Philip O'Sullivan's Market Musings

Financial analysis from Dublin, Ireland

Posts Tagged ‘PetroNeft

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.

Market Musings 22/8/2012

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Having been on holidays in Finland and Estonia for the past week, today’s update represents something of a ‘revision session’ as I look through what has been happening since my last update on the stocks that comprise my investment universe.


(Disclaimer: I am a shareholder in AIB plc) To start off with the banks, according to press reports, AIB is looking to reduce its pension deficit by transferring loan assets into it. This is a common-sense move by the bank, which reported a pension liability of €1.5bn at the end of June, and I wonder if it might provide some food for thought for other businesses that find themselves asset rich but cash poor.


(Disclaimer: I am a shareholder in CRH plc) Ireland’s biggest company, CRH, tempered its full-year guidance when it released interim results a few days ago. Having previously forecast that it anticipated “overall like-for-like sales growth in 2012 and a year of progress for CRH”, it now says: “we expect that EBITDA for the year as a whole will be similar to last year’s level”. Tougher macro conditions are to blame, which are clearly beyond the control of the group, although it is mitigating these pressures through cost take-out measures and a focus on cash generation (cash earnings per share, at 85.8c in H1 2012, was well above the 67.1c achieved in H1 2011). On the M&A front the group stepped up its activity here, agreeing to total consideration of €235m for 17 deals in the first six months of the year up from the €172m spent in the same period last year. Overall, the high implied rating that CRH trades on allied to tough end markets means it is difficult to see the shares push significantly higher from here in the short term. This is compounded by a paucity of obvious near-term catalysts for the stock – its next investor day isn’t until November and its next development update isn’t expected until early 2013. One thing that could change that is a substantial earnings-enhancing deal, but on the M&A front it should be noted that CRH’s style is to go for modest bolt-ons over spectacular large transactions (recent chatter around India notwithstanding).


Elsewhere in the construction space Kingspan released good H1 numbers, which came in ahead of market expectations. Encouragingly, there was a good lift in margins (up 100bps to 7.00%) which underlines the strength of this performance. That Kingspan is outperforming the market shouldn’t be seen as a big surprise, however, given that its insulation base gives it a structural edge over more cyclical building materials companies. The benefits of recent acquisitions, particularly as they are integrated into the business, points to a solid outlook for this firm despite the macro headwinds.


In the energy space Dragon Oil released solid interim results. Management is sticking to its medium-term targets, and given its track record few would argue with them. It was interesting to see Dragon Oil is bidding for licences in Afghanistan – these are located in the more stable northern region of the country.


In other resource sector news, Petroceltic announced a merger with Melrose Resources. I don’t follow either company closely, but on paper this looks like a sensible deal which creates a reasonably sized group focused on the Black Sea, North Africa and the Mediterranean Sea with a blend of production, development and exploration assets – hopefully a case of the whole being more than the sum of the parts.


(Disclaimer: I am a shareholder in PetroNeft plc) Wrapping up on what’s been happening in the energy sector, there was an interesting deal in Siberia which has read-through for PetroNeft. TNK-BP sold $400m worth of assets in the region at an implied price of $2.56 a barrel – this is 3x the implied value of PetroNeft, all of whose assets are located in the region.


(Disclaimer: I am a shareholder in Independent News & Media plc) In the TMT sector INM’s 30% owned associate, Australasian media group APN, released its interim results. While its underlying performance was in-line, it took a huge (A$485m – a 70% write-down) charge against the value of its New Zealand print assets. This distracted from a stable topline (continuing operations’ revenues +1% yoy) while underlying operating costs fell 3.3% yoy to A$357m and finance costs were nearly 10% lower yoy. Net debt has fallen to A$470m from A$637m at the end of 2011, helped by the restructuring of the outdoor business. Ominously for INM, APN cut its interim dividend from A3.5c to A1.5c, so INM’s cashflow won’t be helped by lower dividends coming from the southern hemisphere this year.


In the healthcare segment there was a good bit of news from United Drug in recent days. In its Q3 IMS management revealed that it now expects 8-10% earnings growth in 2012, a big increase from the previous guidance of 4-8%. The company also said that it is considering moving its listing from Dublin to London, which surely increases the pressure on the Irish Stock Exchange to seek a deal with another European exchange before it loses any more top plcs. The group also bolstered its Packaging & Specialty division with the acquisition for $61m of Bilcare’s UK and US clinical supplies unit. This is a sensible deal which further enhances UDG’s presence in that space.


And finally, one thing that might provide a lift to my readers in Clonmel today is that C&C’s Magners appears to be making a big marketing push in Finland – in a few of the bars in Helsinki I visited (where a pint* can set you back nearly a tenner!) I noticed that all the bar staff were wearing Magners branded t-shirts and the bottled stuff was widely available. Cider is wildly popular in Scandinavia (Kopparberg hails from Sweden) – by way of illustration, in terms of draught most of the pubs I was in only had two taps – one for either Koff or Karhu and one for cider. Magners is also stocked by the Finnish alcoholic beverage retail monopoly, the charmingly named Alko. So, while I don’t claim to have conducted exhaustive field research (not least given the prices the pubs charged!) it does highlight that Magners is making progress outside of its traditional markets. In its FY12 results C&C revealed that, outside of Ireland and the UK, worldwide Magners volumes grew 28% over the past financial year, with circa 10% of Magners revenue now coming from outside of the British Isles.


* Actually, being good Europeans the Finns sold 0.5 litre drinks in pint glasses.

