FT Alphaville » Markets Live transcript 12 Jul 2010

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Markets Live transcript 12 Jul 2010

Posted by Neil Hume on Jul 12 11:10.

Markets Live chat transcript for the chat ending at 11:12 on 12 Jul 2010. Participants in this chat were: Neil Hume, FT Bryce Elder

Right

We have topped killed the first session

and attempting again with a fresh ML

Hola

Viva espana

it’s 11.10am

and time for another edition of Markets Live

FT Alphaville’s daily markets discussion

Bryce is here

Hello again.

FT AV Top Kill a success

Though there’s no chance of the President signing off an Exxon bid for us, I fear.

true

looks like it must have been some corrupt content again

anyway

SNAFU

so let’s push on

11:12AM

So, what are we going to talk about today?

what about

oil

and more oil

and for good measure a lack of oil

Ah. So it’s BP

And Foggle then. Falklands Oil & Gas.

yep

it’s very, very quiet out there

however

it is a bus week

the Q2 earnings season in the US kicks off

and there is lots and lots of eco data

and a lot of govies issuance

in Europe and the US

so there should be plenty to chew off

just now

it is dull

So the FTSE’s down 0.7 at 5133.

yep

and were it not for the falling knife

we would be a lot, lot lower

Start there then?

yes

right

what’s the price action in the rising Knife?

BP Plc (BP.:LSE): Last: 390.23, up 25.43 (+6.97%), High: 391.05, Low: 378.00, Volume: 27.04m

hmmm

400p here we come

I suspect BP aren’t too unhappy at these bid rumours

giving the share price some positive momentum

which in turn helps the CDS

and eases funding fears

True. Escaping the vortex of fear, or whatever it was called.

that’s the one

that was penned by Fred Lucas at JPMorgan

who was of course the first analyst to put forward

the Exxon bid rumour

and make the argument that some bid spec should be in the price

and it is now

For those who missed it, or on the other side of the Murdoch Moat ….

The Sunday Times said Exxon and Chevron has presidential permission to take a look at BP

You got the story to hand, Neil?

sorry

I was on the site earlier

but no more

Hold on then.

hang on

I have it

ARG! That site is SO ANNOYING.

Go on then.

Exxon has sought clearance from Washington to examine a bid for BP, a takeover that would create a mega oil company with a stock-market value of more than $400 billion (£265 billion).

Oil industry sources said yesterday that the Obama administration had told Exxon, the world’s biggest company, and one other American group — thought to be Chevron — that it would not stand in the way of a deal that could value BP at up to £100 billion. The sources cautioned there was no certainty that Exxon would make a move, but said soundings indicated a renewed interest in a bid as BP comes closer to plugging the Gulf of Mexico oil spill.

Yesterday BP removed a cap over the well head as part of a plan to replace it with a tighter-fitting container that should capture all of the escaping oil.

A relief well that will seal the well completely should be finished within the next few weeks. BP’s shares have rallied strongly on the progress. They ended last week at 364¾p, valuing the company at £69 billion, up about 20% since the shares hit a low of 302p after initial efforts to plug the well failed.

Now, there are few brokers out there

who think that BP might have

god forbid

leaked this story

now, I’m not saying i believe that

but a rising share price does help

Yes. The expanding vortex of optimism.

The … um … what’s the opposite of a vortex?

as for the new cap

according to Taxloss and Oil Drum

it’s all going ahead of schedule

I think the idea from BP is that it will be in place by Wednesday

but the pictures from the Ocean floor suggest something different

Hm. Lots of activity on spillcam from Friday.

Right, so how has all this helped the price of Muppet Fund Alpha?

we must be up for the year now

Just pulling up the spreadsheet.

We’re positive!

(Yes TL, I imagined you might)

1.33% on the day, and 0.74% since inception.

We’re earning performance fees again.

excellent

and thankfully we didn’t have any Falkland Oil & Gas

although after today’s fall

they looking mighty tempting as a muppet punt

11:24AM

Okay then.

So what’s happened to Falklands O&G?

Duster

Oh dear.

in the shallow well to the South of the Malvines

share price has cratered

Falkland Oil and Gas Ltd (FOGL:LSE): Last: 105.25, down 96.5 (-47.83%), High: 122.75, Low: 70.25, Volume: 8.12m

(TL don’t do a Torres!)

Fair reaction, or just a panic after it was bid up too high by the retailers?

well it was bid up

and there were several delays in releasing the results

but

this has limited read across for the rest of the Falklanders

because

this was shallow

Borders & Southern the other southern play

well

they are looking in deepwater

and all the geology is very different to the North

where Rockhopper and Desire are drilling

I see.

