Xcite Energy signs Rowan Norway rig deal- no fireworks yet!

So no farm in, no takeover talks, no Rowan Stavanger for Xcite Energy (XEL). An RNS this morning confirms that the deal with British American Offshore for the Rowan Norway is in the bag with delivery Q4 2011.  So Xcite will have oil flowing by the end of this year and with Brent Crude at around $100 a barrel things are looking mightily good. Now the key news is the CPR document which hopefully will upgrade resources significantly.

4 February 2011

Drilling Contract for "Rowan Norway" N-Class Jack-up Rig

Xcite Energy is pleased to announce that its 100% subsidiary, Xcite Energy Resources Limited ("XER"), has entered into a binding drilling contract with British American Offshore Limited("BAOL"), part of Rowan Companies, Inc. for the N-Class "Rowan Norway", a harsh environment, deep water jack-up unit, designed and built for simultaneous drilling and production, which is currently under construction.

The Rowan Norway is expected to be used to commence the first stage production of the Bentley field, the planning for which is currently being undertaken. XER expects the Rowan Norway to be made available in the fourth quarter of 2011.

Return to the madness of the dot-com bubble?

There were reports in the press last week that Twitter had been in talks with both Google and Facebook, with some estimates putting the value of the company at $10 billion. This follows the purchase of the online site the Huffington Post by AOL $315 million. There was talk that Facebook is now valued at $50 billion and Linked in announced its $175 million IPO (LinkedIn turned a profit of $10.1 million on revenue of $161 million in the first nine months of 2010, according to documents filed to the Securities and Exchange Commission).

AOL itself is infamous for the $164 billion merger with media group Time Warner completed In January 2000 at the height of the dot-com frenzy, which created AOL Time Warner. In 2002, the company was forced to report a loss of $99 billion due to the goodwill write-off related to AOL, at the time, the largest loss ever reported by a company. In 2003, the company dropped the "AOL" from its name, and removed Steve Case as executive chairman. In May 2009 Time Warner announced that it would spin off AOL as a separate independent company, with the change occurring on December 9, 2009.

Looks like we're heading for the day's of the 1998-2000 dot-com bubble all over again! (see my previous post on the anniversary of the bubble in March 2010 - http://contrarianinvestoruk.blogspot.com/2010/03/10th-anniversary-of-internet-bubble.html)

History of key Do-com busts from Wikipedia (http://en.wikipedia.org/wiki/Dot-com_bubble)

• Boo.com, spent $188 million in just six months^[17] in an attempt to create a global online fashion store. Went bankrupt in May 2000.^[18]
• Startups.com was the "ultimate dot-com startup." Went out of business in 2002.
• e.Digital Corporation (EDIG): Long term unprofitable OTCBB traded company founded in 1988 previously named Norris Communications. Changed its name to e.Digital in January 1999 when stock was at $0.06 level. The stock rose rapidly in 1999 and went from closing price of $2.91 on December 31, 1999 to intraday high of $24.50 on January 24, 2000. It quickly retraced and has traded between $0.07 and $0.165 in 2010 .^[19]
• Freeinternet.com – Filed for bankruptcy in October 2000, soon after canceling its IPO. At the time Freeinternet.com was the fifth largest ISP in the United States, with 3.2 million users.^[20] Famous for its mascot Baby Bob, the company lost $19 million in 1999 on revenues of less than $1 million.^[21][22]
• GeoCities, purchased by Yahoo! for $3.57 billion in January 1999. Yahoo! closed GeoCities on October 26, 2009.^[23]
• theGlobe.com – Was a social networking service, that went live in April 1995 and made headlines by going public on November 1998 and posting the largest first day gain of any IPO in history up to that date. The CEO became in 1999 a visible symbol of the excesses of dot-com millionaires.
• GovWorks.com – the doomed dot-com featured in the documentary film Startup.com.
• Hotmail – founder Sabeer Bhatia sold the company to Microsoft for $400 million;^[24] at that time Hotmail had 9 million members.^[25]
• open.com - Was a big software security producer, reseller and distributor, declared in bankruptcy in 2001.
• InfoSpace – In March 2000 this stock reached a price $1,305 per share,^[26] but by April 2001 its price had crashed down to $22 a share.^[26]
• lastminute.com, whose IPO in the U.K. coincided with the bursting of the bubble.
• The Learning Company, bought by Mattel in 1999 for $3.5 billion, sold for $27.3 million in 2000.^[27]
• Think Tools AG, one of the most extreme symptoms of the bubble in Europe: market valuation of CHF 2.5 billion in March 2000, no prospects of having a substantial product (investor deception), followed by a collapse.^[28]
• Xcelera.com, a Swedish investor in start-up technology firms.^[29] "greatest one-year rise of any exchange-listed stock in the history of Wall Street." ^[30