Market Musings 13/8/2012

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Since my last update Insulation giant Kingspan announced two acquisitions, buying ThyssenKrupp’s European insulated panels business for €65m and a Middle East composite panels and roofing business, Rigidal, for $39m. These are sensible deals that strengthen Kingspan’s presence in those markets and the acquisition price paid for both is quite undemanding – the ThyssenKrupp business was acquired (if you strip out the €15m pension contribution) for 0.5x its gross assets, and while it is at present modestly loss-making (operating margins are -1.5%), once it is integrated into Kingspan’s existing European operations the synergies should see this rebound into profit, and with the former ThyssenKrupp business having achieved sales of €315m in the year to the end of March 2012 this deal could prove a very tidy bit of business for Kingspan in time. By this I mean that if , for example, the minus sign before its operating margin is replaced by a plus you’re looking at a 10% pre-tax ROI (ex the pension contribution), and given that Kingspan’s insulated panels business achieved trading margins of 6.7% in 2011 the returns over time will presumably be much higher than the example I provide above. As regards Rigidal, a price of 1x sales is undemanding for something that has, according to Kingspan, “an extensive route to market in the Gulf region”, which is an area that currently contributes a small fraction of Kingspan’s annual revenues.


(Disclaimer: I am a shareholder in PetroNeft plc) This morning saw another operations update from PetroNeft. Interest in every one of these updates centres on (i) production trends; and (ii) financing. There was no update today on (ii), while on (i), the company says production is ‘stable’ at 2,000bopd, and while this is lower than the 2,200bopd reported in June I am less concerned than I otherwise might be given that in the intervening period two wells were converted to water injectors for planned pressure support while other points of note include: drilling of the first of ten new production wells on the Arbuzovskoye oil field has commenced and is expected to come into production in September 2012; while the Arbuzovskoye No. 1 well is producing lower than normal output due to an electrical fault with a pump that is scheduled to be replaced. What this all means is that, at least in theory, PetroNeft shareholders could be looking forward to a short-term recovery in production which will either help with securing longer-term funding or make the stock more attractive to a potential suitor.


Elan Corporation announced plans to split the company into two units. Under the plan the group will split into one unit focused on its existing Tysabri blockbuster drug and mainly late-stage  projects, and another more early stage drug delivery business platform whose employees will, I assume, be highly incentivised to deliver on the R&D front in the short term given expected cash spend of $50-60m per annum and start up capital from Elan of $120-130m.


Harvey Nash, a UK staffer I’ve held in the past, issued a solid trading update this morning. Despite the ‘challenging environment’ it expects to report solid revenue (+15%) and profit (+6%) growth in the 6 months to the end of July. It’s a stock I like, offering the right sort of diversity for a staffer – geographic, industry and also a mix of permanent/temporary/outsourcing services for clients. I hope to do some work on this company soon with a view to seeing whether it’s worth buying back at current levels – while I know some of the newsflow out of the sector of late hasn’t been too encouraging, the low multiple HVN trades on mitigates against a lot of the macro risks.


Finally, I’m going to be travelling from tomorrow until Tuesday week, so you can expect some ‘radio silence’ from me until then. However, as always the markets will continue to churn out plenty of newsflow. The key things to watch out for over the coming days, at least from an Irish corporate perspective are:


(Disclaimer: I am a shareholder in CRH plc) CRH reports its interim results tomorrow. Many of its peers have updated the market in recent weeks, and the sector commentary has been full of reports of tough conditions in Europe but a better picture in the US. This narrative was pretty much mirrored in its trading update back in May. It will be interesting to see if there has been any changes in the trends noted across its operations, particularly in the US where there has recently been signs that things could be getting a bit softer, while another area of focus will be on the acquisition front – CRH reported H1 ‘acquisition and investment initiatives’ totaling €0.25bn in July, and more recently it has been linked with a potential large deal in India.


Another firm reporting H1 results tomorrow is Dragon Oil.  It recently noted some minor production issues, but these should be resolved in the near term with the installation of sand screens. The company also recently upped its 2012 development well target to 16 wells from the previous 13, which gives further confidence that it will meet its medium term production goals. I don’t think there’s any real scope for any surprises tomorrow given how recently it last updated the market and its relatively ‘boring’ (at least where oil companies are concerned!) business model, and with the shares supported by the ongoing $200m buyback and trading at a reasonably big discount to NAV I wouldn’t have any major near-term concerns around the stock.


Next Monday Kingspan will report its interim results. The group issued a very solid trading update in May, despite what it described as a “subdued global construction market environment” and it will be interesting to see if it is noticing any changing trends across its world-wide operations since that update.

Written by Philip O'Sullivan

August 13, 2012 at 7:28 am

Market Musings 29/6/2012

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It’s been an incredibly busy 48 hours since my last update. Let’s run through what’s been happening on a sector-by-sector basis.


