Inflation, strong services and manufacturing data point to interest rate increases

Strong data from the services sector, which now makes up 75% of the U.K. economy (and 80% of jobs), a resilient manufacturing base, and inflation way above target makes interest rate increases likely as we move into 2011. Despite negative GDP growth in Q4 2010, the services data from January has given reassurance that the winter weather causes the dip in the economy and that a further period of contraction was unlikely. Consumer confidence remains weak with VAT (Value added Tax) increasing in January adding to the tale of woe for households, partly as a result of tax rises but also huge increases in fuel and food costs during 2010 and 2011. The UN released data last week that a basket of food commodities was not at an all time high, and Brent Crude went as high as $103 a barrel due to the potential impact on the Suez Canal due the Egyptian crisis.

Expectations are that U.K. interest rates will rise 0.25% in April or May, with further increases in the Autumn, with a 1.25% rate by the end of 2011. Good news for savers, bad for borrowers! The Bank of England MPC (Monetary Policy Committee) meets on February 9th and 10th. It is considered unlikely that the Committee will increase rates at this meeting, but given the data flow and the headline rate of inflation at 3.7%, which is double the BOE target, increases won't be far away.

Arbuthnot's Youngson take on Xcite Energy

FROM PROACTIVE INVESTORS
http://www.proactiveinvestors.co.uk/companies/news/25128/xcite-energy-city-analyst-looks-ahead-to-bentley-fields-important-milestones--25128.html

Xcite Energy: City analyst looks ahead to Bentley field’s important milestones

Tuesday, February 01, 2011 by Jamie Ashcroft

The recent horizontal appraisal well and flow test proved that the Bentley field could be commercial. Now Xcite is preparing a new CPR which is expected to increase recoverable reserves

Xcite Energy (LON:XEL, TSX-V:XEL)  is likely to become one of the top three independent oil firms in the North Sea as it pushes ahead with the development of the Bentley field, according to Arbuthnot analyst Dougie Youngson.

The recent horizontal appraisal and flow test was one of AIM’s big stories in 2010. For investors the proposition was both clear and binary. 

Xcite was already sitting on substantial oil-in-place volumes between 109 - 235 million barrels. However it is heavy oil (10 to 12 degree API) and the big question was whether or not Xcite would be able to recover sufficient volumes to make the oilfield development commercially viable.

So Xcite drilled the all important 9/3b-6 well, which would conduct a flow test from a horizontal well section across 1,800 feet of gross reservoir.

Frenzied investors poured into the stock ahead of the pivotal well.  In anticipation the shares soared, rising a staggering 550 percent from 65 pence in August to its peak at 425 pence per share as the testing results were announced on 21 December 2010.

The Xcite team conducted multi-rate flow tests, culminating in a final stabilised flow rate of 2,900 stock tank barrels of oil per day.

Ultimately the flow test proved that Xcite would be able to draw up enough of the heavy oil to make the resource commercial.

With all that Xcitement now behind us where does the company go from here? 

First and foremost Xcite and its partners - a group collectively known as the Bentley Alliance which includes AMEC and BP - are working on a new competent persons report (CPR).

Youngson reckons the CPR will boost the field’s current reserves.

“The next major piece of news should be the updated CPR, which we are expecting in late February or early March,” Youngson told Proactive Investors.

He adds: “If you strip out the weather problems that they had, drilling was better than expected and the flow test results were much better than expected as well,” Youngson added.

“So the CPR is going to be pretty interesting because it will see some of the contingent resources moving up into reserves and we’ll get a better feel for how big the project is actually going to be.

“Certainly the higher end of (current) expectations is probably a reasonable assumption.”

Arbuthnot rates Xcite as a ‘strong buy’ with a 600 pence target – which implies around 65 percent upside from the current price of 362 pence per share.

The analyst stressed that the updated CPR will provide the basis for the field’s development plan and drilling is likely to start in the fourth quarter of 2011.

Youngson adds: “If (Xcite) starts drilling early enough we may see a little bit of production this year, but it is really about development drilling and the subsequent ramping up of production into 2012.”

