Markets live chat transcript for the chat ending at 12:04 on 18 Sep 2009. Participants in this chat were: Bryce Elder (BE) Miles Johnson, FT (MJ) Izabella Kaminska, FT (IK)
BE:
Arr landlubbers, here be Markets Live.
BE:
FT Alphaville’s daily eyeball th’ markets
MJ:
And thar be a lot t’ eyeball this mornin’ t’ain’t thar Bryce?
BE:
Ar.
BE:
Thar be indeed alot t’ go through today.
BE:
Them banks be in th’ news again
MJ:
and o’ course ’tis swabbiess Friday
BE:
Hang on … “Swabbiess Friday”? What?
MJ:
that is how the translator does “people’s Friday”
BE:
Right. I think this has gone too far.
MJ:
I’m with you
MJ:
Even though International Talk Like A Pirates Day come but once a year, the novelty value wears off pretty fast
MJ:
But maybe you’re just upset because you have a stupid pirate name…
BE:
What are you talking about?
MJ:
According to this site Bryce
MJ:
your pirate name is….
MJ:
Ham-Hands Patrick
BE:
Hm.
MJ:
BE:
And yours?
MJ:
Fartin’ Wallace Dead
BE:
Right.
MJ:
on that note we should probably move onto the markets
BE:
Yes indeed.
11:09AM
BE:
Where are we? Still flat this morning.
MJ:
Yup
MJ:
Pretty tranquil out there
MJ:
Footsie up 8 points to 5172
BE:
Stuck in a holding pattern.
MJ:
But why Bryce?
MJ:
why is the FTSE up exactly 8.points?
BE:
Meh.
MJ:
there must be a reason
BE:
Good note out of Evo this morning on this general theme.
BE:
Doing nothing = doing good
MJ:
What are they saying?
BE:
Here’s the summary.
BE:
UK equity performance when US Fed is on hold
UK equities are feeding off a liquidity-theme that centres on confidence
central banks aren’t going to change policy rates any time soon. An
extended pause out to next October would make this the longest period of
pause for the US Fed. An analysis of previous periods of protracted policy
pause shows that the Fed doing nothing is good news for UK equities.
UK equities are feeding off a liquidity-theme that centres on confidence
central banks aren’t going to change policy rates any time soon. An
extended pause out to next October would make this the longest period of
pause for the US Fed. An analysis of previous periods of protracted policy
pause shows that the Fed doing nothing is good news for UK equities.
BE:
Since 1973, the average monthly return from UK equities is +77bps and, overall,
months when the Fed is on hold have delivered +49bps. However, isolating periods
of extended pause (longer than 6 months) shows the longer the Fed is on hold the
more the market likes it. Such periods have delivered an average monthly return of
+108bps, and +140bps if following a period of falling rates (as today).
months when the Fed is on hold have delivered +49bps. However, isolating periods
of extended pause (longer than 6 months) shows the longer the Fed is on hold the
more the market likes it. Such periods have delivered an average monthly return of
+108bps, and +140bps if following a period of falling rates (as today).
BE:
Starting the current pause cycle with a trailing P/E of 7x is also good – there is a
positive relationship between cheap equities and Fed inertia. But what about within
the market? Are there clear sector winners, losers and anomalies?
positive relationship between cheap equities and Fed inertia. But what about within
the market? Are there clear sector winners, losers and anomalies?
BE:
Industrial Metals, Mining, Autos and Tech all outperform when the Fed is on hold but
have risen much further than average in this cycle. Meanwhile Utilities, Telecoms,
Tobacco and Healthcare have most undershot versus their average performance.
From this point (week 37 of the pause cycle), historically, Telecoms, Technology,
Utilities, Banks, Insurance and Financial Services are strong whilst outperforming
Mining and Metals are weak, as are Autos, Travel & Leisure and Personal Goods.
have risen much further than average in this cycle. Meanwhile Utilities, Telecoms,
Tobacco and Healthcare have most undershot versus their average performance.
From this point (week 37 of the pause cycle), historically, Telecoms, Technology,
Utilities, Banks, Insurance and Financial Services are strong whilst outperforming
Mining and Metals are weak, as are Autos, Travel & Leisure and Personal Goods.
MJ:
Hold up a minute
MJ:
So they are saying that the Fed keeping all this money slushing around is a good thing?
BE:
For UK equities, yes. Historically I suppose people like the certainty.
MJ:
Well
MJ:
there is an argument that has been made by wiser folk than me
MJ:
that what we are seeing now is simply the result of large amounts of liquidity in the market
MJ:
hence government bonds and equities rallying at the same time
BE:
So you are saying that the Fed keeping rates low could be good for equities
BE:
but only because the loose money would help create another bubble?
