Philip O'Sullivan's Market Musings

Financial analysis from Dublin, Ireland

Posts Tagged ‘Petrel Resources

Market Musings 19/9/2012

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It’s been a busy couple of days on the newsflow front, with a lot of the Irish smallcap exploration names prominent in this regard. Let’s round up on what has been happening since my last update.

 

To kick off with the energy sector, Kentz was awarded a $50m shutdown services and operations support contract by Exxon in Sakhalin, far-east Russia.

 

 

(Disclaimer: I am a shareholder in PetroNeft plc) Siberian oil producer PetroNeft released a reassuring update this morning, which revealed that output is steady at 2,000 barrels of oil per day, while early results from the Arbuzovskoye well 101, the first of ten planned new production wells on the Arbuzovskoye oil field, are encouraging. We should see a marked pick-up in newsflow from this stock over the coming months as the Arbuzovskoye campaign gathers momentum.

 

Elsewhere, Petrel Resources announced a “new start” in Iraq, with a new team in place that will “work with national and regional authorities in Iraq to identify projects in which Petrel can be involved”.

 

Providence Resources provided an update on its Rathlin Basin acreage. While this project is very much at an early stage, the company has identified a number of anomalies that it will now focus on evaluating.

 

In other resources related news, there was an interesting backward integration move by Samsung, which has invested in a gold mine in exchange for getting a cut of the output. This follows Delta Air Line’s recent purchase of an oil refinery, and may mark a shift by companies to ensure greater security of supply of key inputs and/or margin capture by buying key suppliers.

 

(Disclaimer: I am a shareholder in Smurfit Kappa Group plc) There was further M&A activity in the European packaging sector, with Mondi acquiring Duropack’s German and Czech operations for €125m. This is extremely welcome on two counts. Firstly, the European packaging sector has traditionally suffered from overcapacity and volatile pricing, but as I have previously noted, in recent times there has been a wave of consolidation in the industry. This should lead to more rational pricing and supply policies going forward, which will lift profitability across the sector. Secondly, from a Smurfit Kappa Group perspective, the multiples these deals are being done at highlight the value in the stock. As Davy note, using the Mondi-Duropack multiple would imply an equity value of €11.30 a share on SKG, well ahead of the €7.60 it is trading at this morning.

 

In other Smurfit Kappa news, following a recent similar move the company announced the sale of €250m worth of senior secured floating rate notes due 2020. The proceeds will be used to pre-pay term loans maturing in 2016/17 and while they will not make a significant dent in interest costs (the new notes will pay 3 month Euribor +350bps, versus the 3 month Euribor +362.5-387.5bps the term notes pay) they do push out the average maturity of the group’s debt, thus reducing the risk around the company and giving it enhanced financial flexibility.

 

In the food sector, Origin Enterprises released its full-year results this morning. These revealed a solid performance by its core agri-services business, with like-for-like operating profits up 7%. Net debt has fallen sharply to €68m compared with €92m a year earlier, which reflects the strong cash flow generation of the business (free cash flow was circa €70m, which implies a FCF yield of 12% or thereabouts). Given this, management has upped the dividend by 36%, which moves dividend cover from last year’s 4x to 3x now. Overall, these are solid results from Origin and shareholders (not least its majority owner Aryzta) will no doubt welcome the significant increase in the dividend.

 

(Disclaimer: I am a shareholder in Independent News & Media plc) There was some unexpected fall-out from the Irish Daily Star’s (appalling) decision to publish pictures of the Duchess of Cambridge, with 50% owner Richard Desmond saying that he would take “immediate steps to close down the joint venture“. This is easier said than done, given the troubles this would involve with redundancies, property leases, a loss of profits and printing contracts. While there has been speculation that this could be a stroke by Desmond to replace a 50% owned JV with his 100% owned UK Daily Star in the Irish market, I can’t see INM abandoning its sole presence in the national daily tabloid space. So, either this dispute is settled amicably (perhaps with INM agreeing a call option to buy out Desmond?) or not, in which case INM will likely launch a new tabloid (using a different title, as Desmond owns the rights to the Daily Star name) which should be able to more than hold its own against any imported competitor whose relevance to the Irish market could well prove to be uncertain.

 

In the blogosphere, Lewis looked at Wincanton, with his blog providing enough to persuade me that I don’t need to look at it in more detail!

