FT Alphaville » Markets Live transcript 20 Sep 2010

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Markets Live transcript 20 Sep 2010

Posted by Neil Hume on Sep 20 11:03.

Markets Live chat transcript for the chat ending at 11:18 on 20 Sep 2010. Participants in this chat were: Neil Hume, FT Bryce Elder Paul Murphy

Hola

Another week,

and another session of Markets Live

FT Alphaville’s daily discussion about small cap oil companies because that is the only thing people care about any more

yes it really is possible

to bang on for over an hour

about exploration in the Falklands

Kurdistan

etc

as investors have given up on blue chip companies

So which set of 2P reserve numbers should we begin with?

gawd

I don’t know

the non 2p numbers at Sterling Energy

Sterling Energy PLC (SEY:LSE): Last: 81.00, down 47.5 (-36.96%), High: 85.00, Low: 60.75, Volume: 4.83m

they have hit water

Actually, before we do, we should quickly note that there’s a rat under my desk.

WHAT!

a rat?

where’s Manuel?

So, if we’re knocked off air suddenly, it’s because the rat’s escaped.

and chewed through a wire

Well, Joseph claims it’s a rat. It may just be one of those bodybuilding mice we had earlier in the year.

So anyway, if anything happens, that’s what’s happened.

I bet the rat has GKP

The next supermajor, potentially sitting on 60bn barrels of oil in Kurdistan. Loved by muppets across the globe.

Gulf Keystone Petroleum Ltd (GKP:LSE): Last: 155.00, up 18 (+13.14%), High: 155.50, Low: 141.00, Volume: 5.47m

So anyway. Sterling. Water. Iraq. Tell me more.

11:07AM

yes

they found a bit of gas

and then a load of water

and that’s it

not really supposed to happen in the most oil rich country on earth

but it just goes to show

the dangers of exploration

Comment?

I’ve seen a few bits but none of them made much sense.

one moment

here’s the sector watcher

putting things into plain english

Test from the Shaikan well in Kurdistan has been disappointing and the shares will likely come under some pressure. The well flowed limited quantities of gas from two zones, although in both cases there was a subsequent increase in water production. This looks pretty bad news for SEY, given that commercialisation of gas reserves in Kurdistan is questionable in the first place. All is not lost yet as the well will continue to drill down to the Cretaceous and Jurassic targets. However we’d be avoiding this one for the time being.

Hang on – hang on ……

I think Sector Watcher’s had a Freudianism

It’s Sangaw North, not Shaikan, isn’t it?

hehe

it can happen to the best of us

anyway

here’s something more technical from Evolution

Two open hole DST’s were carried out on the Cretaceous Kometan and Shiranish formations to investigate previously identified potential hydrocarbon bearing zones. Both flowed gas, but both turned to water over the test interval. The liquid content of the gas could not be determined. These reservoirs are characterised by fracture porosity, and the fact that these fractures have a natural propensity to water is not encouraging. However, the company has not ruled out further cased hole testing after reaching TD.

VALUATION AND RECOMMENDATION – The tests of non-commercial
gas from the Cretaceous formation are disappointing, but the well still has
around 1200m to go with further targets in the Cretaceous Qamchuga and
Jurassic. We conservatively remove the Cretaceous resources highlighted
in the CPR (although the Qamchuga has yet to be drilled), which lowers
our Core plus risked NAV and target price to 165p from 250p.

Now

EE makes a very good point

Desire Petroleum

is has moved higher in the wake of Friday’s flow results

from fellow Falklands explorer Rockhopper

it is now valued at £500m

yep £500m

and it has not found any oil yet

explain that

Desire Petroleum Plc (DES:LSE): Last: 149.00, down 4.5 (-2.93%), High: 180.00, Low: 148.00, Volume: 12.83m

That’s nuts. I can’t explain that.

and let’s have a look at Rockhopper

it has found oil

but is a long way from production

Market cap on that one?

around £900m

now

Rockhopper needs another cash call

and I reckon the fact that Merrill Lynch are now bringing out big notes on the company

means we will see one before the end of the month

It is, according to the spin, the “institutionally owned” Falklander.

So perhaps they can get it away with relative ease.

well, there will be more institutional ownership very soon

True.

here’s ML’s take on Rockhopper

worth 700p apparently

Successful flowtest moves Sealion closer to commerciality
Moving the Sealion find in the North Falklands basin towards commercial
development is a key part of the Rockhopper story (see Hopping to the next level;
27 Aug). The successful flowtest announced on Friday is a key step forward to
commerciality, removing uncertainties around the quality of the field. Sealion
flowed at >2kboe/d (we expected 1-2kboe/d) with peaks of 2.3kboe/d from the
lower and upper fans combined for 18 hours. We note that no water or sulphur
flowed to surface. Given equipment constraints – better equipment should
materially increase flowrates – and the fact that the well flowed longer than
anticipated, we view this result as very positive. Reflecting the commercial derisking
of the field, we raise our NAV/PO by 50p to 700p. Buy.