But, on a more facile level, it is dusters 2 gushers 1 so far.

indeed

and for FOGL

well that’s dead money for a while

their next drilling is in deepwater to the east

and they don’t have a rig yet

so the price will probably dip

but

they only spent £12m of the £50m they raised

so they survive

Any comment?

yep

first up the sector watcher

The Toroa-1 exploration well, located to the south of the Falklands, has failed to find hydrocarbons and has been plugged and abandoned as a dry hole. Obviously bad news for the JV comprising FOGL (49%) and BHP (51%), although sentiment towards the other Falklands players (RKH, DES, BOR) is also likely to be hit, certainly in the short -term. Toroa was FOGL’s only shallow water well, with the Ocean Guardian rig now returning to RKH to drill the Ernest prospect and to test the Sea Lion discovery, both located to the north in different geological setttings to Toroa – we understand RKH should have the rig by 20 July.

FOGL raised £50m last November, with Toroa budgeted at only £12m net to the group, hence the group is still financially viable. However there is likely to be a long wait for the next drilling news as the group’s other prospects are deepwater, with no rig yet contracted – this could easily stretch into next year. Whilst today’s news is clearly very bad for FOGL – we believe the shares could test the 115p/share funding level from last November – any pronounced weakness in the other players should be seen as a buying opportunity, particularly for RKH which has the only confirmed discovery to date.

and second Richard Rose at Oriel

who is house broker

FOGL has announced that drilling on the Toroa prospect in the South Falklands was unsuccessful. The well was plugged and abandoned without finding any reservoired hydrocarbons
On discussion with management, they did confirm that the targeted Springhill reservoir sands were present in the well and in decent quality which was a key pre-drill risk alongside source
Toroa was not the partner group’s first choice prospect, its selection dictated by rig constraints, however the well has provided useful geological data which will should help refine future prospects
The rig will now be released to Rockhopper which will drill the Ernest prospect
FOGL’s shares will obviously come under pressure today but we would highlight that exploration is at early stage in this large frontier basin with significant remaining prospectivity

and one more

from Evo Securities

Punters will be disappointed that the FOGL Toroa-1 well in the South Falklands Basin failed to find reservoired hydrocarbons (no details) – and no doubt those with a lack of appreciation of geography (let alone geology) will “beat up” all the Falklands exploration companies as a result. However, smart investors will be aware of the massive geological and geographical “gap” between the South and North Falklands basins – the latter having been massively derisked by the Sealion discovery. Attention will switch to the next prospect to be drilled – Ernest – a structure similar to the successful Sealion discovery in the North Falklands Basin

De Jong

the Ocean Guardian rig heads back ooop North

to Rockhopper

should arrive by July 21 we hear

I see.

There doesn’t seem to be much else to say about this. Should we move on now?

11:31AM

Right

back to Tuna’s question

is there any truth that I have been offered a non-exec at Ocado?

and the answer to that is no

I haven’t even been offfered a tour round their warehouse

which is 10 mins from my house

Though we did hear from their PR on Friday.

yes we did

and were told Ocado were talking extensively to the paper

and that would set the record straight

and my word

wasn’t it set straight

Ah yes. Mr Schroders certainly did set some people straight.

great quotes in this story

brilliant

(More system issues. Neil, can you find the story?)

Richard Buxton, head of UK equities at Schroders, said on Friday: “This is only for investors who wish to create capital gains tax losses.”

http://www.ft.com/cms/s/0/b9798af4-8ba4-11df-ab4d-00144feab49a.html

Mr Buxton said: “It seems there is a new rule in the City – the greater number of investment bankers on the ticket, the worse the deal. I would be amazed if this was covered at the lower end of the range.”

He added: “We might be more interested at a valuation of between £500m and £600m, but we remain very concerned about the sustainability of the business model and the loss of the M25 business.

and

Another senior fund manager said: “We genuinely don’t believe that they can get it away at this valuation.”

One investor highlighted the prospectus clause stating that the group is a going concern “on the receipt of £200m of net proceeds from the IPO”.

“This is not an IPO, it is a rescue rights issue,” he said.

So the record set straight there

Hm.

of course

the really odd thing about the PR response is that Ocado

is an internet retailer

yet they only want to talk to the paper

Which is really odd, given anyone googling

for the likes of “ocado valuation”

Will find Alphaville on top of that pile.

