Portfolio Update - February 28th 2010

A relatively benign week on the markets but a good month for equities in general. The FTSE 100 rose 76 points to 5,354 on Friday, whilst U.S. stocks finished modestly higher (DOW JONES Industrials 10,325 +4 points) to have their best month since November (DOW +2.6%, NASDAQ +4.2%, S&P 500 +1.5%, FTSE 100 +2.6% for the month)

On Friday, the U.S. Commerce Department reported that GDP grew at a 5.9% the fourth quarter of 2009, the fastest rate since the third quarter of 2003 confirming the the American economy is solidly moving out of recession. This compared with the U.K.’s revised GDP of 0.3%.

The portfolio was hit hard this week by the disappointing news from Nighthawk Energy (HAWK), highlighting the risks and rewards of investing in small cap stocks. Contrarian Investor UK is currently assessing some new ideas for the portfolio with a view to rebalancing to a more diversified portfolio.

Nighthawk Energy (HAWK) – On Tuesday, Nighthawk finally issued a more comprehensive report on the Jolly Ranch shale oil and gas play in the U.S.. The results were poor, with the field still producing little more than 150 barrels per day (BPD) despite promises as the Annual General Meeting (AGM) that production would be closer to 800-1000 by quarter one 2010. The horizontal drilling technique used on some of the wells to extract oil seems to have been relatively unsuccessful meaning that HAWK is looking at the economics of the field based on standard vertical drilling. The company had $18 million of cash and liquid assets left after the fund raising in 2009. Contrarian Investor UK sold his position on the news at 27p, with the stock finishing the week at 25p. A 30% loss was painful given the commitment in time to this company but I am concerned that the “proving up” of the Jolly shale oil field will take the company into late 2010 where cash resources will become stretched and a further fund raising will be necessary. It is also somewhat concerning that private partner Running Foxes, who currently fund 50% of the drilling work, may not have an appetite for continued high investment in Jolly. Although HAWK may decide to sell its Revere or Cisco Springs fields, this stock is now looking very high risk and I disappointed in the results from Jolly Ranch after the strong convictions expressed at the AGM by MD David Bramhill and Steve Tedesco (from partner Running Foxes). At 25p, HAWK may still produce a return for buyers at this level but although it may go to 40p, sub 20p may also be just round the corner for this company which seems to thrive on shareholder disappointment.

Falkland Oil drillers (Desire Petroleum, Falkland Oil and Gas, Borders and Southern) – The Falkland Oil explorers all slipped this week, as the Argentinean government continued to apply political pressure through the Rio Summit and U.N. for the British government to stop further drilling around the Islands. This political pressure has been to date unsuccessful but added to the relative risks of these shares. I continue to hold DES, FOGL and BOR on expectation of results from the Ocean Guardian rig in March despite all the volatility in these companies.

ITV (ITV) – ITV continues it’s move back up and finished at 54p, following a positive outlook from Scottish Television company STV (which was formerly known as SMG). STV chief executive, Rob Woodward, forecast that the national TV ad market was likely to be up between 4 and 8% year on year in April.

GW Pharma (GWP) – Approval for cannabis spray, Sativex, is still expected in Q1 and this remains Contrarian Investor U.K’s largest holding.

Amgen (AMGN) - A quiet week for Amgen with the stock finishing at $56. Further news on osteoporosis drug, Prolia, still awaited in quarter one 2010.

Micron Technology (MU) – The stock moved back over the $9 mark as the outlook for DRAM memory chips continue to improve in the the second half of 2010. 

Political heat rises as Falkland Oil drilling finally starts

Desire Petroleum’s Ocean Guardian Rig finally started drilling in the North Falklands basin last Monday and it only served to bolster Argentinian efforts further to use political pressure to try and disrupt the drilling campaign, but these efforts are considered by many commentators as being unlikely to succeed.

After the disastrous war with the U.K. over the sovereignty of the Falkland Island (Malvinas) in 1982 started by Argentinian president, General Galtieri, things have been relatively quiet in the South Atlantic for the last 28 years. The islands were discovered by the British in 1592, permanently occupied in 1833 and for the last 100 years Argentina has contested ownership of the Islands with the British.