(Disclaimer: I am a shareholder in Allied Irish Banks plc and Bank of Ireland plc) We saw a lot of news out of the Irish financials. Bank of Ireland issued a couple of updates. The first related to the Irish mortgage market, where the group revealed that its share of new lending has increased to 40%, while it did not indicate (emphasis) any change in the pace of arrears relative to its previously stated expectations. Its second update, released yesterday, brought confirmation that Bank of Ireland has completed its €10bn divestment programme within PCAR base case assumptions. This comes as no surprise (the group had previously disclosed that it was 97% of the way through this) but it is an incremental positive and reaffirms my previously expressed view that Bank of Ireland is doing an excellent job at managing the factors it has control over. Bank of Ireland’s main domestic competitor, AIB, released an AGM statement yesterday, the key points of which are: (i) Its non-core business is performing better than expected; (ii) The integration of EBS is going well; and (iii) AIB’s share of the mortgage market is now 35%. On the last point, adding in Bank of Ireland’s share noted above means that 75% of  Irish new mortgages are being issued by AIB and Bank of Ireland – so, essentially a duopoly market. Smallcap IFG’s AGM statement revealed a good start to the year for its core UK and Irish operations, while management said it is going to review its options post the sale of its international unit. Elsewhere, NAMA repaid another €2bn of bonds,  taking its total debt paydown in the past 2 years to circa €3.5bn. At the end of 2011 NAMA had €29.1bn of debt securities in issue, along with another €1.6bn of a subordinated equity instrument. Overnight we heard news of a ‘breakthrough‘ agreement on Ireland’s debt burden which may have significant effects on the banks here. However, I would echo the caution expressed by Constantin Gurdgiev here, namely “we cannot tell how positive it is yet”.


(Disclaimer: I am a shareholder in RBS plc) Switching to financials in other jurisdictions, the LIBOR investigation has had a significant impact on sector valuations in the UK. Also, the “Dude. I owe you big time! Come over one day after work and I’m opening a bottle of Bollinger” quote on page 19 of the FSA’s report should have a significant impact on what people put in work emails in future! From my perspective, my UK bank sector exposure is limited to a small position in RBS, which had already become smaller on the back of its IT problems. Yesterday’s 11.5% slump threatens to push the share price below £2 for the first time since the 1-for-10 reverse share consolidation. I’m still positive on the stock on a longer-term perspective, and am monitoring its current difficulties closely with a view to gauging if the risk/reward justifies topping up my position – although clearly this is not something I envisage happening in the immediate future.


(Disclaimer: I am a shareholder in PetroNeft plc) This morning’s 2011 results from PetroNeft give me few grounds for optimism. While management say that “production levels have been stabilised”, at 2,200bopd presently output is still below the 2,300bopd reported in early April and the 3,000bopd achieved at the end of 2011. I also note management’s comments that: “we have initiated discussions with a range of strategic investors about possible farm-outs, long term off-take agreements and potential equity or asset investments which in the long term would strengthen the Group’s financial position”. This ties in with the revelation that Macquarie wishes to reduce its $30m available loan facility to PetroNeft by $7.5m, “however they are giving the Group time to work this out “. Overall my sense is that a solution to the challenges PTR faces will likely prove to be unfriendly to existing shareholders, but assuming I’m right perhaps this is already reflected in the price as I note that the shares have opened higher this morning.


In the food sector, Greencore made what it described as a ‘platform acquisition’ in the US, buying Schau for £11m, or around 0.5x annual revenues. It also revealed a new $50m contract, which assuming a 6% margin should lead to around $3m in extra operating profits on a full-year basis. Overall, Greencore’s US business continues to make progress, but it is still a marginal player in a huge market – I wonder would the capital the group has tied up here be better deployed in strengthening its strong position in the UK instead of trying to build a sizeable operation in the States. In other Irish food company news, Origin Enterprises released a fascinating presentation about its agronomy operations. I’m very bullish on the long-term outlook for this business, which is underpinned by rising food consumption across the world, the lifting of EU quotas and food security issues.


In the support services sector, CPL Resources released an upbeat trading statement, featuring the word “strong” no less than three times, which bodes well for Ireland Inc.


(Disclaimer: I am a shareholder in Trinity Mirror plc) In the media sector,  News International raised the cover price of The Sun newspaper, which could (emphasis) pave the way for Trinity Mirror to follow suit with its Daily Mirror title.


In the blogosphere Lewis took a look at Plastics Capital, which is not a name I’m too familiar with and based on his blog not one I wish to become more acquainted with anytime soon! Speaking of blogs, FT Alphaville posted up UCD Professor Karl Whelan’s Target2 presentation. I was particularly struck by slide 20 – Eurozone countries’ net balances with the Eurosystem.


Finally, John Kingham looks at how his top tips for 2012 have performed in the year to date – I will outline how mine have done over the weekend.

Market Musings 1/6/2012

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This is a bit of a ‘catch-up’ blog as I spent much of the past couple of days building a financial model for AIB to support my analysis on that stock.


(Disclaimer: I am a shareholder in BP plc and PetroNeft plc) The energy sector has seen some very interesting developments. Parkmead, a vehicle led by ex Dana Petroleum executives, agreed to buy DEO Petroleum for £12.7m earlier this week, which hopefully signals a resumption of the frenetic M&A activity within the sector that we saw earlier this year. Elsewhere, Dragon Oil entered the Iraqi market. While the award of one exploration licence is hardly a game-changer for the stock, it is encouraging to see it continue to execute on its strategy of geographic diversification. Going the other way is BP, which said this morning that it is to “pursue a potential sale of its interest in TNK-BP“. I am delighted to hear this news given that the venture seemed to be more trouble than it is worth. In other Russian oil sector news, PetroNeft announced that it has agreed a new $15m debt facility, while also saying that its output is “stable” at 2,200bopd (in its last update in early April output was running at 2,300bopd). PetroNeft’s shares moved higher on the back of the update as some investors had feared that a rights issue / placing would accompany any new facility, but of course it should be noted that $15m doesn’t go too far in this industry.