China overtakes Japan as world's second biggest economy

Japan has reported a preliminary 0.3 % decline in GDP (gross domestic product) in the last quarter of 2010 as a government stimulus package which included subsidies on eco-friendly cars came to an end in the previous quarter. Japan's GDP fell by 6.3% in 2009 and 1.2% in 2008. The poor state of the Japanese economy means that China is now clearly ahead of it in terms of economic output after itself producing a 10% GDP rise in the last quarter, making China the second biggest economy in the world after the U.S..

Could it be RNS time for Xcite Energy tomorrow at last?

Investors in Xcite Energy have been patiently waiting for news on the Rowan Norway rig. Now the deadline (extended for the second time) passed on Friday, so it seems pretty unlikely that CEO Richard Smith will either delay things yet again or issue no news at all. I'm sure lots of fellow Xcite Energy investors will be glued to their computers tomorrow morning waiting for the all important RNS.

I would be surprised if we see a takeover announcement (but of course it would be pleasant surprise), more likely I believe is that the CPR (Competent Persons Report) may be issued together with a farm-in announcement from one of the Bentley Alliance partners.  It would seem incredible that the delay is purely caused by price or contractual negotiations with British American offshore who own the Rowan Norway rig. Of course the other scenario is that production may be accelerated by leasing the Rowan Stavanger before it goes to Talisman Norway in the North Sea. 

So lots of possibilites, but it seems the least likely that they'll just keep quiet. If its another delay...they're lawyers need a damn good talking to!! Anyone seen any Champagne bottles piled up in a skip outside the offices in Banchory recently?

I'm keen to invest in some other companies hence I've added my watch list page (http://contrarianinvestoruk.blogspot.com/p/watch-list-shares.html) but a big chunk is tied up in Xcite so little flexibility at the moment. Come on Mr Smith, lets get this share moving again, we're fed up with it under £4!!

Have we learnt anything from the last financial crisis of 2008 & 2009?

The 2008/2009 financial crisis saw the bankruptcy of Lehman Brothers and the effective nationalisation of Royal Bank of Scotland, Northern Rock, AIG, Lloyds, Freddie Mac and Fannie Mae and Citigroup. We saw the takeover of HBOS by Lloyds TSB, Bear Stearns by JP Morgan Chase, Merril Lynch by Bank of America and Wachocia by Wells Fargo. Without the U.S. government backed TARP (Toxic Asset Relief Programme) and the U.K. government backed cash injections it is likely that the global financial system could have collapsed following the Lehman bankruptcy, a spiral that ultimately was caused by the Sub-prime mortgage debacle in the United States.

The U.S. TARP was agreed to purchase assets and equity from financial institutions to strengthen its financial sector which was signed into law by President Bush on October 3, 2008 and allowed up to $700 billion to be allocated to the programme. However by the end of 2010, much of the money used had been repaid, with the final liability to the U.S. tax payer of as little as $20-30 billion. Whilst $245 billion was pumped into financial institutions, over $169 billion has been paid back, including $13.7 billion in dividends, interest and other income, along with $4 billion in warrant proceeds as of April 2010.

The U.K. tax payer has spent around £850 billion pounds propping up the financial sector including the nationalisation of Northern Rock in February 2008 and now owns owns 84% of Royal Bank of Scotland (RBS) and 41% of Lloyds. The U.K. government spent £45.2 billion rescuing RBS in November 2009 at an average price of 49.9p (currently 44p) and Lloyds Banking group cost at an average of 75p (after open offer, currently 66p) in return for insuring £260bn of the group's toxic assets.

Have any lessons been learnt from this near calamity, which nearly made the Great Depression of the 1930's and 1940's (following the Wall Street crash of 1929) look like a picnic?