Moving to full appraisal to capture further upside
We now see RKH focusing on accelerating the appraisal of the field – an attempt
to capture the significant upside that Sealion still offers: P50 volumes (the basis of
our base case valuation) are estimated at 242mmboe and P10 is 670mmboe. We
expect the appraisal phase to include additional seismic and 2-3 wells over the
next 6-12 months for which RKH has yet to secure rig capacity.
Near term: reassessing prospect inventory and drilling
Rachel prospect
In the near term, we expect an update on the prospect inventory as the company
incorporates recent data. We believe that with an improved understanding of the
subsurface and the well control that older wells (drilled in the area in 1998)
provide, we could see an increased number of drillable prospects medium term.
On the drilling front, the rig now moves to drill the medium risk Rachel prospect
(risked 2p; unrisked 15p) in block PL003-004, operated by Desire, to the south of
the SeaLion find

and then there is the company

whose name we daren’t mention

they want to go to the main list and into the FTSE 250

so all the index trackers can buy it

and pump its valuation further

Well that’s nice.

and given that small cap oil is where all the trading action is at the moment

one imagines that the LSE will allow it to move

I dare say they will.

right

bored of small cap oil

and we can revist it later

let’s head to the wider market

11:16AM

So? Up?

yeah

all a bit strange

Friday saw the market regain 5,600 after the expiry

then come off and end 35 points lower

and today

it’s back up 62 points at 5,570

and I don’t really know why

Wires are pinning it to oil.

Which seems tenuous.

BP Plc (BP.:LSE): Last: 409.85, up 6.8 (+1.69%), High: 411.25, Low: 407.00, Volume: 10.09m

Royal Dutch Shell Plc (RDSB:LSE): Last: 1,836, up 25 (+1.38%), High: 1,838, Low: 1,824, Volume: 732.21k

BG Group (BG:LSE): Last: 1,102, up 19 (+1.76%), High: 1,108, Low: 1,093, Volume: 935.51k

I suppose the bottom kill worked

that’s helped BP

Yup – “effectively dead” now.

Not unlike the rest of the market.

still

it could be an interesting week

we have the Irish bond auction tomorrow

when we will find out if the Irish are actually out of the market or not

and then the FOMC meeting

although I think everyong – including Goldman Sachs – has given up on the idea of more QE

actually

I have a quick note on the FOMC meeting

from RBS

Go on then.

The FOMC meeting and key activity data on both sides of the Atlantic will take the centre stage this week, while woes related to the euro area periphery will likely continue to be a critical theme for investors

Our US economists do not expect the FOMC to announce any additional QE measures at this stage. They note that in his Jackson Hole speech, Chairman Bernanke indicated that the Committee was prepared to provide additional monetary accommodation through unconventional measures “if the outlook were to deteriorate significantly.” They believe the prerequisite of a significant worsening in economic conditions tamped down speculation that QE II would be announced at the September meeting. In addition, a Wall Street Journal article last week noted that Fed officials differed on the question of how weak the economy had to get before undertaking additional steps of support

The article indicated that, “with no consensus on the threshold for action, officials are unlikely to launch any new bond-buying effort at their 21 September meeting”. If the data worsen (i.e., if private payrolls decline or inflation heads lower), our US economists have little doubt that QE II would be announced in November. However, if the data continue to point to sustained expansion (albeit at a sluggish pace) and steady (though uncomfortably low) inflation, then the prospects for QE II are much less clear. They believe the decision to provide more monetary stimulus rests heavily on the degree to which the FOMC downgrades its growth forecasts for 2011 at the 2-3 November meeting.

Hence, in September there may actually be relatively few changes in the FOMC statement. With respect to the outlook, the Fed may indicate that the pace of recovery in the near term is likely to remain modest. As for prices, following last week’s benign core CPI reading, we do not expect any meaningful changes to the Fed’s stated expectations for inflation to be “subdued for some time”. With respect to the Fed’s policy tools, we do not believe the “extended period” language will be altered.

Just going back to the Irish question …………..

Just curious. What would constitute a fail?

(Sir Incom – I have no idea what Pickens record is like)

We were discussing that earlier

you can borrow from the EFSF and IMF at 5%

of Greece have

so I guess that’s some sort of benchmark

anything above that

is probably saying to the Irish

you must go cap in hand and call in the IMG

still

it’s not a huge acution EUR1.5bn

four and eight year notes

So it seems very unlikely that they’ll not be able to get that away.

keeping with things macro

Moody’s has slipped out a note on the UK

And?

rating not expected to change in forseeable future

thanks to the work of the new chancellor

and the fact

that we had the good sense

to raise a lot of cash at long maturities

here’s the covering letter

that goes with the report

Moody’s stable outlook on the UK’s Aaa rating — implying that the rating is not expected to change in the foreseeable future — is largely driven by the government’s commitment to stabilise and eventually reverse the deterioration in its financial strength. Government debt is also well-structured, thus limiting re-financing risk. Moreover, the UK economy appears sufficiently flexible and robust to grow moderately, even in the face of the challenges mentioned above and austere fiscal consolidation.