(Disclaimer: I am a shareholder in Datong plc) Yorkshire-based spy gadget maker Datong released solid H1 results. As previously guided, the first half of the year was unusually quiet, but very bullish guidance saw the shares initially gain well over 30%. The firm’s order intake during April and May was £3.1m, versus £1.2m in the same period last year, supporting management’s previous forecast of an unusually strong H2. Datong had net cash of £2.1m at the end of H1, or roughly 55% of its market capitalisation. NAV of £10m works out at 73 pence per share, a huge premium to the 28.5p the shares currently trade at. While management has been doing a good job in recent times, given Datong’s very poor liquidity and limited resources I can’t help but wonder if investors would be best served if the group were to sell itself off to a larger defence business.


In the support services space, Harvey Nash, a staffer I’ve held in the past, released a solid Q1 IMS today. Unsurprisingly, given recent positive signals from the US economy, it sees the strongest growth across its operations there, while the UK and continental Europe is slower. HVN remains on my watchlist, but for the time being I’m focusing on trying to realise value across my portfolio and reduce the number of positions I have as opposed to adding more names to it.


(Disclaimer: I am a shareholder in Abbey plc) In the construction space, London-focused housebuilder Telford Homes released a strong set of results, with profits coming in ahead of market expectations. The company raised its full-year dividend by 20% in a strong expression of confidence about the outlook, while in terms of its forecasts for this financial year management say they expect to report a “substantial increase in profit before tax”. Overall, the signs from the South-East England property market remain very robust and this has positive implications for Irish listed housebuilder Abbey, which derives the majority of its business from that part of the UK.


In the food and beverage sector, I was interested to learn that Ireland’s Glanbia produces 18% of global output of American-type cheese. Elsewhere, pub group Fuller, Smith & Turner’s full-year results revealed nothing new relative to what its peers have been saying of late, namely that the sector is betting on a positive impact on demand arising from the Jubilee, Olympics and Euro 2012.


(Disclaimer: I am a shareholder in Trinity Mirror plc) In the media sector, there was a considerable amount of intrigue around Trinity Mirror. The group dispensed with the services of the editors of the Daily Mirror and Sunday Mirror, announcing that they will be merging the titles. Rival publication The Daily Telegraph claims that the departed pair were planning a bid for the group, with the support of an unnamed ‘wealthy figure’. Regardless of whether or not there’s any truth to that story, to me the stock is great value given its strong asset backing (freehold property worth 69p/share, or 2.5x the current share price) and its low rating (1.2x PE, 5.2x EV/EBIT on my estimates for FY12), while on the liability side it has made material progress in cutting net debt in the year-to-date, while the pension deficit is, I believe, very manageable. Hence, I’ve doubled my stake in Trinity Mirror today.


Turning to the macro space, this article served as a useful reminder of what often happens when countries impose capital controls.


In the blogosphere, Calum did a good write-up on BSkyB, but I would dissent from his conclusion about the valuation, chiefly because I’m disinclined to pay double-digit multiples for stocks when there are so many names trading on low single-digit multiples in this market. Lewis maintained his impressive blogging work-rate with a piece on Tullett Prebon. Like Lewis that isn’t an area I’m particularly familiar with, so despite being optically cheap my instinct is to stay on the sidelines.

Written by Philip O'Sullivan

June 1, 2012 at 10:30 am

Market Musings 6/5/2012

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(Disclaimer: I am a shareholder in Independent News & Media) Since my last update, Denis O’Brien confirmed that he has increased his stake in Independent News & Media to 29.9%, which is the maximum level he can own without being compelled to bid for the balance of the company. The next largest shareholders are Sir Anthony J. O’Reilly on 13.3% and Dermot Desmond on 5.75%, so half of the company’s shares are held by those three individuals. This will presumably see the Irish Stock Exchange reduce its free float determination on INM and hence the company’s weighting, but if O’Brien’s purchases lead to deeper efforts to reform the group and lift profitability that will hardly matter to the rest of INM’s shareholders.


Aer Lingus announced that it is to pay its maiden dividend as a publicly quoted company. The 3c/share dividend works out at a 3.1% yield based on Friday’s closing price, and with management indicating a willingness to pay the same amount out in each of the next 2 years, that means people buying Aer Lingus at these levels get nearly a 10th of their money back in a little over 2 years, while in terms of the prospects for capital appreciation, Aer Lingus exited 2011 with net cash of €317.6m, which compares to a current market cap of €521m. So for only €204m or so you get Aer Lingus’ owned aircraft, Heathrow landing slots, earnings streams etc. Sounds pretty attractive to me.


Speaking of Aer Lingus shares, one outfit that holds some in its funds is Matterley. I’ve met Henry and George before and I’m a fan of their value-oriented approach. I see they’re still long Aer Lingus after correctly identifying the opportunity in it when it was (and this is astonishing when you think about it) trading at a discount to its net cash. Another Irish listed stock they hold is Dragon Oil, which I traded in and out of earlier this year.