Argentina’s President Cristina Fernández de Kirchner’s has undertaken an anti-corporate campaign of significant proportions, with her latest move being to try to collect more than $6.5 billion in currency reserves to pay down debt and breath live into the flagging economy, after a move to privatise private pensions in 2008. An unpopular fight with farmers over export taxes has made her and her party postions weak in elections due in 2011. Desire Petroleum’s move to drill in the Falklands has been met with much vitriole. The first step was discourage ships sailing to the Falklands by requiring them to get permits if they pass through Argentinean waters - the Falkland Oil drillers have said this will have little impact on the drilling campaign. The Argentine foreign minister, Jorge Taiana, met with Ban Ki-moon, the U.N. secretary general, last week to pressurise the U.N. to agree with the assertion that Britain should be forced to acknowledge sovereignty claims. Taiana also argued that the U.K. does not have the right to exploit resources in the Falklands without first obtaining approval from Argentina.

At the Rio, Latin America summit this week, Hugo Chávez pledged his country's military support for a Falklands war. However, a military move against the U.K. would be suicidal from a political and economic perspective and it would be surprising if the Argentine government is even close to considering this despite the rhetoric in Rio.

If Desire do strike any significant oil during March, then the heat coming from Argentina can only get worse, even if military action is highly unlikely after the disastrous 1982 attack on the Islands. For De Kirchner’s government, added pressure on the U.N. and other organisations about sovereignity is highly popular in her country and it would be a tough sell indeed to her electorate if Desire or any other of the Falklands drillers (Rockhopper Exploration, Falklands Oil and Gas, or Borders and Southern ) “strike it rich” and Argentina was seen to be doing nothing as the U.K. collected the wealth from this "Argentine asset of right". Next year's Presidential election makes the Falklands an easy diversion to the country's own economic problems, just as Galtieri used the Islands back in the 1980's to cover similar but much more serious issues.

For shareholders such as myself, the politics have made it a nervous week on the markets for the Falklands Oil drillers. Despite the Ocean Guardian Rig spud on Monday, share prices have moved down as political risk has clouded the opportunity and talk of a military strike on the rig by Argentinian jet fighters has made investors question the risk/reward of the Falklands drillers. I for one took the opportunity to increase my holding in Desire Petroleum as the rumours rose later in the week. There is significant risk of course, but it is more of a no oil show than a pre-emptive attack by the Argentinian Navy.

U.K. Q4 2009 GDP revised upwards to 0.3% from 0.1%

The Office for National Statistics (ONS) said that British gross domestic product (GDP) grew by 0.3% in the final three months of 2009, revised up from the initial estimate of 0.1% but still below expectations of a 0.4% increase. U.K. GDP decreased 3.3% in 2009, one of the worst recessions in British history. The Q1 2010 data will be watched with interest for confirmation that that the decline in the economy is at an end.

Markets weak on economic worries

Yesterday, the Dow Jones Industrial Average fell 53 points to 10,321, after falling as much as 188 points at its low. The DOW is now down 2.5% for the month. The FTSE 100 index fell 65 points to 5,278. The weakness was driven by poor jobless-claims data from the U.S. which renewed worries about the economic recovery and Moody's potential downgrade of Greece's credit rating. The dollar showed strength early in the U.S. trading session as a safe haven for currency investors but the timing of the stock market reserve coincided with a move back into the Euro as short trades were closed.


Sentiment was not helped by JP Morgan's CEO Jamie Dimon's comments yesterday that he feared that the U.S. economy was heading for a double dip recession.

GW pharma partner Almirall hints at Sativex approval timing of Q1 2010

From pipelinereview.com (February 25th 2010):


Following publication of Spanish company Almirall's 2009 results today:


"The regulatory filing of Sativex® for the treatment of spasticity due to multiple sclerosis was submitted in UK and Spain under the European decentralised procedure, following the announcement of positive results in a phase III study where Sativex® showed relevant improvement in spasticity in multiple sclerosis patients. It is expected that the outcome of the regulatory submission will be known during the first quarter of 2010. Following potential approval in the UK and Spain, submissions for approval would be made in other European countries during 2010 under the mutual recognition procedure. Development of Sativex® for oncological pain in ongoing with results from an ongoing phase II/III study expected mid 2010."


