Philip O'Sullivan's Market Musings

Financial analysis from Dublin, Ireland

Market Musings 29/9/11

with 4 comments

It’s been a busy few days, but I’ve managed to get some trading done and read up a lot on the economic situation both at home and away. I thank those of my readers who sent a few comments / suggestions to me – please keep them coming.


(Disclaimer: I am a shareholder in PetroNeft plc) Following a series of bullish comments about equities from me, I put my money where my mouth is and made a return to the markets, doubling my shareholding in PetroNeft yesterday. To me PetroNeft offers a compelling risk/reward trade-off. It is a simple story – Soviet scientists discovered oil deposits in the 1970s in Western Siberia that were deemed too small to exploit at the time. Fast forward three decades, post considerable technical advancements in the energy sector and higher oil prices (which have made smaller fields much more economical to exploit), and Irish listed PetroNeft bought the rights to these fields and commenced their development (this broker note has a good snapshot of the company’s history). While the firm has encountered technical difficulties with getting the field up to its targeted production levels this year, disappointing the market, it has continued to find new oil deposits, underpinning its existing strong reserves base. At the end of 2010, it had audited 2P (proven and probable) reserves of just under 100m barrels of oil (see here and here). Leaving all of its discoveries since the start of the year to one side, taking its current market cap and net debt (which provide an enterprise value of $155m), the group is trading on an EV/BOE of circa $1.6 (based off its audited 2P reserves). In plain English, that means that if you add together PetroNeft’s market capitalisation and its net debt, and divide the product by the independently audited barrels of oil it has in the ground, the market is valuing PetroNeft’s oil reserves at around $1.60 a barrel. That is remarkably cheap by any definition. The group is also well resourced financially to continue its development, having secured a facility of up to $75m from Macquarie. As ever, readers are strongly advised to do their own research!


Aer Lingus released a positive trading update ahead of yesterday’s well-received investor day. Both yields and passenger volumes were ahead of year-earlier levels in July, August and September. This is an improvement on the trends reported in its last update, which I blogged about here.


We’ve seen a lot of talk around China. Forensic Asia’s Gillem Tulloch believes that the Chinese property market is a bubble on a similar magnitude to the crisis in the US. Elsewhere, BOA-ML are warning of a hard landing for the Chinese economy. In a further sign of concern, shares in Burberry slid today on fears about the Chinese consumer. All in all, China’s economic prospects look gloomier with every passing day. A hard landing for China would have severe consequences for global growth. Hence, I would not be recommending that people invest in companies with a material exposure to that market.


Turning to the Irish economy, the CSO issued retail sales data for August yesterday. I was interested to note the decline in volumes across the different sectors since the index was last rebased in 2005. Over the past 6 years or so the volume of motor and bar sales are both down by more than 30%, which primarily reflects the dramatic reversal in the economy (and also the extent to which a lot of bar sales have migrated to the off-trade).


Elsewhere, my old friends at the Adam Smith Institute posted an interesting blog – Ireland has 99 problems, but austerity ain’t one. In the absence of having a currency that we can devalue to give the economy a lift (at least in the short-term), the private sector here has done a great job at achieving a “competitive devaluation”, with costs falling sharply, helping to drive a surge in exports.


Staying with Ireland, I note that the Irish government may privatise more State assets than previously planned. Interestingly, this coincides with a recent spike in reports of US private equity funds visiting Dublin, but it will be difficult to get asset sales away in the current climate. Speaking of the current climate, I spotted that Citi’s chief economist, Willem Buiter, cut his GDP forecasts for the US, UK, Canada, Japan and the EU yesterday. It should be noted that these downgrades cover all of Ireland’s major trading partners, hence the risks to Irish GDP growth lie firmly to the downside (not something that regular readers of this blog should be in any way surprised by).


Lastly, in terms of my peers in the blogosphere, the Expecting Value blog has a good round-up of recent updates from Morson and Begbies Traynor that’s worth a look.


Written by Philip O'Sullivan

September 29, 2011 at 6:17 pm

4 Responses

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  1. […] portfolio had one of its worst days ever, shedding a whopping 4.6%, with PetroNeft (-18%) – which I’d only recently doubled my shareholding in! – doing most of the damage […]

  2. […] is the success of the competitive devaluation in recent years here (something I’ve mentioned before), which has helped narrow the gap between “rip-off Ireland” and its peers. While the UK […]

  3. […] result (due in December) from its hydraulic fracturing programme at the Lineynoye oil field. I recently doubled my shareholding in the company, and while clearly my timing could have been better, I’m glad that I persevered with the […]

  4. […] end of the range of current market expectations“, which continues the more positive narrative I’ve remarked on before. Elsewhere, IAG (British Airways + Iberia) has announced that it is to buy BMI. This raises an […]

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