The UK’s Aaa rating is premised on Moody’s central scenario that the UK economy will maintain a moderate pace of growth over the medium term, that the primary budget balance will be in surplus by around 2014, and that the restructuring of the country’s banking sector will only incur small additional costs.

for more

go here

http://v3.moodys.com/viewresearchdoc.aspx?docid=PR_205844&cy=usa

of course S&P

is the real bear of the UK

I think they have them on negative outlook

And any reaction from the GBK?

one moment

cable is $1.5602

and a euro thingy buys

0.8390p

not sure why the euro is so firm

with the Irish stuff in the background

Three periph auctions due tomorrow. Perhaps we’re just on pause.

although the strength of the euro

could be an issue for Greece

according to this note I have just picked up from BNY Mellon

As we have highlighted throughout this year, the core problem for Greece
(and others) remains that they are locked into a currency system that has
ended up exposing them to extended period of inappropriate monetary policy
and (in the absence of fiscal union or a will to deal with deep seated
structural problems) left it exposed to an extended boom and a dramatic
subsequent bust. More simply, with no meaningful reform having taken place
over the past decade, Greece now finds itself locked into the EUR at a
disadvantageous exchange rate. Investors clearly recognise the problems
facing Greece and have reacted accordingly, as can be seen by the price
action in the local asset markets as well as from our own flow data.

Unfortunately, the EUR is currently being driven by forces that are, to a
large extent, external to the Eurozone. With the safe haven currencies of
choice during the first half of the year (the JPY and CHF) now being
constrained (or being implicitly threatened with constraint) by their
respective authorities and with China expressing renewed concerns over the
outlook for the USD (driven in part by its growing political conflict with
the US over currency policy), investors have been left with few choices in
what to buy in the mainstream currency markets. As a result the EUR has
been rising almost by default over the course of the past week.

The rise in the EUR, however, places the likes of Greece in a difficult
position. If the primary part of the problem is that they now find
themselves locked into the EUR at an inappropriately high exchange rate
then a sharp rally in the single currency only serves to exacerbate this.
With disquiet already rising over quite how high Greek unemployment will
rise in the months ahead following the end of the tourist season, a rally
in the EUR runs the risk of significantly intensifying the pain.

With no certainty as to when the external factors that have driven the EUR
are likely to dissipate (the battle over Japanese currency policy has still
some way to run), the risk is that the EUR remains strong for a while yet.
It seems to us, however, that this does not provide us with a particularly
good reason for buying the EUR. Indeed, although these were (roughly) the
market dynamics that drove the EUR during its extended rally between 2002
and 2008, the key difference is that no-one now can be unaware of the
underlying problems that face the likes of Greece. As such recommending
buying the EUR in the circumstance (given what we now know) seems
dangerously close to the “greater fool theory” of investing (buying
something not because you believe that it is worth the price, but rather
because you believe that you will be able to sell it to someone else at an
even higher price). More simply, buying the EUR simply because of market
dynamics sounds a dangerous idea.

Good note that.

So is that enough macro? Should we return to stocks?

11:31AM

Right

what else is moving?

are the banks doing anything?

Small up.

Barclays PLC (BARC:LSE): Last: 309.05, up 4.4 (+1.44%), High: 314.50, Low: 304.45, Volume: 16.48m

Lloyds Banking Group plc (LLOY:LSE): Last: 76.68, up 1.34 (+1.78%), High: 76.92, Low: 75.26, Volume: 38.73m

Royal Bank of Scotland Group PLC (RBS:LSE): Last: 48.54, up 0.7 (+1.46%), High: 48.57, Low: 47.61, Volume: 15.27m

Why?

surprised by Lloyds

looks like the IBC

the independent banking commission

chaired by John Vickers is chaning tack

instead of breaking up banks and all that casino banking nonsense

they are focusing on retail on the high street

and the lack of competition

I just wonder if

the Lloyds/HBOS merger gets unpicked

That’d be more dramatic a result than most commissions ever produce.

true

So this is due on Friday, right?

their first public appearance

our very own Martin Wolf

is on the commission

but this Lloyds/HBOS deal

has clearly made things less competitive

in fact I was looking at JP Morgan report this morning

and the ROE

have a look at this

The most meaningful improvement in UK retail banking profitability has taken place
in Lloyds Banking Group where having reported a RoE of 7.5% in 2009, this is
expected to come in at 27% in 2010E and to continue to improve to 33% in 2011E,
where in line with the sector trend, it is expected to peak and then start leveling off.
With an estimated Group PBT contribution from UK retail banking of 75% in 2011E
going to 52% by 2014E as losses in International normalise, understanding the
sustainability of returns in UK retail banking is crucial in determining the longer
term profitability outlook for the Group.