The causes of the 2008/2009 financial crisis are many and too complicated to go into here, but there are several good books on the topic (I particularly enjoyed Andrew Ross Sorkin's Too Big too fail). However there is some examples of key themes which contributed to the near collapse:

1. Excessive leverage by financial institutions - excessively large bets without oversight by the SEC, FSA etc. of the potential risk and capital required. Although stress tests have been done both in the U.S. and EU, the severity of these tests is still under question. LESSON LEARNT - NO

2. Risk taking culture exacerbated by focus on short term profit for bonuses - although Project Merlin in the UK has tried to address short term versus long term financial incentives for bankers, it looks like a damp squib. There is reluctance to adopt a true global compensation system for the financial services industry and individual countries are worried about draconian action unilaterally because of the threat that banks and hedge funds will relocate elsewhere. Hence, the problem is still there. This is likely to be illustrated by Barclays Capital (Barcap) this week, since it is expected to announce that it has handed an even bigger share of revenues to its investment bankers. Whilst individual bonuses have been cut by as much as 10%, the overall compensation pool covering pay and incentives will have risen to about 40% of revenues. LESSON LEARNT- NO

3. Too much global liquidity due to low interest rates and sovereign wealth funds -  this situation is unchanged, interest rates are at historical record lows and China and other countries with plenty of capital to invest are driving up asset prices. The U.K and U.S. quantitative easing programmes, where government bonds are bought has probably heightened the problem and encouraged money flow to riskier assets with larger returns.  LESSON LEARNT - NO

Overall, we seem to be in little better shape to deal with the next financial crisis and it will come one day. Being very gloomy you could see a scenario where central banks are forced to raise interest rates because of rising inflation (caused to some extent by speculation in commodities fueled by cheap money), which kills economic growth and leads to financial institutions taking big write-downs in their assets. Do they have enough capital next time to deal with the darkest of financial scenarios?

Nokia and Cisco former tech bell weathers hit turbulent times

Two former technology bell weathers, Cisco of the U.S. (CSCO) and Nokia of Finland (NYSE: NOK), have had a bad week, the former because of disappointing earnings and the latter because of its announcement of a mobile phone alliance with Microsoft (MSFT).

Canadian, Stephen Elop and ex-Microsoft executive, became the new CEO of Nokia Corporation in September 2010 September 21, 2010, taking over from Finn, Olli-Pekka Kallasvuo.

On 11 Febuary 2011, Nokia entered a strategic alliance with Microsoft, and announced it would replace its phone operating systems Symbian and Meego with Windows 7 for its smart phone devices. Bing, Microsoft's search engine will the search engine for all Nokia products. Nokia's shares fell 14% ($1.5) on Friday, to $9.36 on the NYSE, having declined two-thirds in the last 3 years.

The rationale for the deal appears to make sense given Nokia's weakening position in high end mobile or smart phones partly driven by the inadequate Symbian operating system. However many have questioned whether two under performing companies in the mobile market can come together to make a success of it. Analysts have questioned why Nokia has made this deal to pay royalties to Microsoft to use Windows 7 Phone when they could have incorporated Android for free from Google. Its seems unlikely that Nokia/Microsoft can really take on the might of the Android and Apple products and hence the sharp drop in the share price. In addition to these changes, changes to executive management and a general restructuring were announced which underscores how this once dominant company has fallen on hard times.

The transition to the new system will occur in 2013 and Credit Suisse thinks Nokia’s smartphone market share could fall from almost 30 per cent to 15-odd per cent during the next year alone, which would reduce earnings from €0.50 per share in 2010 to more like €0.40 in 2011, or a forward price/earnings of 18. With the lack of visibility and poor outlook, the shares could fall even further.

Networking and IT infrastructure company and a Dow component, Cisco Systems , fell from over $22 to finish the week at $18.70, a fall of 15% following its latest earnings report.

Margins were hit again this quarter and the forward guidance was uninspiring. The company losing market share in two significant product categories, switching, with sales down for three consecutive quarters and routers sales declining 8.9% quarter-over-quarter.

The forward price/earnings is around 10 which isn't expensive and though this monster of a company has a $104 billion market capitalisation, it has $30 billion of cash. Many are saying that Cisco's best days are behind it and it has become too big following its large acquisitions over the last few years.

Clearly the CEO's of Nokia and Cisco are going to have some sleepless nights and the competition isn't going to get any easier. Adapt, or die!

Portfolio review of the week - 12th February 2011

The FTSE 100 finished up 43 points at 6,063, a rise of 1% for the week on news that Egyptian president Hosni Mubarak had stepped down. The Dow Jones Industrial Average rose 44 points, or 0.4%, to 12,273, a rise of 1.5% on the week. It was the Dow's highest close since June 2008. WTI Oil futures dropped a dollar yesterday to $85, on the news from Egypt.