"Silodosin (a licensed product from Recordati for use in the treatment of benign prostatic hyperplasia) was recently approved by the European Comission and we expect the regulatory outcome from Sativex® (used in the treatment of spasticity in multiple sclerosis) during this first quarter of 2010. Pending pricing and reimbursement processes, both products could generate sales in 2010, and could contribute to sustain the base business in the years to come."


"Free Cash Flow has reached € 206,4 mill despite the acquisition of linaclotide European rights (US$ 40 Mill downpayment + US$15 Mill of equity following positive phase III CC data) and milestone payments to GW Pharma (GBP 8 Mill) after the positive Phase III and continued regulatory progress of Sativex®"

Pound drops to 9 month low against Dollar

The possibility of an extension to the U.K.'s asset purchase (quantitative easing) programme and fears of a Hung parliament added to a bearish slant on the British pound. Sterling hit 1.52 against the U.S. Dollar, a 9 month low and an 11 month low against the Japanese Yen. Despite rating agency Moody's saying that Greece's credit rating would be downgraded if the fiscal debt reduction measures were not actioned, the Pound even fell against the Euro. Currency traders are looking for a safe haven, but they seem to be few and far between. Investors have a choice of a debt engorged America or Europe, Japan weighed down with all sorts of problems (ageing population, deflation, debt etc.) or emerging markets with all their intrinsic risks. Maybe gold looks the most solid bet given all this uncertainty. A tough trading environment for currency speculators that's for sure!

PIIGS debt may cause global economy to stumble in 2011

The debt default worries of the PIIGS European economies (Portugal, Ireland, Italy, Greece, Spain) look increasingly to be disregarded by the markets after the worries of last week. In order to safeguard the integrity of the Euro, there is significant political pressure for the more economically strong countries such as Germany to step in to the weaker economies such as Greece. However for politicians like Angela Merkel to sell any bail outs to their electorates is a difficult task. Greece and the other PIIGS countries are seen by French and German voters as having brought their problems on themselves through bloated state pension schemes, poor tax collection, excessive spending and an inability for politicians to tackle powerful unions.

For the Euro to collapse would be embarassing for European leaders and therefore it is unlikely to happen. But the scale of debt rollovers is so large that it may become a huge issue as international bond investors refuse to take on the risk especialy if PIIG polititicians won't take the difficult decisions and cut their budget deficits or raise taxes. Either route may mean that these politicians are voted out of office at the next national election. So these countries are stuck between a rock and a hard place! Without the flexibility to devalue their currencies, which countries like Greece used before the Euro, things are looking bleak for these heavily indebted economies. Suddenly the U.K.'s decision to keep the pound looks good for the British economy especially with the debt being racked up in the recession. Overall I fear that the glut of debt in Europe and the U.S. will come back to haunt the stock markets of the world in late 2010 and 2011, especially when stimulus spending comes to an end in the United States.

Disapointing Nighthawk Energy update from Jolly Ranch project forces sale

Nighthawk Energy (HAWK) announced a further update from its Jolly Ranch shale oil/gas prospect this morning. The market was unimpressed with a 10% fall to 26.75p as the company issued very much a “jam tomorrow” story and this disappointed many short term traders. Although production is expected to ramp up from 150 barrels per day gross (BPD) to 1000 BPD by end 2010, 1000 BPD was originally talked about by end of 2009. It has been clearly stated by MD David Bramhil that Nighthawk is in the game of proving up the Jolly Ranch project not making it a producing asset at this stage. However, solid production flows from the test wells are needed to attract outside interest. The flows from the horizontal drilling seem to have disappointed since the company is now focused on marketing the project on the basis of the economics of vertical wells –“With these assumptions and taking account of all royalties and production taxes, plus applicable regional and federal taxes, the discounted cash flow over the life of the well has been estimated to beUS$4.7 million, providing a rate of return on the cost of the well of 330% on a discounted basis. On this basis, capital expenditure on the well pays back in less than six months”.