MJ:
Well, that is certainly one view
MJ:
just because shares go up, doesn’t have to mean value is being created
MJ:
Izy did a very interesting post on this a while back
MJ:
Looked at the Zimbabwe stock market. http://ftalphaville.ft.com/blog/2009/09/07/70361/a-zimbabwe-rally-effect/
BE:
Ah yes, I remember that.
MJ:
said that the Zimbabwe inndustrial index was the best performing index in 2008. It rose 30,000% in 12 months
BE:
Really? 30,000%?
MJ:
It did apparently
MJ:
Extreme example I know, but an interesting one I think
BE:
Actually, just as a postscript to this
BE:
It’s a bit of a shame we have a flat market today
MJ:
Why is that?
BE:
We have David Hare’s set designer in the office
BE:
Looking at how pricing screens work
BE:
And we can show him …. absolutely jack squat.
MJ:
Well… FTSE is up 10 points now. Erm.
BE:
Anyway, we’ve lots to get though this morning so we’d best get on.
11:18AM
MJ:
Lots of banks news this morning
BE:
Yeah – I’m afraid we need to make an early visit to the banking sector
BE:
(Hedgehog – I think you have a crossed line there.)
MJ:
You were looking at the latestt from Lloyds right Bryce?
BE:
Inevitably, yes.
BE:
After they were bounced into a statement this morning.
BE:
Confirming – as if it needed confirmed – that they’re trying to cut their draw on the Government slush fund.
BE:
LLOYDS BANKING GROUP PROPOSED POTENTIAL PARTICIPATION IN THE GOVERNMENT ASSET PROTECTION SCHEME
BE:
Lloyds Banking Group (Lloyds) notes recent media speculation regarding its proposed potential participation in the Government Asset Protection Scheme (GAPS). Lloyds is continuing its discussions with HM Treasury with respect to its possible participation in GAPS. However, in light of improving economic conditions and the results of Lloyds’ detailed reviews of its loan portfolios and their expected performance, Lloyds and HM Treasury are discussing possible changes to the commercial terms on which Lloyds might enter into GAPS from those announced in March 2009, including the possibility of reducing the amount of assets covered by the scheme.
BE:
Lloyds is also considering possible alternatives to entering into GAPS and is in discussions with HM Treasury, UK Financial Investments and the Financial Services Authority in this regard. All possibilities remain open and, as part of this process, Lloyds is focused on ensuring that any potential alternatives to GAPS would be in the interests of shareholders and other stakeholders.
BE:
A further announcement will be made as soon as practicable.
MJ:
(be patient SFB)
BE:
(No-one said this was a democracy.)
MJ:
But none of that Lloyds stuff is news, is it?
BE:
Well, it is after the Telegraph went to print with this
BE:
Lloyds scheme fails FSA stress tests
BE:
Lloyds Banking Group has been forced to abandon its plan to withdraw from the Government’s toxic debt insurance scheme after failing to raise enough capital to meet the Financial Services Authority’s strict requirements.
BE:
The decision dashes the hopes of Eric Daniels, chief executive, who wanted a wholesale exit from the asset protection scheme (APS) to prevent the taxpayer’s stake in the bank rising above 43pc and limit the scale of state-aid remedies threatened by European regulators.
BE:
Mr Daniels is understood to have presented the FSA with plans to raise just over £15bn through a rights issue, preference share conversion and sub-ordinated debt buy-backs.
BE:
However, after a series of stress tests, the regulator decided the bank needed more capital to withstand escalating bad debts while retaining sufficient firepower to lend an extra £28bn to households and businesses over this year and next, as agreed with the Government.
BE:
To pass the stress tests, Lloyds required more than £20bn, added to which would have been a fee of up to £1bn to pay for the six months that the bank has been operating with the insurance.
BE:
I must admit, I’m getting quite frustrated with this story.
BE:
We’ve obviously got a huge game of brinksmanship happening behind locked doors in Whitehall.
BE:
News on which arrives to us in a slow drips. Like Chinese water torture.
MJ:
So you think the Telegraph story is another bit of brinksmanship?
BE:
Hell, who knows.
BE:
I’m not party to all these off-the-record chats at The Cinnamon Club and The Clarence.
BE:
But I guess you have the remember the EU has given Lloyds a joker to play in the negotiations with its demands to sell Halifax
BE:
Which you have to imagine would be a huge risk the government does not really want any more exposure to.
BE:
It seems the general impression remains that we’re grinding towards some kind of hybrid deal.
MJ:
That does appear to be the word on the street so to speak
BE:
Yup.
BE:
That street being Whitehall.
BE:
Participation in the GAPS reduced, businesses such as Scottish Widows disposed, a rights issue of sorts, and a conversion of the preference shares into ordinary equity.
BE:
But the political sensitivities here simply cannot be underestimated.
MJ:
Is there any analyst comment on this?
BE:
Not a lot.
BE:
Here’s a few lines from Simon Maughan at MF Global, who’s been on sell for a long time.