The Contrarian Investor UK Portfolio had a mixed week, with gains from Xcite Energy (XEL) tempered by a large fall in Rockhopper (RKH), though XEL represents a much larger part of the portfolio. The unexpectedly large drop in RKH, meant that my margin requirements were looking a little stretched and therefore I reluctantly had to close a couple of Xcite spread bets late on Friday, albeit at a profit, and my portfolio still has a lot of Xcite with news just around the corner.

Xcite Energy(XEL) -  Xcite finished down 3p on Friday, but a gain of 25p on Wednesday meant that it finished the week at £3.82, a rise of 20p on the week. The rig signing deadline with British American Offshore for the Rowan Norway rig passed yesterday (this was the second extension) with no news. Given the company normally issue an RNS the day after a signing deadline, it is pretty much certain an RNS will be forthcoming on Monday. Wednesday's rise was partly related to a FT.com story that there was "vague talk of a takeover" (see previous post http://contrarianinvestoruk.blogspot.com/2011/02/xcite-energy-ftcom-quotes-vague-bid.html). As I stated earlier it was frustrating to have to close some spread bets on Friday, but there is still plenty there to benefit from upside from a good RNS. The key document, the CPR reserves report is expected anytime in the next month, and you never know, it might be sooner than we were all led to believe.

Rockhopper (RKH) - Unfortunately buys on Thursday and Friday were poorly timed with a subsequent 17% fall on Friday afternoon, but my previous post (http://contrarianinvestoruk.blogspot.com/2011/02/rockhopper-1410-3-disappoints-market.html) illustrates why I wasn't panicked into selling like many others on the drop.

ARM Holdings (ARM) - A short on chip designer, ARM holdings, was closed for a profit after the shares hit all time highs this week.

Bowleven (BLVN) - An update from the Sapele 1 well in Cameroon didn't do much to help the shares this week. They finished down 2.5% at £3.29. Several failures in the AIM oil sector this week (Rockhopper, Nautical, Encore) plus perhaps the changes at CMC holdings seems to have contributed to a lot of volatility. Bowleven remains a core holding for medium term gains particularly with a second rig being mobilised in February to accelerate appraisals.

Weatherly International (WTI) - The RNS from 8th February was good news. "mining activities have resumed at both the Otjihase and Matchless mines with ore being blasted and stockpiled awaiting commissioning of the concentrator. The commissioning of the concentrator is progressing well and the plant will resume normal operation in accordance with the programme. Weatherly expects to have sufficient quantities of concentrate to commence transport to Walvis Bay in March with the first revenues to be realised from concentrate sales shortly thereafter." This remains a very promising share with Copper prices at all time highs and production ramping up.

Sirius (SXX) and Angel (ANGM) - Nothing to report. Where is that gold shipment report Elias Jones?(Chief Exec. Angel) - what's all this talk you've been on holiday!!??

Rockhopper 14/10-3 disappoints market but fall seems overdone

After starting the week at 385p or so, its been a down hill run for Rockhopper (RKH) all this week, culminating in a 17% fall (58p) to 277p on news from the 14/10-3 North Falkland basin drill. A 28% fall from last week, on a well 8km from the previous Sea Lion discovery and the first of several wells intended to map the extent of the Sea Lion reservoir. As a reminder, RKH raised £206 million in mid October at 315p, so the current share price is now 12% below this institutional placing. In January, Goldman added Rockhopper to its conviction buy list and estimated that with Sea Lion alone at 200 million barrels, with no further discoveries, the shares would be worth 350p.

Today's announcement was disappointing but did not justify a drop to £2.77. No doubt many small investors had stop losses in place or simply panicked and sold on the news, despite the fact that the 14/10-3 is the first of several wells with 14/10-4 considered much more likely to have a good sized hydrocarbon reservoir. It was interesting that even with the 14/10-3 being 5 miles from Sea Lion, oil was discovered but not commercial on a standalone basis. But it is quite possible that this hydrocarbon find may be the edge of the Sea Lion reservoir and that it why additional analysis is needed before any conclusions can be reached. 14/10-3 was not a "duster", live oil was recovered, it was just too small.

