Philip O'Sullivan's Market Musings

Financial analysis from Dublin, Ireland

Posts Tagged ‘Tullow

Market Musings 9/9/11

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Since my last update, we’ve seen the good (Tullow), the bad (ECB, Euroland, Obama’s jobs proposals) and the ugly (HMV).


On Tullow, one of my more thoughtful readers contacted me yesterday to ask about rumours of bid interest from CNOOC (China National Offshore Oil Corporation). This story continually does the rounds, and given both China’s thirst for oil reserves and Tullow’s spectacular oil finds in Ghana and Uganda (in particular) you can see why. However, while a “Chinese takeaway” is a credible endgame for Tullow, the story itself has appeared with so much frequency that one is reminded of the fable of the boy who cried wolf. So, I wouldn’t be punting on Tullow on the basis of the latest manifestation of this rumour. However, why I would consider punting on Tullow is its exploration activity. On this front, we received a reminder of Tullow’s proven skill in finding oil in new markets with news of a 72m net oil pay find in offshore French Guiana today. This is a shedload of oil. Goodbody’s Gerry Hennigan, who is one of the top oil analysts I’ve ever come across, puts today’s discovery into context:


“In comparison to [the] previous discovery in Ghana, 72m of net oil pay is considerable, Mahogany-1 and Mahogany-2 encountered 95m and 50m respectively”


And if that’s double-Dutch to you, this piece explains why Tullow’s Ghana find was huge.


In Euroland, we have seen both Greece being warned about its fiscal delinquency and the latest ECB meeting. On the latter, the euro has come under pressure as the European Central Bank has halted moves to hike rates, and indeed rate cuts in 2012 are increasingly being seen as a given.


Here’s Danske Bank on why the UK should be rated A+, not AAA.


Turning to the US, markets have given a lukewarm reaction to President Obama’s jobs plan. The best way America can grow employment is by giving companies the confidence to invest the trillions of dollars in cash they have sitting on corporate balance sheets, rather than having the Federal Government continue to spend money that it doesn’t have. The uncertainty caused by the unsustainable fiscal and monetary paths the Obama administration and Chairman Bernanke have respectively embarked upon does little to promote confidence.


Do you know who the 10 countries with the biggest gold reserves are?


(Disclaimer: I am a shareholder in Irish Continental Group plc) In terms of other corporate newsflow, Goodbody had a bullish note out on Greencore following its Uniq deal yesterday. They rate it as a “buy” with an 80c price target (c.33% upside). The broker is particularly positive on the food producer’s cashflow and 7.8% dividend yield. By my calculations, Greencore and Irish Continental Group (7.0% yield based on yesterday’s close) are the two highest yielding stocks listed on Dublin’s ISEQ Index. Something for income investors to think about.


Following yesterday’s grim updates from Dixons and Home Retail Group (which owns Argos and Homebase), the UK High Street Horror Show continued today with yet another set of eye-watering like-for-like sales numbers from HMV. The UK retail sector is not on my list of things I’d like to invest in at the moment!


Another one of my thoughtful readers brought this new film to my attention. Looks good!


Written by Philip O'Sullivan

September 9, 2011 at 1:23 pm

Market Musings 21/8/11

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Activity on the blog has been quiet this week as I had to finish two articles for the new issue of Business & Finance magazine, in which I look at the outlook for global markets and also talk to two of Ireland’s brokers, NCB and Dolmen, about the options they have for investors looking to diversify out of Ireland and the eurozone. Sadly, this meant that this blog remained quiet while the markets were anything but that!


There was panic on the global equity markets as investors rotated out of shares and into “safe haven” assets such as gold, which continues to shoot higher. At the time of writing it is just under $1,852 an ounce, having surged 14% in the past 30 days (it’s up 47% in the past year). Another “safe haven” that has seen massive inflows is government bonds, and we’ve seen some chunky moves here, with yields on US Treasuries at levels last seen when Eisenhower was in the White House.