BE:
Much of the analysis of developments centres on the core capital ratio that Lloyds will have, but this ratio long since ceased to be the driver of the share price. Suffice to say the ratio at year end should be somewhere between the estimated 13.5% with GAPS and 5.3% without it, after a second half scarred by more hefty losses.
BE:
The stock price should be determined by expectations of EPS when Lloyds has recovered, with reference to the tangible book value per share. This latter figure should trough around 80p under a watered down version of GAPS, which may also prove a reasonable price for a rights issue. EPS in 2011 is estimated at 14p, but this remains at risk from a forced break up of the bank by the EU.
BE:
While analysts worry about the precise core capital ratio, it is worth noting that both earnings and equity per share are reduced by the conversion of preference shares into ordinary equity and this process dilutes the holding of existing owners, who might prefer a rights issue as a means of raising cash. We would presume that the government cannot participate in any rights, because it is impossible to argue in the same breath that the economy is looking up and that
BE:
Lloyds needs more tax payer support. Thus the government’s 43% share of any rights issue will have to be taken up by new shareholders, who will want a meaningful discount to the existing share price. A rights price of 80p has been mooted for some time. We see little reason for a loss making Lloyds to trade much above this level.
BE:
And this is from Mike Trippitt at Oriel
BE:
We estimate that the current GAPS structure would result in 2013 EPS of 8p (50% dilution from base case) and Tangible NAV of 62p (18% dilution from base case).
Replacing GAPS with a £15bn equity raising at 70p per share (rebuilding 2013e core tier 1 to 8.0% from a base case of 4.5%) would result in a 2012 EPS of 8.8p (44% dilution) and TNAV of 73p (3% dilution).
On the current GAPS basis we value the core bank at 133p and the non-core run off bank at -30p, resulting in fair value of 103p, before considering the impact of additional or alternative capital raising.
Whilst LLOY should be a geared play on UK recovery and a beneficiary of asset spread widening, we retain our Reduce recommendation until there is clarity regarding both the capital structure and the EU’s conclusions regarding asset deposals.
Replacing GAPS with a £15bn equity raising at 70p per share (rebuilding 2013e core tier 1 to 8.0% from a base case of 4.5%) would result in a 2012 EPS of 8.8p (44% dilution) and TNAV of 73p (3% dilution).
On the current GAPS basis we value the core bank at 133p and the non-core run off bank at -30p, resulting in fair value of 103p, before considering the impact of additional or alternative capital raising.
Whilst LLOY should be a geared play on UK recovery and a beneficiary of asset spread widening, we retain our Reduce recommendation until there is clarity regarding both the capital structure and the EU’s conclusions regarding asset deposals.
BE:
And finally, for runthough of the arguments from a bull, it’s worth repeating a note from HSBC’s Peter Toeman examining the GAPS alternatives earlier this week
BE:
We examine three possibilities; sticking with APS mark 1, reducing its scale (APS mark 2) or foregoing the APS altogether
Whichever option is chosen, Lloyds will require GBP12-15bn of equity; the main differentiating feature is the extent to which this comes from the private or public sectors
BE:
The advantage of APS mark 2 is that it would reduce the fee payable, adding 9p to NTA. But unfortunately the amount of equity required to be raised would be similar to the GBP15.6bn of the original APS scheme. However, rather than coming exclusively from the Government through the issuance of B shares, this sum could be raised through a conventional rights issue. Even with Treasury participation, the Government’s stake would stick at 43% rather than increase to 62%, with no more than GBP9bn required from the private sector.
BE:
Scrapping the APS: Shareholders will have to consider what pro forma core tier1 ratio they will require to feel comfortable subscribing for new equity. With cumulative
impairments of GBP20-25bn over the next eighteen months, a GBP12bn rights issue
would be required to achieve an 8% core tier 1 at end 2010e. But given the now openended exposure to impairments, an even greater capital buffer could be required. Lloyds will need to convince investors that expectations for impairments are too pessimistic.
impairments of GBP20-25bn over the next eighteen months, a GBP12bn rights issue
would be required to achieve an 8% core tier 1 at end 2010e. But given the now openended exposure to impairments, an even greater capital buffer could be required. Lloyds will need to convince investors that expectations for impairments are too pessimistic.
BE:
Sources of new equity: The GBP12-15bn of additional equity required for APS mark 2 or the cancellation of APS need not necessarily come entirely from a conventional rights issue. Rather, part of the group’s GBP4.9bn of preference shares and/or GBP6.8bn preferred shares could be voluntarily converted to ordinary equity. Placing equity with fixed income investors would almost certainly create a serious flow-back issue, but this could be managed through the use of mandatory convertible notes.
BE:
Irrespective of the outcome, we estimate sustainable earnings, incorporating a normalised level of impairments, will still emerge at 16-17p; maintain 150p TP, OW(V) rating
11:28AM
MJ:
Right, we appear to be drawing some flak on the right for ignoring the peoples friday pledge
BE:
Yeah – not half.