Rockhopper looks very undervalued now on the basis that of the Ocean Guardian rig activity planned for the rest of 2011 it would be expected that oil additional to the 200-240 million barrels will be encountered, on the balance of probabilities. With £200 million in the bank and Sea Lion, I am surprised that this share has fallen quite so far on this news.  The positions I have been acquiring over the last couple of days are down, but from a fundamental not "share holder panic" point of view, I am confident that by holding we are likely to see a return over £3.50 in the not too distant future (possibly within weeks). A disappointing well result like 14/10-3 tests the investor when the "sheep investors" panic and sell out driving the price down to excessively cheap levels. This is the time a contrarian investor makes his or her money - as Buffett said "when others are fearful be greedy!". It is time now for clear heads, not panic and just a little patience for 14/10-4.

The rumours of a big strike were ultimately wrong, and the gradual fall in the share price before the announcement, shows that those in the market who are really in the know tend to dictate the direction of the price. Maybe rumours were just misinterpreted since oil was encountered, just not enough of it. This was not the case with the Sea Lion discovery, where the price fell heavily before the discovery , then sprung up like a coiled spring on positive news. But the Falkland oil companies seem to emanate leaks with great regularity.

RNS Number : 1130B

Rockhopper Exploration plc

11 February 2011

For immediate release: 11 February 2011

Rockhopper Exploration plc

("Rockhopper" or the "Company")

Results of 14/10-3 Exploration Well

Highlights:

·      64m good quality gross reservoir encountered

·      7.3m net pay with low oil saturation

·      Live oil recovered to surface from MDT

·      Well, on a stand-alone basis, considered to be uncommercial

·      Results considered technically encouraging for reservoir development within Sea Lion

Rockhopper Exploration plc (AIM: RKH), the North Falkland Basin oil and gas exploration company, announces that exploration well 14/10-3 located in licence PL032, 8 km to the north west of the Sea Lion oil discovery was drilled to a total depth (TD) of 2,830m. The well was designed to explore the northern lobe of the sea lion fan feature and is the first well to be drilled in that area.

The well encountered good quality reservoir from 2,425m to 2,535m in a sequence of 4 main sandstone intervals. Within these 4 main sand intervals 64m of gross reservoir sand was encountered with net sand of 54m (a net to gross ratio of 84%).

Wireline log interpretation was carried out using Rw taken directly from downhole MDT water samples from each sand. Logs indicate that three of the sands encountered (Sands 1, 2 and 4) have high water saturations with hydrocarbon shows during drilling and in cores. Logging indicates that one sand (Sand 3) has net pay of 7.3m using a cut off of 70% Sw.

The reservoir is located beneath a thick regional shale seal. The sands which came in, as prognosed by the Company, are of good quality with average porosity of 18-20% and peaks of up to 25%. 

	Depth	Average Porosity	MDT Sample	Sw
Sand 1	2,425m - 2,446m	18%	Water	>90%
Sand 2	2,452m - 2,469m	20%	Water	>90%
Sand 3	2,473m - 2,481m	18%	20% live oil	63%
Sand 4	2,517m - 2,535m	20%	Water	>90%

The Company believes that Sands 1, 2 and 3 are likely to be related to part of the main Sea Lion feature, while Sand 4 could be related to the S2 feature.

Oil and gas shows were detected throughout the reservoir intervals. Four conventional cores were cut through the reservoir totalling 101 metres and both the bleeding of live oil and oil staining were observed throughout. However, MDT samples on Sands 1, 2 and 4 returned water.

A number of live oil samples were recovered from Sand 3 using a standard MDT tool, samples were approximately 20% live oil and are indicated to be medium gravity.

The Company then performed a mini Drill Stem Test ("DST") on Sand 3 by using a dual packer MDT tool downhole. During the test, water was produced into the well. Further technical work is required to understand why the mini DST produced water while the standard MDT recovered 20% live oil from the same sand interval.

MDT pressure readings taken over Sand 3 indicate that it appears to be lying on the same oil pressure gradient as the main Sea Lion fan in well 14/10-2, indicating the potential for good lateral communication. Further wells and technical work will be required to determine if this is the case.

Log interpretation has proven to be complex and the Company believes that further work is required to fully understand what has been encountered in the well and its implications.

The Company believes that the lowest sand (Sand 4) could form the downdip, distal part of the S2 feature and will now undertake further analysis to determine the likelihood of oil being present updip in the S2 lobe. Despite the high levels of water saturation in Sand 4, oil staining was observed in the core.