While there is no denying that the catalyst for the slide in equity markets – fears of a ‘double-dip’ recession and deleveraging slowing the pace of a future recovery – is real, the market reaction to me looks excessive. Concerns have been heightened by weak GDP readings across many of the world’s leading economies, however, low growth and high debt are hardly new concerns, and I believe that markets have more than moved to compensate for a more adverse scenario playing out. Moreover, given the hysterical tone of much of the financial commentary I’ve recently read, my view is that we are in and around the point of maximum bearishness (recall, however, the old stock market adage that nobody rings a bell at the top and bottom of the market!), and that shares will rebound significantly between now and the end of 2011.


While there’s no denying that the economic outlook is gloomy, things are nowhere near as bad as they were in 2008 (comparisons with 2008 have been repeatedly made this week) and it shouldn’t be forgotten that corporate balance sheets have dramatically improved since the onset of the global financial crisis (one article I read this week said that US and European corporates are sitting on $3trn in cash). Furthermore, with government bond yields at record lows and sovereign balance sheets in rag order, minuscule returns on cash and gold looking frothy (in the short-term, as it has spiked well above trend, however, the long-term fundamentals remain intact), I would submit that bluechips with strong balance sheets and well-covered dividends (dividend yields for many large corporations stand at a multiple of their countries’ bond yields) are looking particularly attractive here to people with money to invest. 


It takes guts to step in when panic like this sets in. Perhaps the market has further to fall. But when sentiment turns, and the huge sums of cash that have been parked at near-zero returns in the money markets in recent weeks rotate back towards riskier assets, the rebound in equity markets (I can’t see the funds rotating into government bonds or precious metals, given where they are trading at) will be an extremely violent one.


Turning away from the overall market and to specific companies, I was amused to see stockbroker Peel Hunt use the recent UK riots as one of the reasons why it recommends Domino’s Pizza UK & Ireland plc to investors as a buy:


“We would also take seriously recent social developments, which even after calm has been restored, may result in a subtle shift between the considerations for going out as opposed to staying at home. This cannot be bad for the delivery business”


I was pleased to see solid interim results from Kerry Group during the week. Growth was led by its world-class Ingredients division. The company  “remains confident of achieving its growth targets for the full year and delivering 8-12% growth in adjusted EPS” as previously guided.


I recently commented about how there has been a spike in share buybacks. On Thursday Ryanair disclosed that it has bought back a further 1% of its shares. I wonder if any other Irish plcs will follow the lead set by it, Abbey and United Drug given the recent market falls.


Finally, looking to the week ahead, the main scheduled Irish corporate news will be the interim results from Kingspan (Monday), Tullow and Glanbia (both Wednesday) and Independent News & Media (Friday). Doubtless they will provide plenty of talking points.

Market Musings 7/7/11

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It’s been a busy couple of days, both privately and on the markets. A lot of my time has been taken up with assisting in a flat clearance, which gave me a brief glimpse into what life as a rock star must be like as I watched sofas fly off a 3rd storey balcony!


The Irish government released the latest Exchequer Returns, covering the period to the end of June. All major headings of tax revenue in Ireland were down yoy in H1 except for income tax, customs and excise receipts, which tells its own story. On the spending side, total voted expenditure was +2% yoy in the first half of the year, while of the 15 diffferent “vote groups”, 6 reported an increase in spending in H111 relative to H110. This, we’re told, is “austerity”. The Exchequer deficit was €10,828,463,000 in H1, or €2,364 for every man, woman and child in the country. This is clearly an unsustainable position, and one that will require cutbacks far in excess of what the government is currently planning if we are to stabilise the public finances. Constantin Gurdgiev has a further analysis of the data here.


There was a lot of Irish corporate news as well. Tullow Oil revealed that its Ghanaian operations are now producing 80k barrels of oil per day, up from 70k in May, and this will rise to 120k by August. Management also reiterated its FY capex goals.