In terms of what to expect over the coming days, we’ve a busy week ahead in Ireland in terms of scheduled corporate newsflow. In a nutshell here are what I’m expecting / looking out for:


  • (Disclaimer: I am a shareholder in CRH plc) CRH trading update on Tuesday – This should be a bit of a mixed bag. Recent peer updates reveal improving trends in the United States, but patches of weakness in some of the group’s key European markets. Strong cost take-out efforts should see profitability rise compared to year-earlier levels. I will be looking for: (i) indications on how trading is going as we move into H2; and (ii) any sign of a pick-up in M&A activity.
  • United Drug results on Wednesday – Health cutbacks should presumably mean the tone of these results is reasonably subdued, but its very strong balance sheet and proven willingness to invest in expanding its international operations means that there’s an outside chance of an M&A announcement to distract from the underlying performance.
  • Glanbia trading update on Wednesday – Tough comparatives due to a blow-out 2011 will presumably mean that the headline growth rate will slow somewhat, but the underlying performance of the group should be quite resilient. Recent signs of a weakening in the dairy market won’t help, but the high-margin nutrition space is clearly going from strength to strength, as evidenced by Nestle’s recent $12bn deal for Pfizer’s infant formula business. I took profits in this name earlier in 2012, and would look to buy back in on any weakness.
  • Fyffes trading update on Thursday – I’ll be watching this one for news on (i) pricing; (ii) share buybacks (possibly); and (iii) the success the group is having with passing on high fuel costs. There may well be some read-through for Total Produce, which regular readers know is a core holding (in every sense!) in my portfolio.
  • Grafton trading update on Thursday – The main interest here will be on trading conditions in the UK and Ireland. The group has been carefully adding to its portfolio of operations through bolt-on deals in its key markets as well as in its nascent Belgian operation, so there may be an update on this also within the statement.
  • Kingspan trading update on Thursday – The group smashed expectations in its FY2011 results, so I wouldn’t be surprised to see another good update from the company this week. While its structural growth qualities are not in any doubt due to its leading position in the insulation space, any sign of an improvement in cyclical demand could be a catalyst to push these shares significantly higher.
  • (Disclaimer: I am a shareholder in PetroNeft plc) PetroNeft results on Friday – In my view, the main areas of interest in this release will be: (i) production levels, given recent disappointments on this front; and (ii) financing. What management says about these will presumably prompt a violent share price reaction – either to the upside or the downside!

Written by Philip O'Sullivan

May 6, 2012 at 4:31 pm

Market Musings 2/4/2012

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Just when I thought the volume of newsflow would ease off as we reached the end of the results season, we get another slew of trading updates, placings and news of commercial opportunities!


(Disclaimer: I am a shareholder in Irish Life & Permanent plc) IL&P’s results this morning contained few surprises given prior guidance provided by management on impairments and arrears. The loan-to-deposit ratio improved to 227% last year from 249% in 2010, and this is of course miles offside the Central Bank’s target of 122.5% by the end of 2013 (I should note that €500m of deposits from Northern Rock moved into ptsb after the year-end). The net interest margin rose 10bps yoy to 0.96%, helped by rising variable mortgage rates and a greater reliance on low-cost ECB funding. We’ll know by the end of this month what the State’s intentions for the future of the banking unit is. Until we get some clarity on that, I remain inclined to steer clear of the stock (my current position is a residual legacy holding that scarcely seems worth the effort of selling!)


(Disclaimer: I am a shareholder in Datalex plc) Friday’s results from Datalex were rather lost in a deluge of news from the financials sector along with Ryanair’s chunky share buyback. Going into them I had forecast revenue, EBITDA and cash of $28.6m, $4.6m and $12.9m respectively. In the event these came in at $28.0m, $4.3m and $12.5m, so a little bit behind me but bang in line with what brokers Davy (revenue of $28.0m, EBITDA of $4.3m) and Goodbody (revenue of $28.5m, EBITDA of $4.3m) had forecast. In terms of my model, not a lot has changed. I now expect revenues of $29.3m and EBITDA of $5.3m in 2012, which is perhaps too conservative given that the company will have at least eight new paying clients this year. Against that I’m a little nervous of how the tough economic backdrop could be impacting demand for a number of its existing clients. Here I would point to the $0.4m provision Datalex booked in its 2011 accounts against its receivable from Spanair, which ceased trading in January. In any event, the model now spits out a valuation of 62c/share (versus the previous 64c / share), which is 24% above where the shares closed at on Friday (50c). Datalex is certainly cheap, at 6.4x 2012 EV/EBITDA (on my estimates) and with the balance sheet bolstered by gross cash of $12.5m (just over a quarter of the market cap) it’s not a stock I’d lose any sleep over. I’m happy to stay long, and would probably top up my position if I realise some gains elsewhere in the portfolio (I’ve as much total market exposure as I’m comfortable with for now).


(Disclaimer: I am a shareholder in Playtech plc) Elsewhere in the TMT sector, I note that Playtech is one of three firms shortlisted to provide an online betting platform for Greece’s OPAP, which is Europe’s biggest betting firm. While we’ll wait and see what the outcome of this process is, it’s encouraging to have seen a consistent stream of good news from Playtech of late.


(Disclaimer: I am a shareholder in France Telecom plc) In the final bit of TMT related news, I was interested to read that France Telecom’s new low-cost competitor in the French mobile space, Free, appears to be having serious teething problems. This is presumably deleterious to Free’s customer acquisition strategy, and by extension bullish for the likes of France Telecom and Vivendi. I wrote a recent detailed piece on France Telecom here.


In the healthcare space, Merrion Pharma released results on Friday afternoon. With revenues, EPS and net cash all declining, the results looked just like you’d expect results put out just before the weekend kicks off to look!