 

And finally, if you’ve ever wanted to learn more about money and banking, UCD’s top-rated Professor Karl Whelan has very kindly put up his lecture slides from a course on this very topic.

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162 Group (BOD.L/CON.L/PET.L/CLON.L)

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Earlier this week I met with the team at 162 Group, one of Ireland’s most entrepreneurial businesses. Led by Dr. John Teeling, it has an impressive track record of building start-up ventures, mainly in natural resources. While these are inherently high-risk plays, recent exits from its portfolio highlights the potential upside when these things work out – since the start of 2010 shareholders have received over $250m in cash and shares from the disposals of Cooley Distillery, Swala Resources, African Diamonds, Pan Andean Resources and Stellar Diamonds. While past performance is of course no guarantee of future returns, I figured that it would be worth running the slide rule over what is left in the 162 portfolio to see what the team is presently developing.

 

There are three strands to the 162 Group today. The Industrial business comprises unlisted businesses in the renewable energy and beverage sectors, along with a minority shareholding in Norish plc. My main focus in this piece is on 162 Group’s Mining and Oil units, where the firm manages four AIM listed companies, namely: Botswana Diamonds, Connemara Mining, Petrel Resources and Clontarf Energy. I profile each of these in turn below.

 

  • Botswana Diamonds (Ticker BOD.L, Market Cap £3m). Through this vehicle 162 aims to replicate the success it had with African Diamonds. The firm holds exploration licences in Botswana and Cameroon as well as early-stage diamond licence applications in Zimbabwe. Its main activities are in Botswana, which has been described as the ‘Switzerland of Africa’ due to the stable political backdrop and business-friendly climate. In addition, Botswana is the world’s largest producer of diamonds by value. The firm’s latest presentation gives a good overview of its activities and plans.  While not exactly flush with cash, management’s strong track record in diamonds and industry relationships should prove helpful in agreeing partnerships to exploit any high-potential opportunities the firm manages to identify.
  • Connemara Mining (Ticker CON.L, Market Cap £3m). This business holds 34 prospecting licences in Ireland, with a focus on zinc (Ireland produces 25% of Western Europe’s zinc) and gold. Connemara has agreed joint ventures with Teck (the world’s third biggest zinc producer) in respect of 21 of its licences (zinc and lead prospects) and with the privately-owned Hendrick Resources for another 5 (gold prospects). Its sole venture licences are mainly located close to established zinc and lead hotspots (e.g. Lisheen, Galmoy and Silvermines). The partnerships help bring financial muscle and technical expertise to Connemara’s prospects. In its recent results release management said the company “has adequate funds for all proposed expenditure in the next year“.
  • Petrel Resources (Ticker PET.L, Market Cap £4m). This oil stock has three strings to its bow – firstly, in Ireland, it has license options for two packages of blocks in the Porcupine Basin, and with interest in offshore Ireland on the rise after recent positive exploration news from the likes of Providence Resources, this could prove to be a very interesting asset. In Ghana it is awaiting ratification (a decision is expected in Q4 of this year) for a high potential spot relatively close to previous Tullow Oil finds. Finally, in Iraq it has some early stage assets. It does trade at a modest discount to its end-2011 net cash, but of course developing its assets will not come cheap.
  • Clontarf Energy (Ticker CLON.L, Market Cap £4m). This firm offers a mix of production (stakes in two gas producing fields in Bolivia) and exploration (Peru and Ghana) assets. The Ghanaian interest looks particularly attractive – assuming ratification is received (it is hoped before the end of the year) it will comprise a 60% stake in the field Petrel Resources is similarly awaiting approval to acquire a 30% interest in that is relatively close to Tullow Oil’s finds in that country.

 

Overall, to me the listed companies in the 162 portfolio are all reminiscent of options – the very low market capitalisation relative to the potential upside from a successful commercialisation of their asset bases means that the potential (emphasis) returns are very high. Of course, so are the risks, not least in terms of potential dilutions through farm-outs or placings. So, these are not, for now at least, the type of stocks you’d recommend to widows or orphans. At the same time, for more adventurous investors looking for a high-risk punt, all four of these appear worthy of doing some more work on. It should also be noted that management are significant investors in each of the four listed companies, which points to aligned management and shareholder interests.

Written by Philip O'Sullivan

August 25, 2012 at 10:37 am

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