Xcite and the Bentley alliance are considering how they will fund the initial development phase, which will ultimately lead to first oil in 2012.

In the meantime it is keeping its finances in order and revising certain development contracts.

Just this morning it extended a binding letter of intent (LOI) for a production rig - the original LOI was first announced in November and it has been extended twice since then. 

It has been extended by mutual consent to 11 February 2011, with no amendment to the existing US$4 million termination fee payable by Xcite in the event it does not enter into a definitive agreement by this date.

Xcite also secured more short-term funding with a £5 million draw down on its Standby Equity Distribution Agreement (SEDA) with Yorkville Advisors’ investment fund YA Global Master SPV Ltd.

Once the project financing deals are taken care of, the alliance will press ahead with oilfield development.

Xcite shares will have been the standout success story among the portfolio’s of some plucky investors. The stock truly transformed over the past twelve months. This time last year Xcite shares were changing hands at around 40 pence.

While the year began slowly the spudding of the appraisal well sparked investor interest in September. Just a few short weeks later a better than expected drilling update from the well’s vertical section took this interest up another gear.

The vertical pilot section of the well encountered a larger than expected oil column towards the end of October.

Xcite shares finally broke through the 300 pence level in early December, after testing the level a few times in mid-November. The stock reached a new high at 332 pence on 3 December 2010. 

On 21 December Xcite shares rallied sharply as the company announced the news of the successful flow results. The stock hit a new high in of 425.25 pence in intraday trading.

Since then some, quite understandable, profit taking saw the stock pull back to the current level of around 360 pence. With a series of important milestones ahead, it looks like there might be more to come from this popular oil junior.

Plenty of rumours with Rockhopper and some look credible

Interesting the rumours on the iii.co.uk bulletin board on a Rockhopper oil strike from a respected poster with a good history. Now the pieces are falling in to place why others "in the know"in the City advised topping up last week, though I considered Rockhopper at the upper end of risk compared with my other holdings. I hear a couple of guys from one of the brokers were down in Stanley....and leaking some interesting emails. Some are bull, but one or two look credible with respect to supplies moving out to the Ocean Guardian rig which would only be used if there was hydrocarbon shows. Looks like it may be a nice surprise early next week, or someone's put a hell of a smokescreen in the square mile!

Gordon Gecko, Wall Street and some great quotes

The DVD of WALL STREET 2, Money never sleeps has just come out and it reminded me what a great film, Oliver Stone's original Wall Street (1987) was, with the anti-hero, Gordon Gecko played by Michael Douglas. Strangely enough, Gecko was one of the reason's I originally got interested investing, funny given he's such a nasty piece of work! 


Here are my favourite Gecko quotes:
"The point is ladies and gentlemen that greed, for lack of a better word, is good. "


"Ever wonder why fund managers can't beat the S&P 500? 'Cause they're sheep, and sheep get slaughtered. " - HOW TRUE!!!


"If you need a friend, get a dog."


"Lunch is for wimps!"

Portfolio review of the week - 5th February 2011

The Dow Jones Industrials ended the week up 2.3% after a 30 point rise on Friday to 12,092 and the FTSE 100 closed the week at 5,997, a rise of 2% for the week.

A mixed non-farm payroll jobs report yesterday gave the markets confidence that the U.S. Federal Reserve would not move quickly to raise interest rate or curtail the quantitative easing programme where it creates money to buy government bonds and other financial assets, in order to increase the supply of money in the economy. Since early 2009 the U.S. government has spent or committed $2.3 trillion dollars to this programme. The theory is that by buying bonds and taking them off the market, the Federal Reserve pushes up their prices and push down their yields which mean lower interest rates for borrowers and encourages spending. In addition, it encourages investors into stocks and corporate bonds which offer higher returns than government bonds and hence it is generally good for investors. The downside of the programme is that it creates inflationary pressure in the economy since in effect the central bank is printing money. The Bank of England has also spent £200 billion on quantitative easing.

On the Contrarian Investor UK portfolio front its been a relatively stable week with just a couple of small additional purchases in Rockhopper Exploration (RKH).