(Disclaimer: I am a shareholder in Total Produce plc) In the food sector, I picked up a story from the South African media that said the third biggest shareholder in Capespan, Bidvest, has given up on plans to boost its stake in the firm. The article speculated that either of the two biggest shareholders, Zedar and Total Produce, may buy out Bidvest. Given the strategic importance of Capespan to Total Produce, I would welcome an increase in TOT’s stake in the firm.


(Disclaimer: I am a shareholder in PetroNeft) Switching to the energy sector, PetroNeft issued a reassuring update this morning. Following a recent run of disappointments, it was good to see a 36% increase in its reserves while output was steady at 2,300 bopd. So, no surprise to see the shares open strongly this morning. Elsewhere, Providence announced that it is raising $100m to help commercialise its recent oil find offshore Cork and pay down convertible debt.

Written by Philip O'Sullivan

April 2, 2012 at 8:10 am

PetroNeft (PTR.L) – Siberian Tiger

with 27 comments

(This is the tenth installment in my series of case studies on the shares that make up my portfolio. To see the other nine articles, on Irish Continental GroupIndependent News & MediaTotal ProduceAbbeyGlanbiaIrish Life & PermanentDatalexTrinity Mirror and Datong, click on the company names)


While PetroNeft was only incorporated as recently as 2003 and made its debut on the Dublin and London stock exchanges in 2006, the origins of this story stretch back as far as the 1950s, when Soviet scientists made the first of a number of discoveries of oil in the West Siberian Oil Basin in the areas that now comprise PetroNeft’s areas of operations, Licence 61 and Licence 67. At the time these finds were deemed too small to exploit by Soviet officials, who preferred to focus on bringing larger fields into operation.


PetroNeft acquired 25 year leases over Licence 61 in 2005, and Licence 67 in late 2009. The terrain where these licence areas are located in is extremely challenging. As PetroNeft itself says, “the region is characterized by waterlogged soils, shallow lakes and extensive swamps. Winters are severe and last seven to nine months of the year with mean temperatures ranging from about −15° C to −30° C. “The climate is strongly continental, characterised by long cold (as low as −50°C) winters and short warm summers. Blizzards and heavy snowfalls persist from October till April. The average soil freezing depth is 1.2m. The maximum frost penetration depth in swamps is 0.5m. The snow cover reaches 1.5m. The heating season lasts from mid-September until May. The Licence area is uninhabited , with access via winter roads of compacted snow, or by helicopter or waterways. A long winter makes for greater progress in the exploration and development of the oil fields. Seismic acquisition activities take place in the winter months. Drilling activities can take place year round provided the rig, supplies and heavy equipment have been moved to site during the winter months“. Not your ideal holiday destination, in other words!


PetroNeft’s priority in its early years was to re-analyse vintage seismic and other data, build a central processing plant and export pipeline, and commence drilling development wells. The company spent close to $100m on capex relating to these efforts in the five years to the end of 2010. There have been a number of positives from this, in particular the significant increase in the independently audited 2P (proven & probable) reserves, from 27.9m barrels in 2005 to 96.9m in 2010. In 2011 the group announced the discovery of new oil fields in both the Licence 61 and Licence 67 areas. It has also completed a 60km pipeline connecting its Lineynoye oil field to Imperial Energy’s facilities at Kiev-Eganskoye, storage facilities and a processing facility that can process a minimum of 7,400bfpd (PTR has stated that capacity at this facility would increase to 14,800 bfpd by the end of last year, but I haven’t seen any confirmation that this increase has come on-line – either way, with current production running below 7.4kbopd it’s not a crucial point at this stage).


As with all young energy companies that are focused on bringing new facilities on-stream, funding is key. Since the start of 2006 PetroNeft has raised $127m in gross proceeds from the issue of shares, while it also has a $75m debt facility from Macquarie. Given the scale of the capex noted above, along with the running costs of the firm, the latter facility has become especially important to the group. At the time of the firm’s H1 2011 results the firm disclosed that it had swung into a net debt ($12.9m) position. I estimate that it exited 2011 with net debt of $31.3m.


Of course, debt and equity are not the only sources of funding. In 2010 the group moved from being an exploration company into being an exploration and production company. At the time of its FY10 results, management hailed output of 3,100 bopd and guided that output would rise to “a range of between 7,000 and 8,000 bopd by the end of Q1 2012”. However, soon after the group ran into production difficulties, turning to a fraccing programme to boost output. H1 2011 output averaged only 2,182 bopd as wells were taken offline to facilitate the fraccing. The share price tumbled on the back of output missing previous guidance. In early December 2011, the company struck a different note, saying that the initial results from its post-fraccing wells were “encouraging”, and that output had picked up to about 2,500 bopd.


Just when things had started to look up for PetroNeft, the company suffered a fresh blow when management revealed last Friday that current production levels had tumbled to 2,300 bopd having touched 3,000 bopd at the end of 2011 as reservoir pressure at a number of the fracced wells had declined. This led to a near-40% one-day decline in the share price, as investors reeled from the impact of another production disappointment (PetroNeft had guided in December that output would hit “4,000 to 5,000 bopd by the end of Q1 2012”).


So, with the shares having been on the receiving end of a severe kicking last week, what should be the response of investors like myself? To begin to answer this question, over the past few days I’ve built a model from scratch for the company and incorporated some pretty conservative assumptions into it. On the output side, I see only 3kbopd on average being produced this year, rising to 5kbopd in 2013 and 6kbopd in 2014. I suspect the risks to my 2013 and 2014 estimates are to the upside, but given the production disappointments to date, I see no harm in being cautious. In terms of the oil price, I assume a long-term price of $85, which I also think is extremely prudent.


