Philip O'Sullivan's Market Musings

Financial analysis from Dublin, Ireland

Market Musings 4/1/2012

with 2 comments

It’s been a quiet enough start to 2012 so far in terms of newsflow, with some of the key themes from last year continuing to play out, particularly on the macro front.

 

In China, the authorities signaled that they will be rolling out incentives to encourage more consumer spending, in a further sign of the country’s deteriorating economic fortunes.

 

Closer to home, Irish house prices continued to fall at double-digit percentage rates in Q411. Given the rate of decline and challenging economic outlook, I don’t see prices leveling off until 2013 at the earliest.

 

There is a mountain of sovereign debt maturing this year. The G7 and the BRIC countries combined have $7.6trn to refinance –  that’s a sum equivalent to over 10% of global GDP. Again I ask – who is going to buy all of this? The answer, in my view, is that a lot of it will be snaffled up by the central banks as monetary policy globally gets even looser during 2012.

 

(Disclaimer: I am a shareholder in PetroNeft plc) Turning to equities, Paul Curtis, a self-described small cap investor focused on the oil sector,  posed an interesting question yesterday about whether 2012 will be a year for E&P consolidation, given that many small caps cannot access finance or raise new equity, while large cap players are throwing off a lot of cash. That got me thinking about PetroNeft, whose reserves are valued at circa $1.50/barrel, while the company has already done a lot of heavy lifting in terms of getting the infrastructure in place to exploit these reserves (it is targeting output of up to 5,000 barrels/day by the end of Q112). If I was a CEO of a large oil company looking to add to my reserves, in these markets I would be tempted by low-hanging fruit like PetroNeft instead of committing resources to speculative exploration activity.

 

(Disclaimer: I am a shareholder in CRH plc) In a development update released this morning, CRH said that it made “23 acquisition and investment initiatives totalling approximately €0.4 billion” in H211, taking FY11 development spend to €0.6bn. As Goodbody note, CRH’s total development spend of €570m in 2011 compares with 2010’s €520m and the €420m spent in 2009. The considerable firepower CRH is deploying once more serves as a reminder of its industry leading balance sheet (net debt/EBITDA was only 2.2x in 2010), while the volume of transactions also reminds us of CRH’s preference for bolt-on deals over blockbuster ones (a strategy which reduces CRH’s riskiness).

 

The total value of M&A transactions in Ireland fell 28% last year.

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Written by Philip O'Sullivan

January 4, 2012 at 11:45 am

2 Responses

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  1. […] on from the bearish tack on Irish house prices I expressed in my last blog, here’s a fine piece by Cormac Lucey on the outlook for […]

  2. […] In the energy sector, Dragon Oil announced that it exited 2011 producing 71,751 barrels of oil per day, which is slightly ahead of its 70k target. Elsewhere, I found two pieces of interest in this oil sector note by Edison. The first is the chart on page 3 which rates oil stocks on an EV/BOE basis – this shows that some companies’ oil reserves are being valued at close to nothing (or in some cases less than nothing). The obvious health warning on that chart being that investors need to look at the companies’ ability to bring those reserves into production in a shareholder friendly way before rushing into all of those names. The second thing of note in the report is the question the analysts pose about the potential for consolidation in the sector, which echoes Paul Curtis’ views from two weeks ago. […]


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