BE:
The mob are baying.
MJ:
we should try and give the people what they want
BE:
Errrm. I’m not sure about this.
MJ:
No, no. It was your idea anyway
MJ:
I blame you
BE:
On the principle that it might be quiet. Which it’s not.
BE:
And what were the people after then?
MJ:
People are crying out for some Irish banking comment
MJ:
And the Goldman note
BE:
Tracy’s doing a detailed post on that Goldman note at the moment.
BE:
On Irish banks, there’s plenty of comment around.
BE:
Just as from Jason Napier at Deutsche
BE:
This is from midsession yesterday I think
BE:
Irish government provides additional clarity
The Irish Finance Minister has provided details on NAMA: paying E54bn to buy
E77bn of loans (30% discount), E7bn above current market value. Though some
details remain unclear, AIB was able to announce its view that it would require
E2bn in capital over the coming 12-18 months to weather NAMA and the
recession, leaving the stock on ~ 6-9x earnings already, depending on how these
funds are raised. Though much remains subject to change, we retain a Hold and
E2.7 target price. BKIR will update the market at 12pm BST tomorrow.
The Irish Finance Minister has provided details on NAMA: paying E54bn to buy
E77bn of loans (30% discount), E7bn above current market value. Though some
details remain unclear, AIB was able to announce its view that it would require
E2bn in capital over the coming 12-18 months to weather NAMA and the
recession, leaving the stock on ~ 6-9x earnings already, depending on how these
funds are raised. Though much remains subject to change, we retain a Hold and
E2.7 target price. BKIR will update the market at 12pm BST tomorrow.
BE:
Much more clarity than before
The disclosure of the amount of loans to be purchased and the broad discount at
which this is expected to take place (in line with market expectations in our view)
helps the market better scope the capital adequacy of the main listed Irish banks
in our view. With BKIR to update the market tomorrow, we focus on AIB which
released a statement this evening.
The disclosure of the amount of loans to be purchased and the broad discount at
which this is expected to take place (in line with market expectations in our view)
helps the market better scope the capital adequacy of the main listed Irish banks
in our view. With BKIR to update the market tomorrow, we focus on AIB which
released a statement this evening.
BE:
Latest core and equity tier 1 to fall to 6.7%% and 3.5% respectively
We estimate that the transfer of all loans to NAMA at 1H09’s capital level would
reduce AIB’s core and equity tier 1 ratios to 6.7% and 3.5% respectively. These
would increase to 8.6% and 5.3% assuming the bank raised E2bn in equity.
Fortunately the bank has options here, with large stakes in listed companies Bank
Zachodni and M&T Bank, and a disclosed approach from interested investors
(company announcement of 14 Aug 09). We believe business sales could yield
140bps of core tier 1 for the bank.
We estimate that the transfer of all loans to NAMA at 1H09’s capital level would
reduce AIB’s core and equity tier 1 ratios to 6.7% and 3.5% respectively. These
would increase to 8.6% and 5.3% assuming the bank raised E2bn in equity.
Fortunately the bank has options here, with large stakes in listed companies Bank
Zachodni and M&T Bank, and a disclosed approach from interested investors
(company announcement of 14 Aug 09). We believe business sales could yield
140bps of core tier 1 for the bank.
BE:
Is AIB expensive?
We expect AIB to lose money this year and next, NAMA notwithstanding, given
weakness in the rest of its loan book. Further, as we show in Figure 9, even if the
group doesn’t lose any earnings by selling businesses, and assuming the bank can
raise capital at the spot share price (E2bn is about 80% of current market cap), the
share is trading at ~8.4x fully recovered earnings. The sale of earnings naturally in
disposals would increase this multiple further.
We expect AIB to lose money this year and next, NAMA notwithstanding, given
weakness in the rest of its loan book. Further, as we show in Figure 9, even if the
group doesn’t lose any earnings by selling businesses, and assuming the bank can
raise capital at the spot share price (E2bn is about 80% of current market cap), the
share is trading at ~8.4x fully recovered earnings. The sale of earnings naturally in
disposals would increase this multiple further.
BE:
Near term relief, but reasonably full valuation and residual risks
We retain our E2.70 target price which is based on 5.5x assessed undiluted
recovered EPS, in line with our trough TNAV estimate. Though the bank is clearly
in a more comfortable place than we would have though a month or two ago, with
equity capital ratios still low, the expected return to profit in 2012 a long way off,
remaining significant uncertainties around NAMA (NAMA bond yield, tax treatment
etc), and proximity between share price and target price, we remain with a Hold
recommendation.
