Positive start to March on both sides of the Atlantic

The FTSE 100 is currently up 28 points to 5,838 with DOW Futures up 35 to 10,361. Gains in the FTSE were pruned, after Prudential’s announcement that it was going ahead with the purchase of AIG’s Asian business for £23 billion ($35.5) sent the insurer down 11% to £5.34 (when the shares came back from suspension at 10.30, they were down 14%). The acquisition will be funded by a $20bn rights issue, the largest ever seen in the UK. Prudential will also issue $5bn of senior debt, while AIG will receive $5.5bn in new Prudential shares plus $3bn of convertible shares and $2bn of preferred shares. AIG is 80% owned by the US government, which will mean the US taxpayer owning a stake in the UK’s largest insurer.



The news of a possible €25-30 billion bail-out of Greece by Germany and France was circulating this morning. Greek debt would be purchased in the form of bonds, through their respective state owned banks. But the Greek government will need to commit to at least €4bn worth of cuts in public spending which given union opposition may be difficult to execute.


The British Pound has continued to fall heavily against the U.S dollar and Euro today after a weekend opinion poll put Labour only 2 points behind the Conservatives and there were fears that the Prudential deal with AIG would mean it would need to sell the Pound Sterling to buy U.S. dollars . The pound/dollar hit £1.49, a 2% fall on the day. Currency investors are increasing worried that the increasing likelihood of a “hung” parliament will delay any moves to reduce the size of the U.K. budget deficit.

SUNDAY INDEPENDENT - Falklands offer to split oil profits

Britain will take up to half the revenues if drilling programme is successful

By Brian Brady, Sunday, 28 February 2010, Independent

Britain and the Falkland Islands have made a deal to split any proceeds from the controversial oil drilling programme in the South Atlantic.

UK ministers have revealed that the Executive Council in Port Stanley had "offered to share some of any future hydrocarbons-related revenues", which could be worth billions of pounds. If a 30-day drilling programme begun by a British firm last week strikes oil, the yield from corporation taxes and royalties in the fields north of the islands alone could be more than £100bn.

A Foreign Office source said the Government had already begun negotiations over the eventual share-out, and had reached an "understanding" that could see the Treasury taking up to half the profits. Officials have pointed to Britain's multimillion-pound programme of support to the islands over almost three decades since the war following Argentina's invasion in 1982.

Argentina, which disputes the British claim to the Falklands, last week asked the United Nations Secretary General, Ban Ki-moon, to bring the UK into talks over the islands' sovereignty. The Foreign Secretary, David Miliband, said British oil exploration in the area was "completely in accordance with international law".

Ministers have been cautious about who would benefit from the bonanza since the potential reserves were first highlighted almost 20 years ago. The Falklands Executive Council offered in 1994 to share any proceeds as a contribution towards the defence of the islands. The islands' ruling executive council later warned that the spectacle of the Treasury taking oil revenue would be "a propaganda gift to the Argentines, who would say it proved that Britain had an exploitative, colonial attitude to the Falklands".

The Liberal Democrat MP Bob Russell said: "They have been sustained since before the Falklands war to the tune of hundreds of millions of pounds from the taxpayer. It is only right that, if they are going to become instant millionaires, they should share that with the UK and with neighbouring British territories such as St Helena and Ascension Island."

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!