In our base case, we have assumed Lloyds will continue to run its retail banking
operations with a significant duration mismatch. Hence Lloyds UK retail banking is
expected to produce a 22% RoE in 2014E, higher than the sector average at 17%.

If on the other hand, we assume a more matched funding position then RoE for
Lloyds UK retail banking would be substantially lower at 15% by 2014E, slightly
lower compared to the sector as a result of its business mix and duration profile.
This would bring overall Group RoNAV 2012E down from 13.1% to 9.8% i.e. in
line with long term cost of equity.

Yes – but would it be too cynical to think that Levene’s been doing a bit of stirring here?

well

he did give a VERY big interview at the weekend

saying he could raise £3.5bn

to buy branches from Lloyds

although his ideas for this new bank

are not exactly revolutionary

Hm. Yes. “Better service,” is the gist.

And …. that’s it.

yep

no call centres

etc

your own bank manager

ie – exactly what everyone else is doing

I prefer the Metrobank model

at least you can get the dog groomed there

That is a selling point of sorts.

Passed the Holburn one yesterday, as it happens. Open on a Sunday. And empty.

really

any dogs in there?

None that I saw.

surprised by that

anyway

here’s a bit more comment on Lloyds

As a result, we expect concerns over ‘bank break ups’ and commentary on the re-location of banks’ headquarters to other geographies to continue to dominate the press headlines until Friday. Until recently, most of the discusson had focused on the ICB report as the vehicle to separate retail banks from investment banks but the need for more diverse domestic compeitition is now emerging as the key ‘hot topic’. We think that NewBank, an entity which publicly listed in Aug with the mandate to acquire UK banking assets at reasonable prices will use this week to try and push the case for more competition however we note that Lloyds is in no rush to sell its UK retail banking assets and that there is no requirement to accept bids at any price. Eg. Lloyds will look to maximise the disposal price. Key Points: 1) We do think the UK banks’ share prices are sensitive to this report. 2) Concerns over ‘break ups’ for greater competition will weigh on Lloyds while concerns over splitting up banks with ‘casino banking’ and retail banking operations will weigh on Barclays and RBS. 3) We think the commission is likely to look into both competition and separation of activities but unlikely to rule in the end that the UK banks should be broken up and we would buy on weakness. Our top pick in the UK banking sector remains Lloyds. trades on 1.3x 2010 p/TCE. This falls to 0.9x 2012 p/TCE, 6.3x p/E and 8% yield.

Actually, before we leave the banks

So why is Lord Levene of Portsoken’s vehicle trading at a premium?

Explain that, please.

(You can have it Manuel – if we catch it)

NBNK Investments Plc (NBNK:LSE): Last: 119.00, up 1.5 (+1.28%), High: 117.50, Low: 117.50, Volume: 18.00k

er pass

cash shell trading at premium

Are we allowed to say it’s a cash shell?

I guess we just have. Oh well.

but that’s not all

Lord Levene has cashed in

Lord Levene is getting 200,000 free shares, worth £234,000 at Friday’s closing price, as well as other director warrants, options and share awards detailed in NBNK’s admission document. Some critics have said the package doesn’t look much different from old-style banking

“Well yes,” acknowledges Lord Levene. “But that’s very much boilerplate stuff. It’s what we actually do and who gets what and on what terms. That has to be in there.”

(Monkey: a pun yellow, just for old-times sake.)

that was from the excellent Sunday Telegraph interview

http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/8010812/Lord-Levene-goes-shopping-for-banks-and-Lloyds-is-top-of-his-list.html

(yellow rescinded Monkey, I like Barkcap)

Very long. and a bit laundry-list towards the end.

What’s his greatest unfulfilled ambition? “I want to be there when Chelsea win the Champions League,” replies the keen season-ticket holder.

jeez

let’s move on

11:42AM

So. Anything interesting on the raw front?

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.

(WShak – small cap oil bubble>)

RAW

let me have a look at th pad

well

the Moneysupermarket rumour won’t go away

Moneysupermarket.com Group Plc (MONY:LSE): Last: 85.25, up 1.75 (+2.10%), High: 85.25, Low: 80.70, Volume: 143.16k

the idea being that Barry Diller might be interested

As in Expedia etc?

yep

I suppose it could happen

what else have we go

ah yes

Blinkx

Blinkx Plc (BLNX:LSE): Last: 90.00, no change, High: 92.00, Low: 90.00, Volume: 651.03k

a bit of RAW about a 140p a share bid

no names

(@Fatdaz: as in InterActiveCorp.)