The key downside risk for AIB is that an acceleration of loan losses and weaker
than expected pre-provision profit generation increases the bank’s capital deficit,
diluting its earnings power further. Near term, we expect the bank to be lossmaking
due to a commercial-property heavy loan book and weak Irish and UK
asset markets and economies. Upside risk comes from potential inward
investment in the bank or continued improving investor confidence in buying for
beyond 2012 earnings recovery.
We retain our E2.70 target price which is based on 5.5x assessed undiluted
recovered EPS, in line with our trough TNAV estimate. Though the bank is clearly
in a more comfortable place than we would have though a month or two ago, with
equity capital ratios still low, the expected return to profit in 2012 a long way off,
remaining significant uncertainties around NAMA (NAMA bond yield, tax treatment
etc), and proximity between share price and target price, we remain with a Hold
recommendation.
The key downside risk for AIB is that an acceleration of loan losses and weaker
than expected pre-provision profit generation increases the bank’s capital deficit,
diluting its earnings power further. Near term, we expect the bank to be lossmaking
due to a commercial-property heavy loan book and weak Irish and UK
asset markets and economies. Upside risk comes from potential inward
investment in the bank or continued improving investor confidence in buying for
beyond 2012 earnings recovery.
MJ:
Another thing The People were after was a bit on natural gas
MJ:
Which incidently is said to have had a big impact on the International Power share price of late
BE:
Quite.
MJ:
which itself is another request for Peoples Friday
MJ:
See what I did there?
MJ:
Anyways
MJ:
Izy is the expert on that
BE:
(And my impression there, incidentally, was the bid rumours look hopeful rather than founded on actuality.)
MJ:
And she has kindly agreed to come on here and give an explanation of what is going on in that weird market
IK:
Yeah there was a LOT of volatility in natgas this week.
IK:
It shot up midweek (more than 11%), back down 8% yesterday
IK:
so what’s all that about right?
IK:
People quick to blame UNG
MJ:
Right
MJ:
That is the exchange traded fund
IK:
Indeed.
IK:
Although, surprisingly, while it was related to the UNG it wasn’t the fund’s fault itself.
MJ:
Really, why?
IK:
The fund actually did a good job being a little less predictable in its roll. It shed gas swaps on ICE and piled into futures on Nymex. This had the effect of not killing the front-month as it would do usually.
IK:
Meanwhile, because everyone was positioned on the same side of a trade against the UNG — there was something of a short squeeze.
MJ:
But what about the fundamentals?
IK:
Make no mistake, the fundamentals are as bearish as ever, and now the fund’s roll is over the market might be in line for a drop.
MJ:
have you got any comment for the ROTR?
IK:
Yep here’s some stuff from Olivier Jakob at Petromatrix
IK:
US Natural Gas stocks continue to build, the weekly injections
were at the average of the last two year but below the four year
average. If the weekly stock increase continues at the average
of the last four weeks then we should reach the recent years
high already next week. Tropical weather has so far not come
to the rescue of the US Natural Gas producers and they might
be forced to do on Natural Gas what the naughty OPEC cartel
does on crude oil: shut production for lack of alternatives. This
would however increase the spare capacity and act as strong cap on Natural Gas prices
the same way that the spare capacity in OPEC currently acts as a cap on crude oil prices.
On the weather front there are no significant storm threat registered for the weekend. The
NHC is monitoring a Low west of Cape Verde for signs of organization but it has a low
probability of development with no clear indication yet that its path would be a concern.
were at the average of the last two year but below the four year
average. If the weekly stock increase continues at the average
of the last four weeks then we should reach the recent years
high already next week. Tropical weather has so far not come
to the rescue of the US Natural Gas producers and they might
be forced to do on Natural Gas what the naughty OPEC cartel
does on crude oil: shut production for lack of alternatives. This
would however increase the spare capacity and act as strong cap on Natural Gas prices
the same way that the spare capacity in OPEC currently acts as a cap on crude oil prices.
On the weather front there are no significant storm threat registered for the weekend. The
NHC is monitoring a Low west of Cape Verde for signs of organization but it has a low
probability of development with no clear indication yet that its path would be a concern.
IK:
The roll of the UNG is now over and we have
been surprised by two things this week. One,
the CME (NYMEX) proposal on positions
limits that strongly support the development
of Index Funds/ETFs and defend that they
should have limit exemptions; the CME
proposes as well a limit formula that would
clearly work against the ICE exchange. Two,
the positioning of the UNG around the roll.
The UNG has greatly cut its positions in ICE
Swaps and increased its holdings of NYMEX
Futures well above the accountability limits. It will be interesting to see how the UNG
positions develop, especially when new shares are issued at the end of the month. If the
CME believes that its position limit proposal has any chance to pass, then the risk is
clearly that it allows alls sort of excess from the part of Index Funds to make sure that
their Open Interest goes to the NYMEX and not to the ICE.
been surprised by two things this week. One,
the CME (NYMEX) proposal on positions
limits that strongly support the development
of Index Funds/ETFs and defend that they
should have limit exemptions; the CME
proposes as well a limit formula that would
clearly work against the ICE exchange. Two,
the positioning of the UNG around the roll.