(Disclaimer: I’m a shareholder in CRH plc) CRH issued a development update for H1 yesterday, in which it revealed €0.2bn of spending in the first 6 months of the year on 21 acquisition and investment initiatives. CRH has also agreed to buy VVM which will take ytd spend to circa €0.3bn. While the domestic brokers seemed broadly happy with this, I had hoped that the company would have done more on the development front, especially given its sector-leading balance sheet.


(Disclaimer: I’m a shareholder in PetroNeft plc) PetroNeft has been a drag on my portfolio this year, but its shares rallied strongly on the back of its latest operations update, in which it revealed that it has encountered 18.5m of net pay (its thickest ever) at the Lineynoye 206 well. This bodes well for its revised development strategy, but prudence tells me to wait for further positive results before increasing my exposure to this stock.


(Disclaimer: I’m a shareholder in Total Produce plc) I was interested to see that fruit distributor Capespan, in which Ireland’ s Total Produce has a 12% stake, has received a takeover approach. Bloxham’s Joe Gill has a good piece on it, and I note in particular the big PE premium that the bid for Capespan (13x) is pitched at relative to Total Produce’s rating (5.3x). I like Total Produce’s business model – it’s a very stable and defensive company, with good cashflow generation (operating cashflow/underlying EBITDA was 83% in 2010) and a strong balance sheet (net debt/EBITDA 0.8x at the end of 2010). It’s also Europe’s biggest fruit and vegetable distributor, moving over a quarter of a billion cases of fresh produce from 88 locations each year, but given how fragmented the market is (its market share is a mere 5%) there are plenty of opportunities for it to pick up rival companies and squeeze earnings-enhancing synergies out of them. Hopefully the Capespan valuation might attract some buying interest in Total Produce!


On the international equities side, I was interested to see a profit warning from CSM, the world’s largest bakery products group, which was due to rising agri-input prices.  This is a topic I’ve written about for Business & Finance before, and I suspect that the read-across from CSM is negative for Ireland’s Aryzta. Some UK oil names got a boost from a welcome u-turn on North Sea taxes from the British government, which had previously appeared hell-bent on endangering the country’s energy security and countless numbers of jobs by making the North Sea uneconomic for many oil producers. Contrarian Investor, one of the main UK share blogs I follow, had a good piece on this here. (Disclaimer: I’m a shareholder in Trinity Mirror plc) I had mixed emotions over one of my holdings this week. The value of my shareholding in Trinity Mirror increased by over 16% yesterday after a slew of firms stated that they are boycotting the News of the World following revelations about phone tapping. This is positive news for the NotW’s competitor The Sunday Mirror, but I would prefer if the background to this share price rise wasn’t so ghastly. The conduct of certain employees of the NotW represents a new low for tabloid “journalism”.


Yet another worrying sign about China? – the Singapore SWF has offloaded its stakes in two listed Chinese banks.


I was astonished to learn that an Irish MEP, Jim Higgins, thinks that Ireland should introduce a national system of ID cards. Apart from the fact that this would pose a grave threat to civil liberties, or that such experiments have failed elsewhere in the past, the cost of such a scheme would be ruinously expensive at a time when Ireland is broke. Not that Higgins cares about how much things cost, it seems.

Market Musings 10/04/11

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Since I last offered my thoughts on the markets on Thursday morning we’ve seen some interesting developments, especially where interest rates and commodity prices are concerned.


Thursday brought news that the Old Lady of Threadneedle Street – The Bank of England – was, as expected, keeping rates on hold for now. I wouldn’t be surprised to see a hike at the next meeting, assuming that the Q1 UK GDP reading on April 27 doesn’t throw up any surprises. One central bank that did hike was the ECB, which raised rates (by 0.25%) for the first time since July 2008. The market is bracing itself for further rate increases over the coming months, and we could well see the ECB base rate hit 2.00% by year-end. This is bad news for the 400,000 tracker mortgage holders in Ireland. As I’ve said before, Ireland has had an inappropriate monetary policy on the way up, and now we have an inappropriate policy on the way down too.