I thought Blinkx was due to issue a trading statement

anyway

and finally

Clipper Windpower

a stinker of a statement today

Ah. Yes. Saw their latest profit warning.

Clipper Windpower Plc (CWP:LSE): Last: 31.20, down 13.55 (-30.28%), High: 40.00, Low: 27.50, Volume: 358.38k

well

the idea is that the share price fall has been overdone

and UTC, which already have a big stake, will bid

apparently today’s PW warning has released them from a standstill agreement

Has it? Hm.

That’s interesting. Clipper’s been a nightmare for all concerned.

Simply can’t get the manufacturing side to work.

and they have run out of cash again

anyway UTC indicating that they are happy to buy shareholders out

so we could get a corporate mercy killing very soon

Yup. Corporate euthanasia.

here’s a couple of notes

first up JPMorgan

IMS published: Ahead of its 30/09 release of H1 results, Clipper
provided an update on trading and its financial situation. Clipper had
already provided a trading update on the 26th of July. The comments on
trading were mostly unchanged. The new information provided relates to
the difficult balance sheet situation with Clipper now seeing significant
liquidity strain in the next year due to high cash burn and lack of new
orders. Clipper expects to disclose within the interim financial
statements an opinion that the current businesses circumstances create a
material uncertainty on the group’s ability to continue as a going
concern. Given the ongoing discussions on financing, Clipper will
continue to prepare its financial statements under the assumption of a
going concern.

What are the options: Clipper is exploring numerous alternatives to
raise capital including private and public issuances as well as working
capital credit lines with financial institutions as well as its 49.9%
shareholder United Technologies. UTC submitted a non-binding
indication of interest to acquire all of the ordinary shares currently not
owned. UTC and Clipper had entered into a standstill agreement in
January 2010 when UTC invested $207mn into Clipper. Clipper today
has a market value of $100mn vs. UTC market value of $65bn. The press
release says that a cash flow covenant supporting this standstill had been
broken allowing UTC to go to 55%. Clipper has provided due diligence
material to UTC and appointed advisors. Clipper is also exploring other
options to secure financing. Clipper is also in discussions to sell one or
more of its development sites.

and Jefferies

UTC may now increase its stake in Clipper to 55%, which should prove a good
short term catalyst. We caution though that, despite UTC’s interest to acquire all
outstanding shares in Clipper, the potential for a buyout premium may be limited
given the weak outlook and doubts over the ongoing viability of the business. We
maintain a relative preference for other names in the wind sector.

• UTC raising its stake? UTC has indicated that it may seek to increase its stake
in Clipper to 55%, which is permitted under certain circumstances in the
subscription agreement signed in Jan 11. We believe this will be positive in the
short term, as it will enable UTC to use its balance sheet more constructively (e.g.
vendor financing). UTC has also indicated an interest in acquiring all outstanding
shares, which would require shareholder approval as it contravenes the current
subscription agreement.
• New orders still pending. Clipper maintains 2010 guidance at the lower end of
its 350-450MW range of firm orders, though this is now dependent on customer
project schedules. Though Clipper indicates that it has accumulated 1.75GW of
active turbine proposals as a result of broader marketing efforts and UTC’s
warranty support, we highlight that Clipper has not booked a single new order in
2010. We believe the market needs to see a new firm order from Clipper in order
to become more constructive on the stock.

11:49AM

Hi there

Go GKP go!

special guest time

Murphy is in the office

Yeah yeah, just passing thru

Paul Murphy

Former FT Alphaville editor and founder of the site. Now in charge of something called FT Tilt.

I really miss doing ML you know

really

You and Bryce have become a very funy daily read you know

We try.

Very funny indeed

I think we are very popular on iii

But i think i missing something

Why’s GKP up?

well

Have they struck another press release?

story at the weekend

it’s going into the FTSE 250

only for a short while

before it heads to the FTSE 100

Course it is

and a place alongside BP

haha

it has 50bn barrels of oil in Kurdistan

no really, it does

So do we just ignore it, now its a baby blue chip?

We ignore plenty of blue chips.

that’s true

Rexam, for instance.

Rexam

snap

Bunzl

never heard of

Intertek

Intertek?

ive been out the countr for too long

country

still cant type

As typos, that could’ve gone worse.

(WShak – you have just asked the question. and I would add another. Would the LSE want to know more before they approve a move to the main list)

(Did they want to know more about Connaught? Or Marconi?)

That will be a blow to AIM

(And wasn’t there a time when Frank told anyone who’d listen that Regal was going up to the main list?)

(until the LSE said no)

(Not that I’m drawing parallels. I’m not. Please: no more fanmail.)