Xcite Energy (XEL) - Xcite finished at £3.62, after a 6p rise on Friday but down 8p for the week. The revised rig deadline of February 11th is now the focus with the speculation behind the delays in signing with British American offshore for the Rowan Norway Jack-up rig intensifying. I agree with the view that it is strange that that the contract signing has been delayed for the second time when the cost and specification of Rowan Norway have been known for so long.  I am sure there is something underlying this further postponement - either waiting for early visibility of the CPR (Competent persons report) which will move oil resources to official reserves which is due for publication late February or early March, or a farm in deal or even takeover with a third party. It would be very surprising if the weeks of extra delays are just due to lawyers bickering about contractual terms. t is also interesting that Xcite called on the SEDA (Standby equity drawdown agreement) for an additional £5 million this week, is this drawdown needed for the rig? With February 11th not aware, all will become clearer this week.

Bowleven (BLVN) - Cameroon oil explorer Bowleven had a better day yesterday with a 2.3% rise to £3.57 giving a flat week. No news to report on this one but the Sapele 1 drill update cannot be far away.

Rockhopper (RKH) - A 5% rise on the week but no leaks at all from the progress of the 14/10-3 North Falklands basin well. It's a case of watch and wait.

Weatherly International (WTI), Sirius Minerals, (SXX) Angel Mining (ANGM) -Again nothing to report but I am surprised that an update on gold shipping has not been forthcoming from Angel given it was expected in January. A reasonable 4% rise on WTI as we await further news on the listing of CAR (China Africa Resources) on AIM which is due in April and which WTI shareholders will get an automatic holding.

Next step should be more interesting on the RNS front, potentially we have - Xcite Energy (rig news), Angel (gold shipment update), Bowleven (Sapele 1 update) and most importantly Rockhopper (14/10-3 well update). Hopefully more to write about next week!

Imagination Tech (IMG) - Unfortunately this fell through a stop loss and position closed.

U.S. jobs data shows recovery

Non farm payroll data just released at 1.30pm shows that U.S. unemployment rate fell to 9.0% in January against an expected 9.5% rate, as nonfarm payrolls rose by
36,000, against expectations of a 140,000 gain.

It shows that the U.S. economy continues to improve, with over a million jobs created since thespring of 2010. Wall street futures are up on the news which is seen bymarket watchers as a key data point.

Global food price rises adds to inflation risks

The United Nations Food and Agriculture Organization (UN FAO) said today that food prices had reached an all time high following the impact of the Egyptian crisis and potential knock on effect to traffic through the Suez Canal.

The FAO measures food prices from an index made up of a basket of key commodities such as wheat, milk, oil and sugar.The index hit averaged 230.7 points in January, up from 223.1 points in December and 206 in November. Ten years ago, the index was at 90, illustrating how prices have soared in the last five years. The FAO's Cereals Price Index, which includes prices of main food staples such as wheat, rice and corn, rose to an average of 244.8 points in January, the highest level since July 2008.

Prices have been driven up by a combination of increasing consumption, stockpiling and speculation. Bad weather has not helped, for example, with Australia badly hit in recent months by flooding and Argentina suffering a prolonged drought hitting beef production.

Rising food costs is bad news for the developed economies with inflation risks  increasing as a result of a general rise in commodity prices e.g. Brent Crude went over $103 dollars today. The Bank of England has a difficult task ahead with the threat of inflation but with sluggish growth.

Big day for markets tomorrow with U.S. employment data

The U.S. Dow Jones recovered to close up 20 points at 12,062.  U.S. Federal Reserve Chairman Ben Bernanke helped to revitalise the U.S. indices after he told reporters that recent economic data suggests that "a self-sustaining recovery in consumer and business spending may be taking hold" and said he expects the economy to grow at a faster pace in 2011. Bernanke minimised inflation pressures, which he said, in addition to a still-high unemployment rate, continues to justify the Fed's accommodative monetary policy and asset purchase program.

The markets will be highly geared tomorrow to the much anticipated U.S. non-farm payroll unemployment data for January. Economists are expecting payrolls to climb by145,000 in January after rising 103,000 in December. Expect a sluggish U.K. market until the news is confirmed before the U.S market open

No news again for Contrarian Investor UK portfolio, but tomorrow's another day!