The UNG has greatly cut its positions in ICE
Swaps and increased its holdings of NYMEX
Futures well above the accountability limits. It will be interesting to see how the UNG
positions develop, especially when new shares are issued at the end of the month. If the
CME believes that its position limit proposal has any chance to pass, then the risk is
clearly that it allows alls sort of excess from the part of Index Funds to make sure that
their Open Interest goes to the NYMEX and not to the ICE.
IK:
RBC Capital markets meanwhile has this
IK:
Prices
• We remain bearish on natural gas prices over the course of the next 6-9 months as inventories will likely remain well
above average. Natural gas prices should rebound from current $3.50/Mcf levels as winter heating demand relieves the pressures
of high storage levels. Absent an early cold winter, our expectations call for $4.50/Mcf at YE09.
• Long-term natural gas fundamentals support $5.50-$7.50/Mcf. Near-term the oversupplied market along with weak demand
has pushed prices below the marginal cost of new supply. The near-month natural gas price recently dropped below $3/Mcf for
the first time in seven years but prices have subsequently moved sharply higher. We think a real risk remains for natural gas to retest
the $2.50/Mcf level over the course of the next month as there is a high probability we will reach effective max storage of
3.8+ Tcf. We believe full storage induce pressure on near-term prices as gas-on-gas competition will be significant.
• At $4/Mcf (NYMEX) at least half of U.S. projects cannot make a positive return on capital. For producing wells, marginal
operating costs (excl. overhead and interest) are approximately $2/Mcf.
• We remain bearish on natural gas prices over the course of the next 6-9 months as inventories will likely remain well
above average. Natural gas prices should rebound from current $3.50/Mcf levels as winter heating demand relieves the pressures
of high storage levels. Absent an early cold winter, our expectations call for $4.50/Mcf at YE09.
• Long-term natural gas fundamentals support $5.50-$7.50/Mcf. Near-term the oversupplied market along with weak demand
has pushed prices below the marginal cost of new supply. The near-month natural gas price recently dropped below $3/Mcf for
the first time in seven years but prices have subsequently moved sharply higher. We think a real risk remains for natural gas to retest
the $2.50/Mcf level over the course of the next month as there is a high probability we will reach effective max storage of
3.8+ Tcf. We believe full storage induce pressure on near-term prices as gas-on-gas competition will be significant.
• At $4/Mcf (NYMEX) at least half of U.S. projects cannot make a positive return on capital. For producing wells, marginal
operating costs (excl. overhead and interest) are approximately $2/Mcf.
MJ:
Thanks for that Izy
BE:
That should go some way to addressing the accusations that we’re ignoring you lot over there.
11:39AM
BE:
Lots of questions about oil services companies today.
BE:
Lamprell firstly, which has had a bit of a rerating this week.
BE:
Following a couple of quite minor contract wins.
BE:
$52m in total, if memory serves.
BE:
Thing was, this one was sold down quite aggressively after interim figures showed the order book looking bare.
BE:
So the theory is that the only trigger has been signs of new business coming through.
BE:
Can you get me a Lamprell price, Miles?
MJ:
Yup
MJ:
Shares are down 1.5p to 182.5p
BE:
And, more interestingly, Wellstream.
BE:
Getting a lot of attention on these raw rumours of bid interest.
RAW is market chatter – information that has not been formally tested through traditional journalistic channels (PRs etc). The story might be complete rubbish, but if we believe there is some substance to it we will say so. Either way, Reader Beware.
MJ:
What is raw on Wellstream you are hearing?
BE:
Well, there’s no consensus on who might bid.
BE:
They have a standing relationship with Petrobras in Brazil.
BE:
And Saipem’s also been mentioned, which I guess wouldn’t trigger the internal conflicts of an industry bid.
BE:
Have a bit of comment from Hoare Govett on this.
MJ:
Lets have it then
BE:
Some M&A speculation has crept into Wellstream shares. The shares are now almost 40%
ahead of the level reached post the profit.s warning on 20 August and trades on a material
sector premium. The Times suggests Saipem is a possible suitor.
ahead of the level reached post the profit.s warning on 20 August and trades on a material
sector premium. The Times suggests Saipem is a possible suitor.
BE:
Some M&A speculation in the price.
The Times reports M&A speculation in Wellstream with Saipem a possible suitor. The shares have
increased significantly over the last week and now stand almost 40% ahead of the level reached post
the profits warning on 20 August. Current trading is tough for Wellstream with no major contracts
award ytd leading to material backlog declines and lower utilisation, particularly in its Newcastle plant.
The Times reports M&A speculation in Wellstream with Saipem a possible suitor. The shares have
increased significantly over the last week and now stand almost 40% ahead of the level reached post
the profits warning on 20 August. Current trading is tough for Wellstream with no major contracts
award ytd leading to material backlog declines and lower utilisation, particularly in its Newcastle plant.