The obvious question arising from the above assumptions is – “How on earth is PetroNeft going to fund itself if your estimates are correct?”. In my model I have assumed that it will pursue a ‘shareholder friendly’ strategy, in which the company reins in capex to $25m/year for each of the next 3 years (from what I estimate was $40m in 2011). This sees net debt peak at $125m at end-2014, which is clearly well in excess of the current debt facility, but if PTR is able to continue its record of adding to its reserves (I wouldn’t bet against that given the track record noted above) and/or oil prices outperform my conservative forecasts (very likely) I think it’s realistic to assume the company can secure extra credit facilities using its reserves as collateral (as it has been doing up to now). However, this assumes that management, which has presided over an increase in the number of issued shares from the 207.5m average for 2007 to the present 411.6m, will not raise fresh equity either to keep debt levels down or maintain capex at the 2011 rate. This may well turn out to be a heroic assumption.


Standing back from these assumptions makes it clear that making long-term forecasts for PetroNeft, given the relatively early stage its operations are at, the disappointments to date and the possibility that existing shareholders could be heavily diluted (given where the share price is at), is fraught with risk. My model has spat out a NAV of 60p/share, which is 6x where the shares closed at last night (10.0p). Based on my conservative estimates, the biggest risk is that of a large scale equity fundraising, but with 500% theoretical upside on my numbers I have to ask myself if this risk is priced in?


Looking at it another way, PetroNeft had independently audited 2P reserves of  96.93m barrels of oil at the end of 2010. Given the modest production levels and encouraging news on discoveries since then, I think it’s safe to say that these reserves have grown since then. But, for argument’s sake, taking the 2010 reserve figures as a baseline, yesterday’s closing market valuation and my forecasts for 2012 this puts the group on a current EV/BOE of $1.28, meaning that the market is applying a valuation of only $1.28 to every barrel of oil PetroNeft has in the ground. So, the stock does look cheap on this measure.


Cheap as it may appear, clearly, there are significant risks to this company, and its track record to date doesn’t inspire a lot of confidence. Perhaps the beaten up valuation reflects all of this. Perhaps not. Until management demonstrates that it has overcome the production problems PetroNeft will, in my view, likely remain well outside of ‘suitable for widows and orphans’ territory. However,  not being a widow or an orphan, I need to make up my own mind about what I should do about this stock. My model tells me that PetroNeft won’t necessarily have to raise additional equity to execute its strategy, and on that basis, the shares look like they’re remarkably good value here. However, even if I’m wrong, and existing shareholders get diluted by, say, 50% (yes, I’m picking that number completely out of thin air), the upside is still a multiple of where the shares are trading at. To this end, and while noting that the risks are substantial, I think I’ll be adding to my existing position. Whether this turns out to be a brave or foolish decision, only time will tell.

Written by Philip O'Sullivan

February 23, 2012 at 9:30 am

Posted in Sector Focus

Tagged with

Market Musings 18/2/2012

with 2 comments

As has been the norm so far this month we’ve seen a lot of newsflow in recent days from right across the market. Let’s cover what’s been happening on a sector-by-sector basis.


(Disclaimer: I am a shareholder in France Telecom plc) In the telecoms space, I was interested to read that Deutsche Telekom is considering exiting its Everything Everywhere jv with France Telecom in the UK. It will be interesting to see how the latter responds, given that France Telecom has been exiting operations in Europe of late, selling its Austrian and Swiss businesses. Bernstein reckons that it is likely to IPO Everything Everywhere, which would be my preferred choice – France Telecom needs to slash its vast net debt (€30.3bn at the end of H1 2011) and this, along with the proceeds of the recent disposals, could put a chunky dent into it. With the French state, France Telecom’s biggest shareholder, losing its AAA rating from S&P earlier this year and Moody’s threatening to follow suit, I think heavily indebted corporates in that market are going to come under increasing pressure unless they can get their balance sheets in order. Against that I note that FTE is considering spending $2bn to buy out its Egyptian partner in that market, but the costs of that potential deal are significantly outweighed by the disposal proceeds outlined above.


In the construction sector, I was interested to read that the company that bought out Wolseley’s assets in the Irish market has been placed into examinership. While time will tell what the outcome of that process is, any closures would likely benefit Grafton, which has 67 merchanting outlets and 49 DIY retailing outlets in Ireland. Elsewhere in the sector Valuhunter did up a stonking blog on housebuilder Bellway in which he makes a very interesting observation – the UK benefits cap may lead to some internal migration as people move from the more expensive south-east of England to other regions. I am perplexed to read hand-wringing articles on the benefits cap such as this one – surely it is unreasonable to expect taxpayers to pay for people to live in the most expensive areas?


(Disclaimer: I am a shareholder in Total Produce plc) Switching to food companies, I was interested to read Indian media reports (this doesn’t appear to have been picked up by either the Irish media or any of the domestic brokers here yet) that Tata has ‘dissolved’ its joint venture with Total Produce. This is disappointing, as there’s no denying that the jv offered the greatest organic growth potential of all of Total Produce’s units. However, we have to frame that disappointment in the context that it was only a very small part of Total Produce’s business – I estimate only 1 or 2% of turnover.