Not one interesting RNS to get my teeth stuck into today for the Contrarian Investor UK portfolio. Surprisingly for a Falklands Islands oil share, even Rockhopper (RKH), seems to be keeping a firm lid on any rumours on the outcome of its latest drill, be they good or bad. Chief Executive, Sam Moody, Chief Executive, at Rockhopper seems to be keeping a tight ship compared with the likes of Desire Petroleum (DES) where we saw 30%+ swings in the share price on leaks, some more accurate than others. Nothing like that with RKH, a few pence here and there but nothing to write home about.

The FTSE 100 retreated 17 points to finish at 5,983 despite some good news from the U.K. service sector in January (services now represent 75% of the U.K. economy) which seemed to indicate that a double dip recession was unlikely due a further economic contraction in Q1 this year.

Shell dropped 3.3% over disappointment that its $18.6 billion profit in 2010 versus $9.8 billion in 2009 was not even higher due to some refinery output issues. Also analysts were expecting a dividend rise which didn't materialise.  At the other end of the spectrum, Glaxo Smithkline (GSK) rose 3.6% to £11.68 as it announced a £2 billion share buy back and an increase in its dividend of 7% to 65p. Sales for the year to 31 December was down to £28.4bn a 1% decline from the previous year, with its main pharmaceuticals business seeing sales drop 11% due to generic competition for some of its key drugs. Pre-tax profits were down to £4.5bn from £8.7bn.

Using CFDs (Contracts for Difference) and Spread Bets

When I first started trading my own portfolio I would buy actually equity positions on the stock market. I found that a lot of my money was tied up owning too little positions plus owning actual shares means you do not have the advantages of other vehicles such as guaranteed stop losses and the ability to leverage to buy a larger positon than you ordinarily would.

Several years ago I started using Contracts for Difference (CFD) and Spread Betting thorough Igmarkets and IgIndex respectively.

So what are the pros and cons of each:

CFD's
Pros - ability to leverage a position using margin (i.e. you can buy £20,000 of a FTSE 100 company for £1000 margin down payment), guaranteed stop losses are available (even if a company goes bust you are guaranteed the stop price, with normal shares you often cannot sell in a steeply declining market), can go short (sell a share with a view it is going down) or long (buy a share with a view it is going up), free from UK stamp duty
Cons - It is a leveraged product so you need to be careful about having enough margin if the price of one your portfolio constituents suddenly moves, you pay interest on the cash value of the positions you own (which can add up over time), guaranteed stops not always available on volatile AIM stocks, you are still subject to capital gains tax (if you go over the annual allowance)

Spread bet
Pros - leveraged like CFD's, not subject to capital gains tax or stamp duty (since technically a bet), guaranteed stops available (though not always on AIM)
Cons- limited time scale (you have to buy a position based on price 1, 3 or 6 months ahead), you pay a premium in the spread (the difference between buy and sell which is increased on guaranteed stops), a large margin can be required especially for small cap shares

FTSE back to 6,000 mark on manufacturing data

The FTSE 100 closed up 42 points at 6,000 after U.K. manufacturing data proved particularly strong and positive corporate results from constituent Imperial Tobacco (IMT) which ended up 6% after its sales for the final quarter of 2010 were up 5%. Strength in commodity stocks also helped the index. The U.S. market is relatively stable, with the DOW up 11 points at 12,051.

On the Contrarian Investor UK portfolio front its been a stable but uninteresting day. Every stock finished up, but by relatively small percentages. Interesting that Rockhopper (RKH) finished in positive territory after a sell off this morning and Xcite had some relatively big buys at the close. By generally nothing much to report. Hopefully some good RNS's to get my teeth stuck into tomorrow! Sorry to readers that there's nothing earth shattering to write about.

Rockhopper tension builds

I haven't posted much on North Falklands basin oil explorer Rockhopper this week despite buying a few spread bets over the last week or so. Most of the rumours coming out of the "pub in Port Stanley" brigade don't seem to hold any credence and after all the nonsense relating to Desire Petroleum and the huge swings in share price purely on a couple of bulletin board posts I'm taking everything with a big "pinch of salt".