Right

Paul the readers want some info on Tilt

and so do we

talk…

We’re not supposed to say much — the FT PRs go nuts

say we have to control information release or something

specials ops?

But basically, Tilt is a new online news/analysis serviced focsed on the EM

We are building the site just now

and hiring people

Fund some good people

Well Stacy has

Some new colleagues

Actually Neil/Bryce meting a copule of them this wednesday if you are around

worth checking out the competition

sorry

I am colleagues

Neil!

guest slot over

thanks for popping in and telling us about your new service

hahah

(And very good Monkey)

(@Monkey: the lesson is you can’t have everything. I may know sod all but at least I can type.)

Tilt — not “from the US”

There will be a central editing desk there

but the writers will be in various regional bureau

that’s enough

free PR

thanks

moving on

11:59AM

Right

let’s round up all this small cap stuff

starting with the great new Falklands hope

Rockhopper Exploration Plc (RKH:LSE): Last: 469.25, up 49.25 (+11.73%), High: 478.50, Low: 460.75, Volume: 8.07m

Further reaction to Friday’s strike?

not strike

flow data

Yes, of course. Limited only by the size of their pipe, or something.

once they get the right equipment down there

Sea Lion could be spewing out 5,000 barrels a day

of course

there are a few issues to tidy up

oil pipeline

Argentina

extra funding etc

anyway the sector watcher is very excited

For those who missed it, on Friday afternoon RKH announced that it’s Sea Lion well had successfully been tested, materially derisking the commercialisation of the oil discovery. Whilst at first glance a stabilised rate of 2,000 b/d might not sound like a knockout rate, this was achieved with sub-optimal testing equipment and indicated significantly higher potential rates (my guess would be >5,000 b/d). Moreover it says it now believes the field is commercially viable, which should, we believe, help to silence the remaining doubters as to the potential of the Falklands as a hydrocarbon province.

Yes, there are issues with developing a field with no existing infrastructure and there are clearly political concerns with Argentina, but these are surmountable. In terms of valuation we currently carry 441p/share for Sea Lion within our 490p target, although this assumes a conservative 15% discount rate. At 12% this increases markedly to a total NAV of around 720p whilst at 10% we reach over 900p. Moreover I’d be surprised if Sea Lion proves to be the only discovery in the area – look at the 29% increase in Desire’s price on Friday for the market’s confirmation of that sentiment. There’s still a huge amount to chase in RKH – don’t get left behind.

so there you have it

if RKH have found oil

so will Desire

perhaps £500m market cap is not that silly

this from Seymour Pierce

Rockhopper’s (NR) Sea Lion-1 well has successfully tested at equipment-constrained rates of over 2,000 b/d. The oil is good quality, medium gravity and showed no water. As mentioned before, the Sea Lion discovery validated the geological model of the basin and de-risked Desire’s adjacent prospects. In fact, it actually added another prospect – Elaine – to the Desire portfolio. The successful test of Sea Lion indicates a potentially commercial project which would help the viability of other discoveries in the area. As Desire highlighted last week in its interim results statement, oil fields seldom exist in isolation. The rig will drill Desire’s Rachel prospect, spudding later this month. BUY

(@WShak: don’t spam please. You’re not the only person with access to Google.)

Right

the sector watcher has also been looking at Petroneft

a Siberian play

Petroneft Resources Plc (PTR:LSE): Last: 47.12, up 1.87 (+4.13%), High: 47.25, Low: 46.50, Volume: 580.27k

Operational update from PTR ahead of an analyst trip to its Siberian business. There’s good news in the statement, with the company quantifying for the first time its potential reserves in Block 67 (as opposed to Block 61 which contains the producing Linenoye oilfield). Following log and seismic analysis, PTR says it will probably be able to book reserves from the Ledovoye field by year-end, up to a possible 15m barrels, or 20% of its existing reserves base. Our core NAV for PTR of 49p/share is around the current price although this is for Phase I of Linenoye only – Phase II gets us to 66p/share. Moreover this assumes a 15% discount rate – arguably now Linenoye is producing we could justify using 12%, in which case we can get close to 80p/share. This also assumes zero value for Block 67, which could easily deliver future value. Don’t be put off by the share price chart – continue buying PTR.

and Dominion

a play on Tanzania

this is like round the world in 40 days

Update from DPL, where the group has commenced a 3D seismic survey in Block 7 in Tanzania. It seems likely that the extensive survey, combined with recent deepwater drilling successes elsewhere offshore East Africa, will serve to materially reduce the risks associated with Block 7. In turn, we expect this to enable the group to agree a farm out deal with a larger company on favourable terms. In the meantime, no doubt investors will keep a close eye on BG’s progress with a well it is due to spud shortly. We are also pleased to see Dominion confirm that it received enough encouragement from the Ngaji-1 well to continue its exploration effort in the Lake Edward Basin onshore Uganda and DRC. Price has been weak following the failure of the first Ugandan well to find hydrocarbons – this looks like a good entry level.