(Disclaimer: I am a shareholder in PetroNeft and an indirect shareholder in Dragon Oil) In the energy sector, PetroNeft issued a ghastly trading update, in which it said production has slipped to 2.3kbopd versus 3kbopd at end-2011. This is eerily reminiscent of the technical problems that dogged the stock throughout 2011, and hence it was no surprise to see the share price close down nearly 40% yesterday. Sentiment will not be helped by an RNS posted after the market close by JP Morgan, which said that it has followed up its recent share sale by offloading a further 5m shares. JP Morgan has 6.8% of PetroNeft’s shares remaining, and were it to run its stake down to zero that would mean the market will have to digest about 8x the ADV. I can’t see a queue of buyers for that at the moment. Elsewhere, Dragon Oil said that it is considering making a bid for Bowleven. Contrarian Investor UK welcomes the return of M&A within the sector.


In the recruitment space, Harvey Nash issued a strong trading update. It’s one that I sold out of early last year – in hindsight, with very good timing – but I have been keeping an eye on it because I like its conservatism, diversification and excellent management team. While there is no denying that it’s cheap – it trades on a single digit PE and yields around 4.5%I suspect there will come a better time to buy Harvey Nash later this year – EPS momentum is set to fall off a cliff from the +16% in the 12 months to end-January 2012 to +4% in the current financial year, before accelerating once again to +34% in the 12 months to end-January 2014.


(Disclaimer: I am a shareholder in Allied Irish Banks plc, Bank of Ireland plc and Irish Life & Permanent plc) I was interested to read that IBRC, the bad bank formerly known as Anglo Irish Bank, is “anxious” to take on the tracker mortgages that are causing so much hurt for AIB and IL&P. Bank of Ireland reports results on Monday that will hopefully give a lot of clues about the dynamics within the Irish market at this time. The key things to watch out for in BKIR’s results are pre-provision profits (most analysts expect €500m), deposit trends, net interest margins, progress on deleveraging and impairment guidance.


(Disclaimer: I am a shareholder in Independent News & Media) I recently did up a case study on Independent News & Media, in which I mentioned the problem of imploding newspaper circulations. I was interested to read that INM has just de-registered 12 of its regional titles from the industry’s official circulation auditor, ABC. I’m sure that there’s no correlation between the two!


(Disclaimer: I am a shareholder in Datong plc) I was interested to read a piece in Growth Company about a stock I hadn’t come across before – PSG Solutions. PSG is clearly a microcap, with a market cap of only £26m, but I was interested to learn that it has a unit called Audiotel that specialises in technical surveillance countermeasures. I wonder if it would be a good fit with Datong, whose surveillance capabilities are well documented. Partnering the two could give it a nice breadth of offerings to security agencies. If anyone has a view on this, why not post a comment below.

Market Musings 24/1/2012

with 3 comments

Since my last blog it’s been mostly all about trading updates and some good blogs from my UK and Irish peers. Let’s take a look at what has been going on.


Dragon Oil issued a solid trading update. Management had already guided the market on production levels, but there was a positive surprise in the shape of an upward revision to reserves. As Goodbody’s Gerry Hennigan points out, Dragon recorded gross reserves of 658 mmboe at the end of 2005, the same figure outlined for 2011, despite production over the past six years. His total risked NAV on the stock is £8.17, which compares favourably with yesterday’s £5.13 closing price. Given that Dragon is effectively a play on the oil price, this could be one to trade should tensions with Iran worsen.


Speaking of the oil sector, you might recall that some months ago I criticised Chancellor of the Exchequer George Osborne for raising taxes on North Sea oil producers. Well, last year only 14 exploration wells were drilled offshore UK, the lowest rate of activity since 1965. Cause, meet effect.


(Disclaimer: I am a shareholder in PetroNeft plc) Elsewhere, I note that there has been an oil IPO in London today – RusPetro – its operations are in the same geographical area as PetroNeft’s, so it’s one I’ll be keeping an eye on.


(Disclaimer: I am a shareholder in Glanbia plc) Switching to food stocks, PZ Cussons issued a trading statement earlier today in which it reported “strong revenue growth” in its Nigerian nutrition business – which is a 50:50 joint venture with Glanbia. This is a further positive sign for Glanbia, although I think its share price is high enough at current levels, for reasons I recently outlined.


(Disclaimer: I am a shareholder in Playtech Ltd) It was a busy day for Playtech, which announced Q4 KPIs, 2 new joint ventures and an acquisition. I take encouragement from the solid trading stats and decent enough start to 2012 for the group. On the joint ventures, these bolster its position in Germany and South Africa, two large markets that are reportedly going down the route of further liberalisation. While my concerns around corporate governance issues have not gone away, I’m happy to let this one run a little longer in the hope that it can get back to my break-even point in the near future. To me Playtech is like a paratroop on a C-130 plane – it’s waiting for the green light before jumping out of my portfolio!


In the blogosphere, Mark Carter wrote a great blog on Premier Foods that’s worth checking out here. Lewis at Expecting Value does a good write-up of his experiences as a shareholder in RSM Tenon, which reminds me of some of the horror stories in my own portfolio over the years!


Finally, I did some digging on the National Newspapers of Ireland website yesterday and was interested to read through how circulation figures have evolved for the national titles here over the past few years. Comparing the most recent data to five years ago reveals that over that period circulations have performed as follows: Irish Times -14%, Irish Independent -17%, Irish Examiner -24%, Irish Star -23%, Irish Mirror -16%, Irish Sun -27%. You can download the data set from my blog by clicking this link.

Written by Philip O'Sullivan

January 24, 2012 at 5:18 pm

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