Portfolio review of the week - 26th February 2011

On Friday the FTSE 100 finished up 81 points at 6,001, down 1.3% on the week. The Dow Jones Jones Industrials finished up 62 points, or 0.5%, at 12,130, a 2.1% fall for the week and the worst since mid August 2010. Shares rebounded on Friday as the oil price stabilised and the markets began to be reassured that the Libya's 2.5% contribution to global oil supplies could be covered by other oil producers and that Colonel Gaddafi's position was becoming increasingly precarious. The U.K. market declined less than across the Atlantic because of the greater number of oil and defensive stocks in the FTSE 100.


The U.K. market was thrown into turmoil yesterday as the London Stock exchange computer system crashed for 4 hours, meaning trading was suspended for most of the morning.To coincide with the LSE problems, the revised Q4 2010 GDP figures were released by the Office of National Statistics showing a revised 0.6% decline in the U.K. economy (versus previous estimates of 0.5%).


Despite the market panic in the middle of the week, the Contrarian Investor UK portfolio had mixed fortunes but I took some opportunities during price dips to top up on Xcite Energy (XEL) and Weatherly International. I also bought into another North Sea oil company, Encore Oil for the first time (EO.). 


Xcite Energy (XEL) - Xcite had a good rise on Friday and finished the week at 346p, a 1.8% decline. There have been some reassuring noises that a farm in or placing may not be needed to bring the Bentley heavy oil field into production. The interview published by Rupert Cole (CFO) indicates that any fund raising will be on Xcite's terms not on the institutions and that they have several options open to them (http://contrarianinvestoruk.blogspot.com/2011/02/xcites-cfo-cole-confirms-partner-may.html). 


An update from British American offshore (Rowan Companies) who are currently constructing Xcite's rig, the Rowan Norway also confirms delivery of the rig is due June 2011, with operations starting in the North Sea in November 2011 (with the transit time from the Duabi construction site). Looking at the SEDA (standby equity drawdown agreement), there is insufficient funds remaining to complete the final $30 million instalment due on delivery in June. Therefore it would be anticipated that the company would need alternative funds by this date. With the CPR (competent persons report) due early in March, it is inevitable that Xcite will leverage this report to find the funds its needs and this is not necessarily a discounted placing. As I have stated before, using a bank loan or bond offer seems possible. Either way, went it went back below £3.40 this week, it was a great buying opportunity.


http://www.rowancompanies.com/_filelib/FileCabinet/PDFs/Offshore-CM.pdf?FileName=Offshore-CM.pdf
Rig is under construction with delivery expected in June 2011. Contract executed for combined drilling and production operations with an initial term of 240 days followed by a one year priced option in the low $250s. Production fee of $1 per barrel of oil produced is also payable during the initial term. Customer is required to provide security for the initial term totaling $60 million by the date of shipyard delivery of the rig. The first installment of $15 million was received on February 17, 2011. The second $15 million installment is due February 25, 2011, with the final installment of $30 million due upon delivery of the rig from the shipyard. Rig is expected to commence operations in November 2011.
Rockhopper (RKH) - Another bad week the falklands oil explorer, with the shares dropping 12% to 233p. I have covered the fact earlier in the week that the current market capitalisation (£600 million) is daft with what the RKH have already discovered at Sea Lion (http://contrarianinvestoruk.blogspot.com/2011/02/taking-advantage-of-silly-valuations-on.html). But this frontier explorer is out of favour, and the private investor stampede has moved onto pasteur's new for now! With drilling results from the 14/10-4 well due around mid-March, it is inevitable that this share should starting perking up in a couple of weeks time. Hopefully 230p is the new base, but you never know with a Falklands oil stock!


Encore oil (EO.) - I took the opportunity to buy into North Sea oil explorer, Encore Oil this week, given the company prospects and news flow over the next few weeks. There was talk of a takeover this week by Premier Oil, but this seems a bit far fetched.

Encore own a 16.6% interest in the Cladhan North Sea licence with Sterling Resources (73.4%) and Dyas (10%). Drilling is expected to commence within the next few days at Cladhan (Blocks 210/29a & 210/30a) with the flotilla of vessels apparently on its way. The Burgman prospect is expected to spud any day soon using Encore's contracted rig the Galaxy II.

Sirius Minerals - Another terrible week for potash company Sirius, with a 15% to 13p. No bad news, such sentiment. Topped up a little at 12.5p and now we wait!

Bowleven (BLVN) - Bowleven had a good week with the share reiterated as being on Goldman Sachs conviction buy list, despite rumours of issues in Cameroon which now seem to have been largely diffused. Goldman has said that recent share underperformance has created an attractive entry point into the stock - "We view the upcoming drilling campaign offshore Cameroon positively, with recent success at the Sapele prospect helping to de-risk the surrounding acreage,". The target price was cut to 578p from 623p, with drilling at the Cameroon Sapele-1 prematurely halted because of high pressure gas which the drilling equipment was not specified to handle.The shares rose 5% on the week to 335p.