Unlike other Falkland Oil drillers, Rockhopper isn't a complete shot in the dark i.e. not a binary bet of betting on exploration success. Goldman have RKH as a conviction buy with a 12 month target gives so the current £3.68 share price, because of the the Sea Lion discovery with its 200 million barrel reserves. This offers downside protection to any failure on the current well drill.

If the 14/10-3 well has a positive hydrocarbon result this will be transformational for Rockhopper. The new well is around 8km from the Sea Lion discovery, and oil will confirm the geology of the oil structure in the North Falklands basin. It is likely in this event that recoverable reserves could be closer to 1 billion barrels not 200 million. This would make it an exceptional commercial opportunity and move the share price many multiples higher.

So in summary I like Rockhopper's risk/reward ratio because £3.68 is protected on the downside by 200 million barrels of oil and the upside is £10-20. This is different from Desire for this key reason, the company already has oil and plenty of cash in the bank for additional wells and seismics if 14/10-3 fails. I believe a buy below £4 with news expected any day now, is not foolhardy by any means and not a roulette wheel gamble. I understand the caution after a lot of smaller investors lost buckets of money on Desire Petroleum, but we have a different much sharper animal here! Good luck all holders, I'm glued to the RNS screen.

Bit of Xcite fun whilst we wait for take off

In a dreary office in Banchory Business Centre (nr Aberdeen, Scotland), Jan 31st, raining hard, 2 degrees centigrade. Two cups of cold brown coffee and 3 day old croissants.

"Richard Smith (Chief  Exec Xcite Energy): So what do we do guys? Those folks at British American want that damn rig signed and they keep ringing me every day. I've put them off until the 11th with some bull about our lawyers not liking a clause.

Charles Lucas-Clements (Director of Strategy and Business Dev. Xcite Energy): Yeah, but the guys in London want to get £11 out of Stat and we can't  drop the Rowan Norway yet!

Richard: Just keep extending the rig talks until the city boys do the deal. I've bought the set of irons and we complete on the Spanish villa in March. I can't take another god damned week in Banchory!

Charles: I know, I know. If we have to take another trip on one of those helicopters to the rig again with my air sickness that'll be it for me !!

Richard: So you reckon we push up the takeover price to more like 15 quid if the CPR guy finishes?

Charles: Yep. He reckons it looking like 250 million reserves so at £11 they're buying us on the cheap.

Richard: Sod it, I've got my eye on that vintage Ferrari. Keep those idiots on the bulletin sweating another couple of weeks.

Charles: Agree. Let's feed them a few more lines. Wasn't it great when they were all following Betty Knutsen for the flow test and we weren't even using it. Ha! Ha! Ha!

Richard: Phone the PR company and tell them to post some crap on the bulletin boards. That'll keep 'em guessing! Saw some idiots are selling their shares!

Charles: Yep, I gave them a big hint at oil barrel but they didn't take the bait! What can you do!

Richard: Anyway, I'm busy sorting out the Caribbean trip for the whole of March once we do the big deal. Another wet weekend in Scotland...no, no!"

(no offence intended of course Xcite board of directors!)

Xcite Energy rig signing postponed again but maybe for CPR?

Two RNS's this morning, one confirming that Xcite are still in negotiations with British American Offshore on Rowan Norway rig and deadline has been extended to February 11th and other saying that the company has had a further £5 million drawdown on the SEDA (Standby Equity Drawdown agreement) where shares are issued in exchange for cash. Groan.... more waiting!!

The 11th February date could well tie in with the Competent Persons Report (CPR) which is due late February or March. Apart from this, I cannot see a valid reason for a delay apart from takeover talks.

01 February 2011

THIS ANNOUNCEMENT IS NOT FOR RELEASE, PUBLICATION OR DISTRIBUTION IN OR INTO THE UNITED STATES

TSX-V, LSE-AIM: XEL

1 February 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 11 February 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.

Some good stock market podcasts

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?