Still, if the blogs are not worth spinning, that’s their decision.

although

one has to ask

what on earth they are doing to justify their fees

arrogant, ignorant behaviour

The best I can imagine is that they’ve fighting fires on so many fronts

That they’re prioritising

They’re not prioritising very well, but …….

indeed I imagine the PR tactic here might be to say nothing and hope the thing gets away

(Muppet: please don’t do that replace-letters-with-numbers thing. Txt-speak is a banning offence.)

Rant over

moving on

11:40AM

Right

time for yet another Vulcan mind meld

Indeed. They’re becoming pernicious.

Anglo American on Friday.

And I think Ambrian may get a cheeky wee call from the IR on the back of this comment.

Anglo American appeared to be selectively managing down some analysts expectations on Friday, hard on the heels of Kumba Iron Ore’s Trading update that was managing up the analyst/market on its earnings expectations that EPS was expected to be between 80-90% up on H1 2009.

ah the mind meld

happening way too often recently

analysts deciding on mass

to trim forecasts

Shell first

then Smith & Nephew

what can be done to stop it?

The FSA could fly into action, I guess.

what against a mind meld?

how

Um ….. we are, of course, not suggesting there’s been selective disclosure

(Even though Ambrian do. Look. They just said it.)

So anyway, here’s the new numbers.

Consensus Interim EPS 175 USc/sh vs Ambrian’s 199 USc

Whilst the buzz in the market was that expectations are being managed down, our discussions with Anglo suggested it was more like just a few analysts (from the pack) were far too optimistic in the overall number – rather than the consensus numbers as a whole being too high and needed ‘managing down’.

Despite our small adjustments to volume of copper production we are overall comfortable with our forecast for Underlying EPS which declined from 205 USc to 199 USc/sh for Anglo’s Interim results. Basic EPS is forecast at 243 USc as it will reflect the assets sales (piece of Tarmac etc).
We continue to recommend Anglo as a BUY with a £35/sh 12 mth price target but still rate Rio Tinto as our Top Pick in the sector.

thanks for that

now on the subject of Anglo

we have a nice piece of fantasy M&A

from Merrill

talking about a break-up

a South African business

and an international business

Go on.

well that’s the idea

and as things in the South African are apparently getting better

now might be the time to move

so here’s how it might work

Since listing in London, Anglo has tried various avenues to dilute its South African
exposures down to levels whereby the market doesn’t derate the other assets.
Previous management chose acquisitions in other industrial products (paper,
aggregates); ex-post, this proved to be a route to underperformance vs. peers.
With this strategy now reversed, Anglo is refocusing on its core mining assets but
investing disproportionately outside SA.

In this note, we discuss a possible step that we believe could provide the basis
for a rerating (in our opinion): Breaking up Anglo American into a South
African business and an international business.
We envisage splitting Anglo American Plc into two London listed vehicles, for
example.

Our analysis suggests that “Anglo International” could have an EV of
approximately US$34. See graph left above left for relative enterprise value &
balance sheet capacity of other diversified miners..
We think Anglo’s suite of international assets including Chilean copper,
Colombian & Australian coal and Brazilian iron ore would achieve a rerating.

and valuation

Sum of parts for two businesses
“Anglo International”: EV of US$34 bn
Our rough estimates on the potential value of these two businesses are extracted
from our NAV estimates for Anglo as a whole. For the international business we
largely value it using multiples of EBITDA (6x for most businesses) except for
Minas Rio which we value using a DCF.

Anglo South Africa: EV of US$30 bn
Our valuation for the South African business is more market driven as we
incorporate the see-through value of Anglo’s stakes in Amplats, Kumba & Exarro.
Combined these would represent some 80% of this vehicle’s valuation.

full note

could appear in the LR later

if people interested

Ta for that.

(OK Lorcan)

Merrill reckons the Intl bit worth $33bn

and the rest

$30bn

current market cap $50bn

(No Lorcan I am starting Valler to bid for Anglo’s interenational business rumour)

anything more on the miners?

No – think that’ll do for them.

(Midlander: the issue is not analysts being crap. The issue is selective disclosure of price sensitive information. Though we’re not saying that happens.)

11:49AM

Right, what now?

some of the Rabble asking about the GDP data

and we also have a big new deal

State side

Aon Corporation (NYSE: AON) and Hewitt Associates, Inc.
(NYSE: HEW) announced today that the boards of directors of both companies have approved a
definitive agreement under which Hewitt will merge with a subsidiary of Aon. The aggregate
consideration is valued at $50 per Hewitt share, which represents a 41% premium to Hewitt’s
closing stock price on July 9, 2010, the last trading day prior to the announcement of the
agreement. The aggregate fully diluted equity value of the transaction is approximately $4.9
billion, consisting of 50% cash and 50% Aon stock (based on the closing price of Aon common
stock on July 9, 2010).

yep

that’s the exciting world of HR consultancy

still big deal

and aren’t Aon the Man Utd sponsor?