The main culprit behind these rate increases is, of course, inflation. We got a few reminders of how frothy commodity prices have gotten this week with silver breaking the $40 level for the first time since 1980, brent crude hitting a 32 month high and gold reaching another record level. Indeed, China reported its first quarterly trade deficit for 7 years this week, as soaring commodity prices have added massively to its import bill. With the Federal Reserve’s QE2 programme scheduled to end in June, it will be interesting to see what the consequences of this will be. Bloomberg economist Michael McDonough wrote an interesting piece showing a strong correlation between commodity prices and Fed Treasury purchases, which is worth a look.


Despite all of the talk of austerity here, I was surprised to see that subsidies for flights between Dublin and Galway will be maintained until the middle of the summer. The PSO has, in my view, had absolutely no justification for the past few years given the major investment by the State in both road and rail infrastructure between the two cities.


Speaking of austerity, some eye-popping numbers – the US incurred a budget deficit of $830bn in the first six months of fiscal year 2011, some $113bn than in the same period in the previous fiscal year. Figures like that really show up the “historic” $38bn US budget deal for what it is – a complete joke which barely makes a dent in the deficit. On that note, Peter Schiff, as always, tells it how it is here. If you are looking for more details on the US budget, read this thought-provoking piece by Peter Tchir.


In terms of sector calls, Davy turned negative on UK housebuilders, which for me wasn’t a huge surprise given the scary updates coming out of firms exposed to the UK consumer in recent times. I was interested to see some predators looking at European debt too – BlueBay is buying Irish government bonds while SVP is attracted by opportunities in distressed debt in Euroland. Fisher Investments, whose insights I’m a big admirer of, released its latest guidance for investors.  It says that this year will be one where stock-picking skills are to the fore, a theme I’ve explored in my articles for Business & Finance magazine since the start of the year.


(Disclaimer: I am a shareholder in CRH plc and AIB plc) Turning to Corporate Ireland, the government confirmed that its stake in AIB is to rise to 92.8% – post the completion of this AIB will have 12.25bn shares in issue. Another plc that caught my eye was Fyffes. I was surprised to read that Fyffes (market cap €143m) paid its directors €2.7m last year, while Ireland’s biggest plc, CRH (market cap €12bn) paid its directors €8.0m in the same period.


In terms of the week ahead, I’ll be watching results from Punch and the IMS from Michael Page tomorrow to get more clues on the health of the UK consumer, while on Wednesday 3 Irish plcs – Tullow, Kerry and Fyffes – all go ex-div so watch out for some interesting price action there. All told my mood is bearish, I’m overweight defensives and see no reason to rebalance my portfolio.

Market Musings 01/04/11

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Today was mainly about the fall-out from the stress tests. The varying share price reactions on the ISEQ today (Bank of Ireland +41.4%, AIB +11.1% and Irish Life & Permanent -58.8%) told its own story about how the market views the prospects for the different quoted banks here.

Despite the huge jump in its price today, Bank of Ireland is still only capitalised at €1.65bn – less than a third of the extra capital it needs to raise. Davy Stockbrokers say it’s the only one of the three that “retains a reasonable prospect of recreating an equity investment case in the near term“, but my view is that it’s going to be a serious challenge to achieve this. I would agree more with Goodbody’s statement that it “would advise investors to await the capital raise details before deciding onwhether or not to get involved“. On Irish Life & Permanent, the spinning-off of its life and investment management division might, depending on valuations, create an interesting new stock for ISEQ investors to play. But the rump banking unit looks very sick.