HAWK said this morning that $18 million of cash and liquid securities was still available but given the cash burn to date, it is unlikely that funds will be available after the fourth quarter of 2010 at these production rates. I believe a takeover is unlikely until 2011 when more robust production data is available. Although news on the Revere project is still awaited, the risks of HAWK now seem to significant given the longer term “proving up” story on the Jolly Ranch project and the patchy flow rates to date. Regrettably I have decided to “kill a weed” this morning and I have sold my holding in the company at a 30% loss to focus on other more short-medium term opportunities. Such is the way with shares, that it is hard to sell a loser. But my funds are better invested in stocks such as GW Pharmaceuticals (GWP). These small caps can be rich winners, but painful losers! When selling a stock, it is always right to look at what the future gain will be on your asset if you invested it elsewhere, not on what your current loss is.

Glaxo's Avandia diabetes drug drags down share price

Glaxo Smithkline (GSK) fell 2.6% yesterday to finish at £12.03 following reports in the The New York Times that the future of its diabetes drug, Avandia, was a matter of "fierce debate" within the U.S. Food and Drug Administration (FDA) because of ongoing concerns about its side effects on the heart. On Saturday the Senate Finance Committee released a report critical of Avandia and the FDA.

However, the problems should be seen in context. In 2009, Avandia represented only £0.8 billion in global sales compared with the company's £30 billion in global revenue ($44 billion) and it is due to go off patent in 2012.

GSK's strategy to grow its business in emerging markets and maintain diversification by having both a pharmaceutical and consumer segment seems smart. With a forward price/earnings (p/e) of 10 and a dividend yield over 5%, any further weakness below £12 seems a good entry point for a medium term return. 

Desire petroleum suffers from buy on rumour, sell on fact

After rising as high as £1.32, Desire Petroleum (DES) fell back with a bump to finish the day down 4p at £1.13. At 3.30pm the long awaited RNS was released which said that the Ocean Guardian had spudded the well at 14.15 GMT. Further news will be released after the 30 days of drilling. For most traders in this stock, and there are many, 30 days is a long time to wait. Without any news flow DES will inevitably drift for a while until rumours from the rig begin to leak. But Contrarian Investor is a little patient so after closing my position at 128p, I have bought back. This one is too volatile to stay on the sidelines for too long. Nice to see FOGL staying in positive territory. I am sure that further rises are on the way.

Upward move in DRAM memory chip looking positive for Micron Technology

Micron Technology (MU) opened above the $9 mark today as isuppli forecasted that  Global DRAM sales are expected to rise 40 percent this year, ending three consecutive years of decline.DRAM chips are used mainly in PC's. Global revenue was forecast to rise for dynamic random access memory (DRAM) chip sales this year to $31.9 billion, up from $22.7 billion last year (+40.5%) and 45% up from 2008 levels. Volume and price per chip are expected to continue rising through 2010.Unlike past trends in the highly cyclical industry, iSuppli believes the current upcycle will not be followed by rapid declines in revenue and price growth in following quarters.

No stopping stampede for Falkland Island Oil shares

The Falkland Oil drillers continued to power ahead this morning as the Ocean Guardian Rig starts drilling on the Liz field: Desire Petroleum (DES) 129p +10%, Rockhopper (RKH) 76.75p +10%, Falkland Oil and Gas (FOGL)159p +5.3%, Borders and Southern (BOR) 69p +2.2%. The North Falklands basin drillers, Desire and Rockhopper are getting the majority of the action given the relative rates of news flow from the Northern and Southern basins.

News flow from Desire Petroleum and Nighthawk Energy

Desire Petroleum (DES) began drilling on its prospect in the Falkland Islands this morning. It would be surprising not to get an RNS updating shareholders during this week. Falkland Oil and Gas (FOGL) and BHP's announcement on hiring of a deep water rig for their South Falklands prospects should also be due any week now.

The key seismic and production information from the Jolly Ranch and Revere projects is expected from Nighthawk Energy (HAWK) this week. Should either be a highly exciting or demoralising news release for HAWK shareholders!