Further technical work will also now be undertaken to determine the likelihood of oil being present elsewhere in the northern Sea Lion lobe and the likely contribution, if any, of this well to any commercial oil development on the Sea Lion feature.

As the regional overlying seal appears to be intact and effective at the well location, reservoir quality is good, oil shows and moveable live oil are present, the main technical risk associated with the northern Sea Lion lobe remains the effectiveness of the seal at the location of the feeder channel and the risk of effective charge from the south if there is discontinuity within the reservoir.

Following completion of all logging operations the Company currently intends to plug and abandon the well in line with the originally intended drilling programme.

The Ocean Guardian drilling unit will then drill appraisal well 14/10-4, which is located 2.3 km north west of the 14-10-2 Sea Lion discovery well.  A further announcement will be issued on the spudding of 14/10-4.

Sam Moody, Chief Executive of Rockhopper, commented:

"This well, which was the first to be drilled in this area, 8 km to the north west of the Sea Lion discovery, was encouraging. The results of the well are complex and will take some time for us to interpret fully. The quality sands encountered confirm our understanding of the depositional system within the basin. We are particularly pleased to have encountered a thick sequence of reservoir as we prognosed and obtained a number of samples of live oil. The results are indicative of significant upside potential elsewhere across the Sea Lion and S2 features.

This well is the first of a number we plan to drill during 2011, focusing largely on delineating the extent and size of the Sea Lion discovery, as well as testing additional exploration upside."

NOTES

MDT: Modular Formation Dynamics Tester

Rw = Resistivity of formation water

Sw = water saturation

Bank of England holds base rate at 0.5%

As expected the Bank of England held interest rates at just 0.5%. The FTSE finished down 32 at 6,020 after dropping earlier in the day after a series of earnings disappointments from the likes of drinks group Diageo and miner Rio Tinto.

AIM stocks take a battering today but some good buying opportunities

Most of the shares in my watchlist are down today, with the small cap commodity stocks in bad shape (with the exception of Range Resources which is up 30%+). I wonder how much is the CMC Aim stock issue (see previous post: http://contrarianinvestoruk.blogspot.com/2011/02/cmc-markets-change-may-impact-aim-this.html) and how much is general market sentiment? Stocks in the portfolio like Bowleven, Weatherley and Rockhopper are all down again today, compounding a poor week. I've taken the opportunity to top up on Weatherley (excellent company for gains in a 3 month time frame, see previous post: http://contrarianinvestoruk.blogspot.com/2011/01/weatherly-international-namibian-copper.html).

Good to see Xcite moving up right now to 390p after the good start this morning evaporated. I'm guessing there was some selling to get into Range (RRL)?

Why i'm not selling one Xcite Energy share just yet

I see that the Xcite Energy share price is coming off the boil a little. I'm not giving the market makers even one of my shares.
Here' s why:
1. News on the Rowan Norway rig is due by the morning of February 12th.
2. Updated Competent Persons Report due mid feb onwards. RNS following flow test in December said that well was flowing at top of expectations and oil column larger than previously thought. Likely Bentley field upgrade from 160 mm barrels to 200-300 mm barrels.
3. Charles Lucas Clements said at the last Oilbarrel conference for investors to expect a doubling or tripling in the share price plus not to worry about rig.
4. Takeover rumours circulating, see previous post re. FT.com (http://contrarianinvestoruk.blogspot.com/2011/02/xcite-energy-ftcom-quotes-vague-bid.html). Statoil has a heavy oil field adjacent to Xcite acreage
5. Bentley field is in North sea, no political risks
6. Well funded through SEDA (Standby Equity Drawdown agreement where shares are issued at no discount in exchange for cash) and Bentley alliance structure

My previous post from January 2nd 2011, covers the main points (http://contrarianinvestoruk.blogspot.com/2011/01/xcite-energy-should-prove-highly.html)

Today's Bank of England decision likely to be neutral

The Bank of England, monetary policy committee (MPC) will finish a 2 day policy meeting at midday.
The markets expect the committee to leave its key interest rates unchanged at 0.5%. But the BOE may want to stamp out any risk of inflation getting out of control with a preemptive strike to say 0.75%.

Consumer price inflation rose to 3.7% in December, versus a BOE target of 2%.  The rate is expected to move to 4%-5% over the course of 2011 due to rapidly increasing commodity prices and the rise in VAT to 20% (from 17.5% in January).