There were two interesting perspectives offered to me today on the stress tests. The first one is this: In the stress tests it ran, BlackRock assumed that any loan in trouble would default, the bank would seize the property and then sell it at a significant discount. With assumptions like that, does that give banks enough scope to start properly dealing with mortgages that need restructuring?

The second perspective was from a note by Citibank, which speculated that Ireland might receive a 1.00% reduction in the interest rate on the EU-IMF package as a payback for not burning the senior bondholders. Personally, I think we should have shafted the bondholders. I don’t subscribe to the Tesco view that “Every little helps”.

The credit rating agencies were busy today. In relation to Ireland Inc, S&P cut its rating on the country to BBB+, which puts us only 3 grades above junk. The outlook was described as “stable”. S&P has Ireland on the same rating as Thailand and the Bahamas. S&P’s rival Fitch placed Ireland’s ratings on Rating Watch Negative, citing “unexpectedly weak” Q4 GDP numbers. Fitch currently rates Ireland BBB+, which like S&P is 3 grades above junk.

An Irish stock that was in focus today was Providence, which sold its Gulf of Mexico gas assets for $22m, having paid $67.5m in early 2008 for them. The valuation of this operation had been hit by the shale gas revolution, hurricanes and the fall-out from Macondo. Speaking of the shale gas revolution, have a read of this primer on it. Its fellow Irish headquartered energy company, Tullow, saw Citigroup cut its target price on it from 1650p to 1590p due to the lower than expected price it got from its recent Ugandan farm-out. Citi has maintained its “hold/high risk” rating on Tullow. Another stock in the news was C&C, where it was reported that the Financial Regulator is investigating director share deals.

From an Irish macro perspective, Goodbody downgraded its forecasts for Ireland Inc today, its economists Dermot O’Leary and Juliet Tennent now see GDP growth of only 0.4% in 2011 and 1.5% in 2012 (from 1.1% and 2.1%).

The fall-out from Japan’s disaster will last for months, and Europe’s ports are only just starting to get affected by this. I’ve a piece in the new Business & Finance magazine on this – if you’re looking for something to read over the weekend, go out and buy it.

Written by Philip O'Sullivan

April 1, 2011 at 5:37 pm

Market Musings 30/03/11

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(Disclaimer: I am a shareholder in Irish Life & Permanent plc and Smurfit Kappa Group plc)

This was always going to be a week in which the Irish financials would be in focus, given that the results of the stress tests will be released after the market close tomorrow. Given the dismal record of the previous analyses a cynic would be forgiven for asking whether or not the authorities should delay them until the next day – April Fools’ Day. In any event, we got a rude awakening this morning with the news that Irish Life & Permanent had requested that its shares be suspended until Friday. Given the range of estimates out there about its capital requirements (€1-3bn), coupled with news about possible asset disposals by the group, this suspension didn’t come as a massive surprise. However, as events both here (the ban on short-selling financial stocks in September 2008) and overseas (the recent traumatic re-opening of Egypt’s stock exchange) have shown, these efforts to restrict trading often do little to reduce volatility in the longer-term. I was disappointed to learn that attempts to sell EBS to the Cardinal led consortium had failed – as indeed were the members of the consortium (WL Ross, Cardinal, Carlyle), who Bloomberg quote as expressing: “extreme disappointment at the outcome of this extended & extensive sales process”. I note speculation that IL&P’s Permanent TSB unit and the EBS may now be cobbled together by the government, which at the very least would help cut some of the costs of the State’s new adventures in high-finance. Speaking of the stress tests, the FT produced this video ahead of them, check it out.

There was more positive corporate news elsewhere in Ireland, with Tullow announcing that it had signed sale and purchase agreements with Total and CNOOC which is another important milestone towards the full development of its resource in Uganda. IFG issued solid 2010 numbers this morning, revealing EPS of 18.8c, having previously guided a range of 18-20c. IFG’s net debt was only €14.8m (circa 0.5x EBITDA), so its balance sheet looks to be in great shape. The company says that it is “looking to the future with confidence”.