Are they?

apparently

moving from AIG to Aon

another name that will mean nothing to United supporters

A bit like Autonomy sponsoring Spurs

Any reaction from the UK insurers on the back of this?

don’t think so

Not sure there’s much of a readthrough.

11:53AM

GDP then?

right this was reading

delayed due to technical problems at the ONS

and it is a mixed bag

final Q1 GDP comes in at 0.3%

which was in line with expectations

but the break down

reveals a few alarming things

For example?

house spending

net exports

basically the whole things raises concerns

of the dreaded double dip recession

here’s Lena Komileva

of Tullett Prebon

The release of the UK national accounts, which was delayed by the ONS due to technical problems, produced a mixed bag of news. The final Q1 GDP figures confirmed the preliminary assessment that the economy expanded by 0.3% in the first three months of the year, pointing to a modest recovery in line with the economist consensus. In the composition of growth, manufacturing expanded at a brisk pace of 1.4%QoQ, revised up from 1.2% in the preliminary estimate, and services expanded at a firmer rate of 0.3%, up from 0.2% before. However in the expenditure breakdown, strong contributions to growth from the inventory cycle, business investment and government spending were offset by an outsized 0.9% subtraction coming from net exports and a relapse in household spending reflecting continued income growth weakness. Household spending fell back by 0.1% (0.0% preliminary), following a brief rebound of 0.6% in Q4 which had followed six consecutive quarters of declines. Real disposable household income rose just 0.4% in Q1, following a 1.0% contraction in Q4.

Hence, the UK’s supply-side driven recovery, following the earlier sharp collapse seen in 2008 and 2009, is tangent to ongoing demand weakness as a result of the continued deleveraging in household and corporate balance sheets. This raises doubts about the sustainability of the current pace of expansion, especially in light of aggressive spending reform plans in the public sector.

The confirmation of the Q1 result, while consensus-neutral, eases fears about the quality of recent UK statistics, which would have prompted a sharp re-pricing of fundamentals and elevated volatility in sterling and Gilts. However, the ONS’s Blue Book backward-looking revisions point to a deeper and more prolonged recession, which could be linked with a wider margin of spare capacity in the economy. The 2008 GDP estimate was revised sharply down to show that the economy contracted by 0.1% between 2007 and 2008, compared with the earlier estimate of +0.5%. This reflected weaker private and public consumption and investment, driven by a faster pace of deleveraging among households. The households savings ratio was revised to show a stronger increase from a low point of -0.9% in Q1 (-0.7% previously) to 8.5% in Q3’09 (8.4%), before moderating to 7.2% in Q4 and 6.9% in March.

Based on the GDP figures, the economy is slowly emerging from a deeper and more prolonged recession, which alongside the weak narrow money supply figures released separately by the BoE, attests to ongoing deleveraging among businesses and consumers, and a weak recovery momentum. Growth in notes and coins in circulation fell sharply to 5.8%YoY in June from 6.5%YoY in May, pointing to weak narrow money velocity and a subdued recovery stimulus. The figures are unlikely to change the BoE’s monetary arithmetic ahead of the August Inflation Report as any estimates of the economy’s output gap are already reflected in the UK’s persistent inflation premium versus the BoE’s 2% target and compared to other major economies. However the continued rebalancing of corporate and consumer balance sheets away from credit, in an environment of weaker income growth and on the verge of a sharp retrenchment in the fiscal sector, will necessitate lower BoE rates for longer.

And sterling’s weaker on the back of that, I assume.

hang on

will check

cable is $1.5005

and a euro thingy buys 0.8372p

Wow. There really is not much happening out there, is there?

nope

we are in silly season

I think

Alcoa tonight.

Nothing happening in the meantime.

I have a good scene setter from Deutsche’s Jim Reid

on the busy week ahead

(LorcanRK: Please. It’s Paul Mason who throws C&M in the bin. Pesto, I’m sure, is an avid reader.)

Indeed its fair to say that there was positive news last week on a number of the imminent pressure points for the market. Spain launched a successful, oversubscribed syndicated deal; European banks accessed the capital markets in larger volumes than for many weeks; and the same institutions seemed to gain the confidence of the markets with regards to the upcoming stress tests. The environment is still fragile on all of these factors above but it was a good week. The other advantage about last week was that it was scarce for US economic data. This is usually true the week after payrolls. This changes this week and US economic data (and the slow start of earnings season, details below) will focus the market back on to the soft patch in data seen over the last few weeks. The highlights are probably Retail Sales on Wednesday. Industrial Production on Thursday, and Consumer Confidence on Friday. We’ll also learn more about the imminent deflationary pressures in the economy with PPI (Thursday) and CPI (Friday).