Portfolio Update - February 21st 2010

The market’s had a good week, with most of the major indices up 3% or so. Sentiment seems to have turned positive over the last 2 weeks after the negativity early in February. One of Contrarian Investor UK’s principles to maintain adequate diversification is being broken this week as my portfolio is too heavily weighted towards GW Pharma and the Falkland Islands Oil companies.  But the “binary bet” on the success of GW’s Sativex cannabis spray for Multiple Sclerosis is far too tempting a target. The previous application for the drug was rejected because of inadequate clinical trial data. This was addressed with an additional phase III clinical and the new application made for a European licence in the summer of 2009 looks very strong.  I have used Contract’s For Difference (CFDs) to limit the downside risk to 20% or so, but approval should move GW Pharma up at least 50-60%. As for the Falklands Oil drillers, all the hype and TV/press coverage is just too tempting to exploit and again the upward move on these shares will be so significant that a guaranteed stop loss using a CFD seems a sensible trade, albeit a gamble. “Fortune favours the brave”.

Coal of Africa (CZA) – Significant upward move in this share price this week on no news from 130p range to a high of 153p. Positions closed despite long term conviction in this stock, especially as Vele mine approval was finally given this month.  This strategy appeared to have paid off on Friday with CZA falling as much as 5% at one point. I will watch for a potential re-entry point if the positive market sentiment turns for the worse.

GW Pharma (GWP) – Still no news on the Sativex European approval but given the timings of the Decentralised approval process (DCP) for drugs in Europe it would be expected that news is not far off.  Have increased position once again at 87p.

Falklands Islands Oil (Falkland Oil and Gas –FOGL, Desire Petroleum – DES, Borders and Southern Petroleum BOR) – Its been an exciting week for the Falklands Oil stocks as Argentina issued a decree that any vessel passing through its waters would need a permit to visit the Falklands which made investors somewhat nervous. On Friday, the Ocean Guardian Rig, contracted by Desire Petroleum arrived on the Liz field in the North Falklands basin and is due to spud this afternoon. I took the opportunity to top up my holding in Desire Petroleum despite some reservations about my significant exposure to the Falklands Oil sector. The risks are significant but the geology of the Falklands basin and oil finds in the previous drilling campaign by Shell/Lasmo gives more than hope that oil will be found in economic quantities. If the Ocean Guardian Rig does strike it rich then I would expectd Desire’s share price to be closer to £20 than 1 so the risk/reward ratio still looks enticing despite the strong run up in the Falkland Island Oil shares. Falkland Oil and Gas and Borders and Southern Petroleum have been relatively benign for a couple of weeks now, so a rise in these Southern Basin stocks would be expected on any news from the Northern Basin drilling campaign.
Nighthawk Energy (HAWK) - Nice move back up from 27p to just over 30p as the company announced the appointment of a new non-exec. director. News on Jolly Ranch should be imminent and therefore I am hopeful of a solid move towards 40p in the next week.

ITV (ITV) – A move up from below 50p to 53p as news on potential government approval of Product Placement on UK TV came through. Position still in deficit but given TV market revenue rebound in both January and February, outlook looks positive.

Amgen (AMGN) – News was received this week that an opinion on the FDA application for Prolia (denosumab) would be received by end July. I have trimmed by position a little this week because of a shift in the portfolio to GWP and the Falkland’s shares but will look to top up in the next few weeks.

Intel (INTC) - Position closed at $21.7, following a good rise in the semiconductor stocks this week. I like Intel long term but it trades within a range of $19-$22 so a move to the upper end triggered a sale.

Micron (MU) – The worst performing stock in the portfolio but Micron continues to rebound from its lows close to $8 to finish Friday at $8.9. Holding

FDA decision on Amgen's Prolia by end July 2010

The U.S. Food and Drug Administration (FDA) has accepted Amgen's (AMGN) application for its osteoporosis drug Prolia (denosumab) and will make its approval decision by July 25, the company said on Friday.The FDA asked Amgen last October to provide additional information before it would proceed with its review and the company submitted its response in late January. A European decision on Prolia approval is expected in the first half of 2010.