In terms of what the brokers were saying about some of our stocks today, Kepler announced that it sees more European pharma M&A post Valeant’s bid for Cephalon. It’s top M&A pick is Actelion, and it also sees Orion, Shire, Basilea and Irish listed Elan as M&A targets. Goodbody had a note out on Grafton, in which it reiterated its Buy rating and noted opportunities for the group to improve its UK performance. Goodbody’s price target on Grafton is 490c (45% upside to the previous day’s close). Separately Goodbody also upgraded its NAV valuation on Dragon Oil by 7% to 685p. Morgan Stanley initiated on Smurfit Kappa Group today with an “outperform” rating, saying that the Irish-headquartered European packaging giant is its top pick in the sector. Shares were +5.4%.

Turning to the UK, I was taken aback by this article about retailer GAME, which suggests that it is not playing by the Queensberry Rules. I was struck by the contrast between the UK and Irish operations of retailer Domino’s Pizza, which today revealed ytd like-for-like sales that were +5.5% in the UK, but -10.5% in Ireland.

Bloomberg had a good article about the pick-up in global M&A activity today, but those of you who bought the March edition of Business & Finance would have already seen my take on this.

The incomparable Zero Hedge reported that the IMF had cut growth forecasts for the USA and Japan, while hiking them for the EU. As I noted yesterday, I fear for the consequences of ECB rate hikes on peripheral European economies, not least our own.

Most interesting statistic I saw today? US e-book sales were up 116% yoy in January, while print sales (ex-education, ex-religion) were -19%. The words “structural” and “decline” come to mind.

There was also some unintended hilarity coming out of Brussels today. Bloomberg were covering a press conference hosted by EU spokesman Amadeu Altafaj and it quoted him as saying the following gems:




I’ll leave it up to you to make what you will of all that.

Finally, as banded offers go, this one is pretty original isn’t it?

Written by Philip O'Sullivan

March 30, 2011 at 6:24 pm

Market Musings 28/03/11

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(Disclaimer: I am a shareholder in Kentz plc and AstraZeneca plc)


Engineer Kentz reported its FY10 numbers this morning. Sales came in at $1057.4m, PBT $67.5m, backing out the finance lease obligations gives net cash of $205.5m and the full-year dividend was 10c. For reference, Bloomberg consensus was for sales of $1035.3m, PBT of $63.27m, net cash of $182m and a full-year dividend of 8.2c. So, it all looks a little ahead of what the market was expecting for 2010.


The group’s order backlog at the end of 2010 increased by 7.0% to $1,602.6m. On this, the group has decent visibility of projects (no great surprise given the nature of its work) with c.$932.2m of the backlog relating to work due in 2011 and the remaining $670.4m in 2012 and beyond. Management say: “Our current future prospects for Kentz from across our current and some new areas of operation exceed $3.7 billion”.


The company also comments on the recent unrest in MENA, saying that in the ytd this is had “no material impact”. On the outlook, the CEO says: “Our current trading is in line with expectations”, while the Chairman says: “I am pleased to report that the outlook for the coming year is very promising; we have exciting project opportunities in prospect and the management team in place to realise the full potential of our Company”.


Elsewhere, Readymix announced that takeover “discussions with all third parties have been terminated”, adding that “trading remains difficult in the construction industry throughout Ireland”. Tullow Oil disclosed that its Teak-2 exploration well off Ghana found 27 meters of oil and gas reservoirs.


While not of particular Irish interest, I note that AstraZeneca has reached a deal with the UK & US tax authorities on transfer pricing arrangements which has prompted it to up its 2011 core EPS target range from $6.45-6.75 to $6.90-7.20


Today’s “You don’t say?” gong goes to Goldman Sachs, which says that Irish government bonds will “continue to exhibit high volatility“.

Written by Philip O'Sullivan

March 28, 2011 at 6:27 am

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