Weatherly International (WTI) - The interim results this week had plenty of encouraging news from this Namibian copper company (http://contrarianinvestoruk.blogspot.com/2011/02/weatherly-international-interim-results.html). Topped up on WTI. I have great confidence that we will see Weatherly shares significantly higher within weeks.

FT.com February 23rd - Bowleven and Encore Oil

London small caps: Broker upgrade boosts Bowleven
By Bryce Elder
Published: February 23 2011 19:39 | Last updated: February 23 2011 19:39


Bowleven rose 3.2 per cent to 323p after Goldman Sachs added the oil explorer to its “conviction buy” list on valuation grounds. Investors were putting no value to Bowleven’s drilling campaign due to start at the Etinde field offshore Cameroon, even though success had the potential to lift the stock above £10, the broker said.

Encore Oil was up by 3.7 per cent to 120½p following press speculation that Premier Oil would agree a bid of around 220p per share for its North Sea peer before May.

“First up, it would be bizarre, in our view, if two companies had agreed a price for a deal and then waited for up to two months to announce it,” said RBS analyst Phil Corbett, who also doubted whether Encore’s exploration portfolio would be of interest to Premier. “Given the market tends to place much greater value on exploration than the industry, and Premier’s only major foray into corporate acquisitions in recent years was through the distressed sale of Oilexco, we would discount these reports for now,” he said.


Source: http://www.ft.com/cms/s/0/eb2119da-3f7e-11e0-a1ba-00144feabdc0.html#axzz1ErFqLn2A

Hurray, a positive day at last for the portfolio, despite FTSE falls!

Despite a nasty day for the FTSE 100 (down 73 to 5,924) and Dow Jones Industrials (currently down 100 to 12,114) it was a positive day for most of the Contrarian Investor stocks. News that The Bank of England’s Monetary Policy Committee (MPC) had moved a little closer to lifting interest rates when it met earlier this was announced today as Spencer Dale, the Bank's chief economist, joined Andrew Sentance and Martin Weale, who voted for higher rates the previous month, in calling for a rate hike. So the vote to retain U.K. base rates at 0.5% was 6-3. No doubt the MPC will be worried about the rising oil price with its impact on inflation and negative influence on economic growth.

Bowleven (BLVN) had its second day of gains, finishing up 10p at 323p with it being reiterated as a Goldman Sach's conviction buy. Goldman has said that recent share underperformance has created an attractive entry point into the stock - "We view the upcoming drilling campaign offshore Cameroon positively, with recent success at the Sapele prospect helping to de-risk the surrounding acreage,". The target price was cut to 578p from 623p, with drilling at the Cameroon Sapele-1 prematurely halted because of high pressure gas which the drilling equipment was not specified to handle. Things appear to be calming down a little in Cameroon, with President Paul Biya reportedly not running for re-election later this year after 28 years in power.

Xcite (XEL) finished up 6.5p at 344p and even Rockhopper (RKH) was in the blue, up 3p at 235p. Could this be the end of the Rockhopper slide at last? Disappointing to see Weatherly international move up only 2% after the positive comments on the interim results report.  The one glitch was the continued slide in Sirius Minerals (SXX) to 13.38p, down 5%.

I took the plunge and bought North Sea oil play, Encore Oil (EO) as it has been on my watch list for a while and around 120p it should be a strong entry point. Didn't want to buy yet another oil company but its North Sea so less risky, oil is going through the roof and frankly I've been struggling to find many decent bets outside of commodity stocks so far.

Catcher North Sea failure hits AIM oil stock sentiment

AIM oil stocks have been taking a beating this morning after Nautical Petreoleum (NPE) and Encore Oil (EO) announced a poor result from their Catcher North Sea field (majority owned by Premier Oil). Encore is currently down 17% and Nautical is down14.5% on the news that the well had encountered gas rather than oil with a poor reservoir quality making it borderline economic. Nautical and Encore both own 15% of the Catcher field.

The bad news in the North Sea was accompanied by a disappointing update fromNighthawk Energy (HAWK) ( a previous holding from 2010 which was fortunately dumped early on as poor data began to be announced) from their Jolly Ranch project in the U.S.where oil recovery had been weaker than expected due to maintenance and well optimisation work. HAWK is currently down 8% today.

So my holdings in Bowleven, Xcite and Rockhopper are all suffering as a result of this negative sentiment. The difference with all these holdings is that they have substantial proven resources, and with the exception of Rockhopper, are derisked (though it still has £200 million in the bank for further appraisal wells and proven reserves of 200 million barrels at Sea Lion). Xcite encountered a larger than expected oil column and top end flow rates in December and reserves are likely to be confirmed of 160-250 mm barrels when the full CPR is published in late February or early March. As they say, there are AIM stocks, and there are AIM stocks!! - not for Widows and Orphans.