BE:
But the market is also excited about Brazil
That said, the market is excited about the recent large finds in Brazil (Wellstream.s largest market)
from BG and Petrobras etc. and we think this has also had a positive influence on the shares
That said, the market is excited about the recent large finds in Brazil (Wellstream.s largest market)
from BG and Petrobras etc. and we think this has also had a positive influence on the shares
BE:
Saipem has no flexible exposure
Saipem does not have flexibles in its product mix and this has precluded it from winning significant
business in Brazil as Petrobras favours the flexible solution. Therefore we would not rule this out
although Saipem believe rigid solutions are better for ultra-deepwater markets (Saipem.s focus).
Wellstream currently trades on a 2010F PE of 19x against peers on c15x. In our view this rating
contains at least some bid premium.
Saipem does not have flexibles in its product mix and this has precluded it from winning significant
business in Brazil as Petrobras favours the flexible solution. Therefore we would not rule this out
although Saipem believe rigid solutions are better for ultra-deepwater markets (Saipem.s focus).
Wellstream currently trades on a 2010F PE of 19x against peers on c15x. In our view this rating
contains at least some bid premium.
BE:
As for the reports of an 850p price – dunno.
BE:
Nice round number I guess.
BE:
But this remains the territory of 
type bandits.
type bandits.BE:
we have no good information either way to say whether this one’s credible or not.
MJ:
Right so a health warning then?
BE:
Well, yeah. I guess.
11:48AM
MJ:
Where to next on Peoples Friday?
BE:
How about UBS?
BE:
They’re in a spot of bother again.
MJ:
Not that we are not getting much love on that
MJ:
Straight no commment. Which is standard for things like this. And this is of course legally sensitive.
BE:
For those who haven’t seen we should paste up the story.
MJ:
Go on then
BE:
UBS faces Swiss exchange probe
BE:
ZURICH, September 18 – Switzerland’s stock exchange is investigating UBS for possible breaches of rules regarding publication of price-sensitive information and information on its board, it said on Friday.
BE:
SIX Exchange Regulation said it had started the investigation into possible breaches of the ad hoc publicity directive – used to regulate potentially price-sensitive information – by UBS from 2007 to the end of 2008.
BE:
It did not give further details.
SIX Exchange Regulation, which monitors and enforces issuers’ obligations for the exchange, is also looking into possible breaches of the corporate governance directive in connection with the UBS 2008 annual report.
UBS was not immediately available for comment.
SIX Exchange Regulation, which monitors and enforces issuers’ obligations for the exchange, is also looking into possible breaches of the corporate governance directive in connection with the UBS 2008 annual report.
UBS was not immediately available for comment.
BE:
The exchange’s corporate governance directive requires issuers to disclose important information on their board and senior management or to give substantial reasons when this information is not disclosed.
Investigatory proceedings will continue for an indefinite period.
Investigatory proceedings will continue for an indefinite period.
BE:
“SIX Exchange will announce its findings, although no information will be provided while the proceedings are ongoing,” it said.
BE:
I can’t imagine that has been well received. What are the shares doing?
MJ:
Down 0.4 per cent at SFr19.11
MJ:
So not that bad
11:52AM
BE:
KP – I’m afraid enquiries about Caledon yesterday proved fruitless.
BE:
Seems very quiet at the moment.
BE:
Hang on – there may be an old autotext in the system that would be relevant
BE:
Informa
We don’t know what’s going on. The original source that detailed the Providence approach for Informa will not talk to us at present. If you own the shares and are worried that the bid will fail, sell the shares and stop worrying.
MJ:
Is that an old service statment I see?
BE:
Yeah – we should really update those one of these days.
BE:
As for Central African, you want to come in on this one Miles?
MJ:
Well the bid price mentioned dissapointed some people obviuosly
MJ:
But the funny thing was the wierd stuff that happened later yesterday
BE:
You mean ENRC’s slapdown of Frank Timis?
MJ:
Well, slap down might be a little harsh
MJ:
But it is, how should it be put, highly irregular for that to happen
MJ:
Must have hurt a few peoples feelings with that statement
MJ:
Anyways maybe a post on this later
MJ:
So we will leave it for now
BE:
I think we’ve covered Camec plenty this week.
11:57AM
BE:
Cape mentioned to the right.
Cape (CIU:LSE): Last: 260.75, down 7.75 (-2.89%), High: 266.75, Low: 248.00, Volume: 878.27k
BE:
Bit of a retracement on yesterday’s spike.
BE:
Here’s Adrian Kearsey at Evo to explain what he thinks was going on.
BE:
Potentially could end up in the FTSE 250
Over the last few weeks investors have speculated on earnings upgrades
and a potential take-over approach. Forecasts have been revised upwards.
