Therapeutics (AKT) shares were once over 150p, now they are less than 5p, after the company had to withdraw its European filing for its brain cancer drug Cerepro (sitimagene ceradenovec) after a negative opinion from European regulators in December 2009 who requested additional clinical trial data.
Recently skin care specialist, Renovo (RNVO), lost nearly three-quarters of their value after the scar treatments developer admitted that its main treatment Juvista has failed to meet its goals in a phase III clinical trial in scar revision surgery. Unlike Antisoma, Renovo has £44 million in the bank and one product left in phase II trials, Prevascar, and results from this study are expected in the second half of 2011 for skin scarring reduction.
Not many examples of out and out successes come to mind from U.K. biotech, though we have major pharmaceutical players such as Glaxo Smithkline, Astra Zeneca and Shire pharmaceuticals. Compare this with the U.S., where they have Genentech (now part of Roche), Amgen, Genzyme (now part of Sanofi Aventis), Imclone (now owned by BMS), Medimmune (owned by Astra). Why the difference? - luck or judgement?
It is true that a series of drug price cuts in the U.K. under the last Labour government under the PPRS (Pharmaceutical Profit Regulation Scheme) to try and offset the rising drugs bill, has given less incentive to spend millions of pounds on facilities such as Sandwich, and more incentive to use low cost operations in places like India or those with higher tax breaks such as the United States. As I wrote in a previous Contrarian Investor UK post, "Is the big pharma model broken for good?, the major pharmaceutical companies are beset by rising drug development costs, yet with a less productive research system than ever and large numbers of big selling products going off patent (http://contrarianinvestoruk.blogspot.com/2011/01/is-big-pharma-drug-model-broken-for.html).
U.K. biotech is not fairing much better. Many of the hoped for stars of the industry have had major drug failures over the last few years highlighting the fact that as few as 16% of new drugs ever make it through clinical trials. Those companies with just one or two development products have significant risks. There are plenty of home grown examples to illustrate this point.
The most infamous is probably British Biotech, a company founded in 1986 and once close to membership of the FTSE 100. Peter McCullagh was ditched as Chief Executive in 1998 when a whistleblower, Andew Millar, alleged that investors were deceived with an over-optimistic view of its cancer drugs.
Its key product marimastat was touted as the "cure for cancer", but ultimately failed in clinical studies and Millar alleged that bad data was concealed. Co-founder, Brian Richards (now Sir Brian), went on to be Chairman of Alizyme, which would ultimately have it own problems. In May 2006, British Biotech's shares peaked at just shy of £33 valuing it at £1.3 billion, when the company merged with Vernalis in 2003, it was worth around £50 million.
Antisoma (ASM) once a promising company focused on anti-cancer drugs, has seen all of them fail human testing. A few years ago, Antisoma was trading close to 50p, now it is 3p! Antisoma's last hope, AS1413 in leukaemia recently had disappointing results after its lead product AS1404 for lung cancer (in partnership with Novartis) bombed in phase III trials. Its has £23 million of cash left but little else.
Ark Therapeutics (AKT) shares were once over 150p, now they are less than 5p, after the company had to withdraw its European filing for its brain cancer drug Cerepro (sitimagene ceradenovec) after a negative opinion from European regulators in December 2009 who requested additional clinical trial data.
Recently skin care specialist, Renovo (RNVO), lost nearly three-quarters of their value after the scar treatments developer admitted that its main treatment Juvista has failed to meet its goals in a phase III clinical trial in scar revision surgery. Unlike Antisoma, Renovo has £44 million in the bank and one product left in phase II trials, Prevascar, and results from this study are expected in the second half of 2011 for skin scarring reduction.
Not many examples of out and out successes come to mind from U.K. biotech, though we have major pharmaceutical players such as Glaxo Smithkline, Astra Zeneca and Shire pharmaceuticals. Compare this with the U.S., where they have Genentech (now part of Roche), Amgen, Genzyme (now part of Sanofi Aventis), Imclone (now owned by BMS), Medimmune (owned by Astra). Why the difference? - luck or judgement?
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