With regards to the stress tests, Media reports overnight reported further information regarding the stress test. Der Speigel is saying that the peripheral debt haircuts will be as follows: Greece (20%), Portugal (11%), Ireland (8.6%), Spain (6.7%), and Italy (4.9%). Bunds will attract a 2.3% haircut. It was also reported that haircuts will only apply to securities held in banks’ short-term trading books, but not for bonds held for longer periods. EU Finance Ministers will meet today and tomorrow which will be the last official full meeting before the release date (23 July). Stress test and the EFSF will be the main discussion points. We can perhaps expect more news flows on this topics over the next 48 hours.

Moving on to this week’s company earnings’ calendar, Alcoa will kick off the Q2 season today after the US trading bell. Although we only expect 23 S&P 500 firms to report (about 10% of the index’s market capitalisation), this week will feature some sector bell-weathers that could set the tone for the days and weeks to come. Intel will report on Tuesday followed by JPMorgan, Google, and AMD on Thursday. Citigroup, Bank of America and General Electric will report on Friday. According to our DB US equity strategists’ note on 7th July, the bottom up consensus is estimating S&P 500 EPS of $19.6 or flat qoq. Seasonally adjusted this is a decline of -4.0% qoq. Financials account for some of this decline as capital markets activity has fallen but a sizeable decline is also estimate for the ex-Financials of -3.6%. Analysts’ will probably be focusing on company’s outlook commentary given the weakness in economic data of late. There is probably little upside for management to provide the markets with an overly upbeat forward looking view.

12:00PM

WAIT!

Someone on the right mentioned GKP news!

Oh yeah

some drilling update

bored with GKP now

never gonna be the super major I thought it might

BP is more interesting

Gulf Keystone Petroleum Ltd (GKP:LSE): Last: 69.25, up 1.25 (+1.84%), High: 71.50, Low: 67.25, Volume: 1.49m

Hm. Looks like the punters are getting bored of GKP as well.

BP’s where it’s at in terms of ten-bagger macro bets.

indeed

the place to be

12:03PM

Okay – I’m scratching around

Hang on

something slightly alarmist has just landed in my inbox

Crisis Awaits World’s Banks as Trillions Come Due

What? Where’s the from?

New York Times surprisingly

it seems

the massive refinancing has crept up on world markets

without anyone knowing

FRANKFURT — The sovereign debt crisis would seem to create worry enough for European banks, but there is another gathering threat that has not garnered as much notice: the trillions of dollars in short-term borrowing that institutions around the world must repay or roll over in the next two years.
The European Central Bank, the Bank of England and the International Monetary Fund have all recently warned of a looming crunch, especially in Europe, where banks have enough trouble raising money as it is.
Their concern is that banks hungry for refinancing will compete with governments — which also must roll over huge sums — for the bond market’s favor. As a result, credit for business and consumers could become more costly and scarce, with unpleasant consequences for economic growth.

“There is a cliff we are racing toward — it’s huge,” said Richard Barwell, an economist at Royal Bank of Scotland and formerly a senior economist at the Bank of England, Britain’s central bank. “No one seems to be talking about it that much.” But, he added, “it’s of first-order importance for lending and output.”

Wow. Is Ambrose E&P moonlighting for the NY Times now?

That’s rather extreme.

it is

market not bothered

and as Lorcan says

there was something smilar in the WSJ today

FTSE 100 is up 5.6 points at 5,138

Yes. It is.

if we did that

it would be another financial comet

Hm. I guess, when you’re filing Sunday for Monday copy, the temptation to bash up becomes unavoidable.

Anyway, we’re done now, right?

The rabble seem to have drifted off.

And it’s a news vaccuum out there.

Nothing on Blinkx

I am afraid

they had some meetings in the City last week

and that was about it

nothing on Taylor Wipeout

well nothing more than was in the paper

OKay

I am hungry

heading off to lunch

and Ptolemy

FIFA

what a story that is

Yes. Sepp Bellend Blatter. What a man.

So, thanks for all your comments today.

yep

thanks for logging on

Please come back tomorrow, when we might have something to talk about.

fingers crossed

I am off to do some news gathering

cya tomorrow

(very good Captain and hello Lady E)

bye

This entry was posted by Neil Hume on Monday, July 12th, 2010 at 11:10 and is filed under Uncategorized. Edit this entry.

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Markets Live transcript 12 Jul 2010

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