The committee is faced with a difficult challenge trying to stifle inflation but not kill of economic recovery completely. A package of austerity measures is kicking in, the VAT rise being the key one, which will dent consumer confidence. At 8%, unemployment remains stubbornly high and disposable income is on a downward spiral as fuel and basic food costs move up.

Gulf Keystone Petroleum, an interesting Kurdistan oil play but not for Contrarian Investor Uk at this price

Gulf Keystone (GKP) is an oil exploration company which was founded in 2001 and first listed on AIM in 2004. Its primary focus and assets are in the semi-autonomous region of Kurdistan in Northern Iraq, following the planned disposal of assets in Algeria.

Assets
In November 2007 Gulf Keystone secured interests in two production sharing contracts in the Kurdistan Region of Northern Iraq, Shaikan and Akri-Bijeel. In 2009, the Company diversified the asset base in Kurdistan with the addition of two new Production Sharing Contracts, Sheikh Adi and Ber Bahr.

Licence Working Interest
Shaikan GKP 75%
Sheikh Adi GKP 80%
Ber Bahr GKP 40%
Akri bijeel 20%

The company holds exploration and appraisal rights over six blocks and two producing fields in Algeria but an orderly exit from these assets with sales due to be completed during 2011 following approval from the Algerian government.

Key members of management team
Todd Kozel , Chairman and CEO co-founder
Ali A. Al-Qabandi, Business Development Director and co-founder
John B. Gerstenlauer, Chief Operating Officer

Key historical drilling activity and resources estimates
GKP first struck oil in the Shaikan-1 well in August 2009 and after an analysis by a largely unknown company called Dynamic Global Advisers (DGA), issued a CPR (competent persons report) in January 2010. Gross OIP (oil-in-place) estimates were confirmed in a P90-P10 range of 1.9 to 7.4 billion barrels. In January 2011 the more widely respected company Ryder Scott, reviewed DGA'S reserve estimate and confirmed a total petroleum-initially-in-place (PIIP) resources at 1.52 (P90) to 7.52 (P10) billion barrels of oil, with a mean of 4.04 billion barrels.

Shaikan-1 tested five levels from 1,450 metres through to 2,850 metres but drilling had to stop at the lowest levels because of a very high pressure zone that was above the tolerance of the drilling rig.

Current and short term drilling programme
The company is currently drilling two wells, Shaikan-2 (spudded November 2010 and due for completion in May 2011) and Sheikh Adi-1 (spudded August 2010). Two further wells are expected to spud in March (Shaikan-4 and Akri-Bijeel). The shallow Shaikan 3 drill was completed in January 2011. The 3D seismic data acquisition program has been fully completed on both the Shaikan and the Sheikh Adi structures. Data processing and seismic interpretation will continue until at least June of this year.

Shaikan-2. the first deep appraisal well being drilled with equipment able to handle a high pressure reservoir, was spudded in December 2010, with a target depth of 5,000 metres over a 6 month period. Gulf Keystone has a 75% working interest in the Block, Kalegran, has 20 percent and Texas Keystone International has the remaining 5 percent.

Litigation issues
At the end of December 2010, GKP announced that they had received notice on 23 December 2010 that Excalibur Ventures had started litigation in New York on 17 December 2010 asserting certain contractual and non-contractual claims against the Companies and claiming that Excalibur is entitled to an interest of up to 30% in the Companies' blocks in Kurdistan. On 21 December, 2010, Excalibur applied without notice to the Companies to the Commercial Court in London for a "worldwide freezing injunction" against the Companies' assets, which was refused by the Commercial Court on the basis that the Judge did not consider there was a risk of dissipation of assets. Excalibur also commenced proceedings in the Commercial Court in London on 17 December 2010 on the same grounds as in the New York City court.

Kurdistan related risks

Although the Kurdistan regional government (KRG) has an Oil and Gas Law, the Iraqi govenrment does not. In addition, the central Iraqi government did not recognise any contracts that the Kurdistan government made with oil and gas companies.

However on February 7th 2011, Kurdish officials announced a deal with Iraqi Prime Minister Nuri al-Maliki calling for Baghdad to honour contracts signed by the autonomous region with foreign firms was confirmed following a meeting in mid-January. The meeting was attended by Maliki, central government Oil Minister Abdelkarim al-Luaybi and a delegation from Kurdistan headed by (regional prime minister) Barham Saleh."