Dominion Petroleum Ltd (DPL:LSE): Last: 3.30, no change, High: 3.73, Low: 3.28, Volume: 7.28m

and er

I’m done on small caps

got anything Bryce?

Smallcapwise? No, not really.

Though I guess we can’t reiterate enough ……

Gulf Keystone Petroleum Ltd (GKP:LSE): Last: 160.00, up 23 (+16.79%), High: 161.00, Low: 141.00, Volume: 7.51m

wow

all good for the Muppet fund

A term of endearment used to describe BB share promoters on FT Alphaville.

On a “moving to the main list – say ” Emoticon

souces”" story

That’s insane. Insane. Insane insane insane insane insane insane insane insane .

But yes, fair point on our emotional hedge.

yes

how is the fund doing?

Up 1.63% today.

good

Now up 19.18% since inception.

That’s a pretty decent three-month performance.

and only been going a few months

very nice

Beat that, T Boone.

I think it might be time to back up the truck on Sterling Energy

good buying op today

and we all know there’s loads of oil/gas in Northern Iraq

Anyway, before getting dragged back into that mire, let’s turn elsewhere.

oh yes

Brit, for instance?

we haven’t covered that

looks like a done deal

12:08PM

Brit Insurance Holdings N V (BRE:LSE): Last: 1,038, up 50.5 (+5.11%), High: 1,045, Low: 1,032, Volume: 763.84k

late Friday

the terms of a deal announced

£10.75

plus a CVR

worth 25p

which is some sort of stubb equity I think

and gets paid if Brit hits an TNAV target

now the reason the market is more optimistic about the deal getting done

is that Apollo now has another partner CVC Capital

although we should stress

there’s more DD to go

and this process has already taken a long time

Odd that the spin thoughout the process was “it’s all going fine, it’s all going fine,” when, in fact, they needed to bring in CVC to pull funding together.

yes

clearly the deal was on something of a knife edge

PE and insurance

not a good mix

if you want to sleep at night

True.

here’s some comment

first up

Morgan Stanley

Slightly better offer terms and edging closer to a
deal: Apollo has now partnered with CVC Capital
Partners (part owner of Acromas, created as a merger of
AA and Saga in mid 2007) and together have made an
indicative proposal for Brit of £10.75 per share plus a
sweetened offer of a contingent value right (CVR) of up
to 25p per share if certain full year net tangible assets
(NTA) targets are met. The full 25p is payable if the
FY10 NTA is £11 per share after adjustments (see
below) and reduces on a linear scale if the full year NTA
is between £11 and £10.75.

On our FY10 estimates, we think an offer of £11 per
share appears plausible: The adjustments for the
pro-forma full year NTA include i) adding back the 30p
interim dividend (the offer includes the interim dividend)
and ii) taking into account the dilution for employee
share options and share plans. On this basis, our
adjusted pro-forma FY10e NTA is £11.04 per share –
our starting point is the 1H10 NTA (fully diluted) of
£10.72 per share, and we add our 2H profits estimates
after tax (assuming fully diluted number of shares of
80.6m) of 32p per share.

New proposal expected to be recommended to
shareholders: The due diligence is currently at a
‘reasonably advanced’ stage and the Board of Brit has
granted a period of exclusivity to the consortium until the
15 October. While the deal is still subject to satisfactory
completion of due diligence, we think it looks plausible
that a deal will emerge.
Increasing price target to reflect better terms and
higher weighting in our bull case: We increase our
bull case to £11 (from £10.75) to reflect where we think
the final offer price is likely to be and we increase our
bull case weighting to 80% (from 60% previously).
Further newsflow and updates are likely to drive the
share price from here.

and KBC

actually

that doesn’t really say anything

There’s plenty that don’t really say anything. Here, for example, is RBS.

Sweetened just enough to get it home
This is hardly a knock out deal, but in our view the consortium offer has added just enough to get
Brits shareholders comfortable that they are just over the line in terms of being able to accept the
offer. It supports our view that Apollo was not in a position to offer much more than £10.75 and that
shareholders just needed a little more to make it palatable. The NTA reported at 1H10 was £11.00 or
£10.72p adjusted for the relevant employee share options, but excluding the 30p interim distribution.
A number of pre-conditions still exist
The indicative offer is still subject to completion of due diligence etc and the Board has agreed to
work actively with the consortium until 15 October 2010 and not to seek other prospective bidders
during this period. Brits Board expects to recommend this offer.

And a bit from Macquarie on the sector.