We suspect the market is being over optimistic about a potential approach.
However, we think investors are overlooking the possibility of Cape rejoining
the full list.
Over the last few weeks investors have speculated on earnings upgrades
and a potential take-over approach. Forecasts have been revised upwards.
We suspect the market is being over optimistic about a potential approach.
However, we think investors are overlooking the possibility of Cape rejoining
the full list.
BE:
Sorting out the balance sheet
Last autumn Cape announced it’s desire to re-join the full list (subject to regulatory
approval). Nothing came of this. We suspect the company failed the eligibility test
since it has a significant contingent liability relating to the asbestos industrial
disease claims. Payouts are averaging c£3m a year and the company has a £36m
ring-fenced scheme with which to pay them. Moreover, given the age profile of
claimants, the claims are likely to start tailing off within the next decade or so.
Therefore, existing shareholders are relatively relaxed about the IDCs. The last
actuarial review (Dec-07) estimated the NPV of these claims to be £74m. Since
then c8m has been paid out to claimants and a proportion provided for. We
estimate the company would need to make a c£55m provision should it wish to
eliminate the contingent liability.
Last autumn Cape announced it’s desire to re-join the full list (subject to regulatory
approval). Nothing came of this. We suspect the company failed the eligibility test
since it has a significant contingent liability relating to the asbestos industrial
disease claims. Payouts are averaging c£3m a year and the company has a £36m
ring-fenced scheme with which to pay them. Moreover, given the age profile of
claimants, the claims are likely to start tailing off within the next decade or so.
Therefore, existing shareholders are relatively relaxed about the IDCs. The last
actuarial review (Dec-07) estimated the NPV of these claims to be £74m. Since
then c8m has been paid out to claimants and a proportion provided for. We
estimate the company would need to make a c£55m provision should it wish to
eliminate the contingent liability.
BE:
Move to the full list would enable Cape to enter the FTSE250
We believe making this accounting move would permit the company to move to full
list. Given the size of the company this move would enable Cape to enter the FTSE
250 at some point in 2010, stimulating further interest in the shares. In addition,
the reduced gearing and the funding levels of the scheme could allow the company
to start paying a dividend at the end of next year (subject to Scheme conditions).
We believe making this accounting move would permit the company to move to full
list. Given the size of the company this move would enable Cape to enter the FTSE
250 at some point in 2010, stimulating further interest in the shares. In addition,
the reduced gearing and the funding levels of the scheme could allow the company
to start paying a dividend at the end of next year (subject to Scheme conditions).
BE:
Valuation not stretched, sentiment improving
Despite the re-rating Cape continues to trade on a discount to its peers. Cape is
trading on 7.7x FY09 PE (having rebounded from a low of sub-1.0x). This compares
to 14x for the sector. The EV/EBITDA valuation gap is similarly pronounced (5.2x vs
7.2x). Crucially the balance is no longer an issue. Net debt/EBITDA ratios are
clearly manageable. They fell from 4.0x in FY07 to 2.1x in FY08, we project a
further fall to 1.5x for FY09 and 1.1x for FY10. The patient is clearly out of A&E. All
in all we think the prospects for a move to the full list, the relative resilient
operational performance (highlighted by yesterdays Interims) and reduced gearing
will help maintain share price momentum. We maintain our Buy recommendation
and have moved our price target from 250p to 350p. This represents 9.5x FY10
earnings, which is still a discount to the sector, so further appreciation is possible.
Despite the re-rating Cape continues to trade on a discount to its peers. Cape is
trading on 7.7x FY09 PE (having rebounded from a low of sub-1.0x). This compares
to 14x for the sector. The EV/EBITDA valuation gap is similarly pronounced (5.2x vs
7.2x). Crucially the balance is no longer an issue. Net debt/EBITDA ratios are
clearly manageable. They fell from 4.0x in FY07 to 2.1x in FY08, we project a
further fall to 1.5x for FY09 and 1.1x for FY10. The patient is clearly out of A&E. All
in all we think the prospects for a move to the full list, the relative resilient
operational performance (highlighted by yesterdays Interims) and reduced gearing
will help maintain share price momentum. We maintain our Buy recommendation
and have moved our price target from 250p to 350p. This represents 9.5x FY10
earnings, which is still a discount to the sector, so further appreciation is possible.
BE:
Hope that’s useful.
MJ:
Right
MJ:
That could well be it for this instalment
BE:
Yup – it’s been a tricky week, so apologies if the sessions have been a bit light.
BE:
But thanks as ever for all your comments.
MJ:
Hope our experiment with democracy pleased
BE:
And sorry if we didn’t manage to cover any of your personal pet stocks.
MJ:
Thanks everyone
MJ:
Have a good weekend
BE:
Bye.
MJ:
Bye
BE:
Enough with the spelling bee.
BE:
Ending session now.