Financial health

In May 2010, GKP placed 152 million new common shares at a placing price of 75p per share raising gross proceeds of approximately $165 million (£114.2 million). These shares were placed by Mirabaud Securities, Renaissance Capital, Fox-Davies Capital Limited and Madison Williams and Company with existing and new institutional shareholders. In October 2010 there was a further placing run by Mirabaud Securities at 140p to raise $175 million (£109 million).

Gulk Keystone has cash of $215 million as of 1st January 2011 to complete 5 Shaikan appraisal wells and 3 exploration wells (Sheikh Adi, Ber Bahr, Akri Bijeel).

The company has agreed a quarterly sales contract - to sell 2,500 tons of oil, about 16,750 barrels, per week from its extended well tests - and it continues to analyse seismic data across the Shaikan area. It has sold 63,000 barrels of oil into the Kurdistan market by the end of January 2011.

SWOT analysis

Strengths

High potential assets in Kurdistan with Shaikan field estimated to hold 4 billion barrels 

Fully funded for appraisal wells and exploration activity with $215 million of cash following 2010 fund

raisings at 75p and 140p

Weaknesses

Focused on one politically unstable area of middle East, Kurdistan (though more stable than the rest of Iraq)

Export pipeline and Oil and gas legislation issues with central Iraqi government

Opportunities

Potential agreement between Kurdistan and Iraqi government on recognition of oil contracts

Further appraisal upside and exploration success from 2011 activity especially Shaikan 2

Threats

Excalibur legal action is significant unknown with potential legal costs and size of settlement not yet quantified

Further disposal of shares by directors (On February 7th, Ewen Ainsworth sold 240,000 shares and John Gerstenlauer, sold 300,000 shares)

Share price outlook

I will not be investing in Gulf Keystone for now. The risks appear too high. Directors are selling shares, following them hitting an all time high on the news that Iraq/Kurdistan may be able to reach an agreement on oil contracts and revenues (around 192p). However, political risk is still high in this area. The issues created by the Excalibur legal action are also a concern, even if they turn out to be unfounded, legal costs can be astronomic given cases are happening in the U.S. and U.K. Brokers indicate that a fair value is somewhere between 160p and 200p, and with the shares currently at £1.80 following a 6p drop on the news of director sales, current upside seems to be limited. Potentially exciting news will be expected from Shaikan-2, but target depth is not expected until May. Even if hydrocarbon shows are encountered before then, it will be several weeks away before solid news is available. Following the Excalibur litigation news GKP's shares dropped to the 135p zone, this seems a much more sensible entry point than 180p. It's a worthwhile reminder that there were substantial placings in 2010 at 75p and 140p. If I was a holder, I would be selling at these levels. Compared with Xcite and Bowleven, the downside risk is high, despite the medium term upside potential. Kurdistan is an uncertain place to drill for oil!

Given the large private investor base, I'm sure there are those who disagree with this analysis. If so, please use the comment box below. Thanks.

Gulf Keystone Petroleum analysis coming soon

Thanks for your votes for the next Contrarian Investor UK share analysis. I'm making the finishing touches to a piece on Kurdistan focused Gulf Keystone Petroleum (GKP) for posting in the next day or so, time permitting.  

Xcite Energy - FT.com quotes vague bid rumours

Very interesting explanation for yesterday's spike on Xcite and good reminder that Rockhopper pretty much crashed before the Sea Lion discovery with everyone "in the know" saying it was a definite "duster". Sounds familiar! Anyway, hoping for a nice takeover RNS this morning from our friends in Banchory.

http://www.ft.com/cms/s/0/3f93ac14-346f-11e0-9ebc-00144feabdc0.html#axzz1DVqxBebT

Focus on Pursuit Dynamics after positive update
By Neil Hume and Bryce Elder
Published: February 9 2011 21:03 | Last updated: February 9 2011 21:03

Rockhopper Exploration was also under pressure. Shares in the Falklands explorer lost 7.7 per cent to 339p as the investors continued to wait for an update on its latest well. However, traders noted that Rockhopper shares fell 29 per cent in the ten days before the company announced a big find at the Sea Lion prospect.

Vague bid rumours pushed up Xcite Energy, 7.1 per cent higher at 385p, while cancer drug company Sareum Holdings rose a further 56 per cent to 2½p on news of “advanced discussions” with a potential licensing partner for its leukaemia treatment.