This approach has created a floor as to the level of discount to NTA the
Lloyd’s vehicles will trade at over the medium term. With private equity
interest and continued M&A debate in the European insurance sector, we
would highlight Chaucer (CHU LN, 46p, OP, TP: 62p) as having strong deal
attractions, particularly given its gearing to the limited positive trending lines
and current level of discount. Other stocks trading at material discounts in the
London market are Novae (NVA LN, 314p, UP, TP: 319p) (legacy issues may
deter bidders), Omega (OIH LN, 95p, UP, TP: 97p) and Hardy (Not rated)
(more recent premium multiples so management may seek premium offer).

thanks for that

12:13PM

One of the ROTR asking about Encore

and why they are up

Encore Oil Plc (EO.:LSE): Last: 94.25, up 4.25 (+4.72%), High: 95.75, Low: 90.75, Volume: 1.41m

i reckon it’s done to this

ENCORE OIL (EO/ LN) – Scotland on Sunday runs an article on EO and its attractions for potential bidders and says the group is likely to be put up for sale within a year. Alan Booth, CEO, said the directors were “trying to make ourselves look tasty to get eaten”. “Whether we are going to be here in another year is another matter,” said Booth. “What we have found is pretty significant. It is likely another company will see it as significant too and as more appropriate for their portfolio.” EO has not yet actively contacted potential buyers but Booth expects that a shortage of good quality North Sea development projects and an “appetite for exploration” among investors will raise the firm’s appeal among suitors.

and er

I think we are done

apart from some fantasy M&A

Restaurant Group Plc (RTN:LSE): Last: 266.00, up 1 (+0.38%), High: 270.00, Low: 265.90, Volume: 86.43k

UBS pushing the idea that it could be a takeover target for

Mitchells & Butlers Plc (MAB:LSE): Last: 293.60, down 0.8 (-0.27%), High: 297.10, Low: 293.00, Volume: 274.10k

Sector activity highlights consolidation opportunity
Recent bids for Carluccio’s and Clapham House have increased conjecture across the sector about other potential candidates for consolidation; and in particular the suitability of The Restaurant Group as a possible consolidation candidate (Financial Times, Telegraph, This is Money). We look at dynamics of a potential deal, and conclude that it could return 15-25% based on a 30-40% take out premium.

RTN is a potential candidate
The Restaurant Group’s resilient trading in the downturn and good mid – long term space growth potential are favourable characteristics when considering it as a potential consolidation candidate. However, its lack of freehold assets and limited opportunity for strategic improvement may impede an approach. We conclude that returns are sufficient to regard The Restaurant Group as a potential consolidation candidate.

Still a Buy without M&A upside
Our Buy rating is premised on the company’s strong brand positioning, defensive out of town sites and good mid to long term space growth potential. We still consider the stock be a Buy, independent of any potential consolidation. Valuation: Buy, PT 300p
We set our valuation on 14x FY11e PER.

Mitchells & Butlers has raised close to £500m in 18 months
The company has sold individual sites, Innkeeper’s Lodge, Hollywood Bowl, and a large package of sites that were not suitable to be converted to their remaining brands.

Some of that cash is earmarked for use, but not all
We assume the dividend will be resumed at this year end, that there will be 45 individual freehold sites purchased over the next three years, added somewhat higher maintenance
capital expenditure per site, and have included the purchase of Ha Ha Bar & Grill in our forecasts. In our opinion, £275m of excess cash will remain on the balance sheet.

We believe that acquisitions provide the best use of capital
While we have no inkling that any of the listed pub and restaurant businesses are for sale, Mitchells & Butlers’ new willingness to operate in leased premises opens up opportunities. In this note we review the cost and return of a potential acquisition of The Restaurant Group or of easing sites from Punch’s managed Spirit securitisation.

and they might revisit Punch

Punch Taverns PLC (PUB:LSE): Last: 83.40, up 0.75 (+0.91%), High: 83.55, Low: 82.40, Volume: 176.05k

Ok – ta for that.

And let’s wrap this up now.

I’ve got to spend lunch using an umbrella to trying to chase the rat out from under my desk.

(wshak if you have the presentation pls email neil.hume@ft.com)

yep

and I have a meeting

Paul has gone off to see one of the bosses

to show him the development site

which we haven’t seen

lots of bells and whistles on it

I imagine

anyway thanks for logging on

for an hour and 20 mins of chat about

small cap oil

fascinating

and I leave you with this

Gulf Keystone Petroleum Ltd (GKP:LSE): Last: 161.00, up 24 (+17.52%), High: 161.50, Low: 141.00, Volume: 7.90m

market cap now

over the £1bn!

how cool is that?

cheap at twice the price

Oh my stars. Todd will be due another pay rise. Good afternoon everyone.

cya

This entry was posted by Neil Hume on Monday, September 20th, 2010 at 11:03 and is filed under Uncategorized. Edit this entry.

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Markets Live transcript 20 Sep 2010

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