Markets Live chat transcript for the chat ending at 11:10 on 23 Apr 2012. Participants in this chat were: Bryce Elder/FT DuncanR
Pollsters have been stressing repeatedly that what matters the most, irrespective of the order for the top two candidates, is the relative size of the Left vote compared to the Right vote. Although historically the incumbent has always been credited with the largest number of voters in the first round, this has not been a guarantee of success. The Left2 obtained 44.0% of the votes in the first round. This is a lower proportion than in the Presidential elections of 1981 (46.8%) and 1988 (45.3%) which ended with François Mitterrand winning on both occasions.
Compared to recent polls which had showed a relatively stable Left vote in a 45-47% range since the start of April (see Figure 6), Sunday’s lower share suggests that the second round could be closer than believed initially. Our calculation of potential vote transfers using the latest first-round results (see Figure 2, first page) still point to a Hollande win, albeit reduced to about 5 points. Furthermore, Sarkozy will find it very hard to court both the National Front vote and the Centre vote at the same time, in our view. Hence, since second-round voting intentions have never put Hollande below 53% (see Figure 7), we believe that it is likely that Mr Hollande will to be the next resident of the Elysée palace on 7 May
Jean-Luc Mélenchon represents the Far Left and has been campaigning with a
strong anti-capitalist and protectionist agenda. His manifesto promises include
among others, a 20% rise in the statutory minimum wage and a maximum salary of €360,000 a year. His fourth place puts him in a solid position to bargain for a role (or several) in a Left wing government assuming that Hollande is elected. However, while we doubt that Hollande will overtly bargain for votes before the
second round, he might choose a Prime Minister with stronger Leftist credentials such as Martine Aubry, the current leader of the Socialist Party, ahead of the more rounded Jean-Marc Ayrault, the long-serving president of the Socialist Parliamentary group. We note that Hollande’s suggestion to involve the Court of Accounts to audit public finances and freeze spending in some areas of central government is an attempt to show some orthodoxy and deflect any blame if some austerity measures were to be announced soon after the election.
Yes, China is cheap. This is necessary, but not enough for an overweight —
Plenty of markets in the region and the world are now cheap, but it’s not enough. We note that China still scores significantly worse than the region on earnings revisions.
The other factor is economic surprises. Whilst these are hard to find globally at
present, Chinese data excels at disappointing.
April’s flash PMI showed modest improvement in manufacturing sector activity, suggesting that earlier easing measures are starting to work. While this should help alleviate concerns of a sharp growth slowdown, the pace of output and demand growth both remains low and the job market under pressure. All this calls for additional easing measures in the coming months. With inflation still on the cool, we expect the introduction of monetary and fiscal easing measures to speed up in 2Q.
The modest improvement in April’s flash PMI results plus March’s better than expected new lending and IP growth numbers suggests that Beijing’s earlier easing measures are starting to work. This, in turn, should help ease concerns of a sharp growth slowdown for China. In additional to the most recent reserve requirement ratio cut delivered at the end of February, the PBoC has also since suspended bill issuance in open market operations and lowered the reserve ratio for some rural financial institutions. Fiscal spending is also picking up, with its growth rate accelerating to 33.6% y-o-y in 1Q from 11.5% in 4Q last year.
Today’s result helps shore up our view that Beijing’s recent easing measures are finally starting to gradually filter through. At the same time, robust US economic data earlier this year is lending some support to exports orders.
That said, the pace of both output and demand growth remains low (vs. the long term average 52.9 and 53.4, respectively). The moderation of input prices implies that overall demand has yet to pick up meaningfully. With production growth still on track for a slowdown, China’s job market remains under pressure. Coupled with the downside risks still posed by a property-led investment slowdown and cooling exports, chances of further easing measures to come remain high.
From depression to repression
Government debt isn’t coming down any time soon
The old solutions – inflation, default, rapid growth – cannot easily be used
Governments will “repress” the financial system, jumping to the front of the credit queue and leaving everyone else behind
While there’s been plenty of discussion about reducing excessive government debt, less attention has been paid to the alternative of living with it. Yet, with neither decent economic growth nor coherent fiscal consolidation plans, governments will have to find ways of rigging the financial system to suit themselves, even if there is a cost to the economy as a whole.
Financial repression results from policies which allow governments to fund their borrowing through imposing costs on others. Financial regulations can be used to force financial institutions to lend more to government and, hence, less to others – domestically and abroad – through, say, higher liquidity requirements. Quantitative easing allows government to escape the disciplines associated with market forces by pushing bond yields down to low levels even when fiscal policy is out of control. Real interest rates end up too low – even negative – and savers are penalised.
Financial repression seemed to work for the Western world in the 1950s and 1960s, a period of rapid government debt reduction. This, however, was more a happy coincidence: debt fell rapidly for other reasons, allowing economies to shrug off the effects of repression. Today, however, repression is only likely to starve the private sector of funds. Higher credit spreads, soporific credit growth, longer credit queues and arbitrary credit decisions are all potential symptoms of repression. While it’s convenient for governments to claim that, with low bond yields, their fiscal plans are on track, the absence of appropriate consolidation imposes costs on the broader economy. Those costs will only rise as timorous governments become ever-more dependent on repression to fund their fiscal excesses.
As expected, Vodafone has launched an agreed takeover bid for Cable & Wireless Worldwide which values the
company at £1,044m. The offer price is 38p per CWW Share, a 92% premium over the closing price on 10/2/12, the
day before Vodafone signalled its interest. This price is final and should not be increased. Shareholders
representing around 18.6% of CWW shares have signed an irrevocable undertaking or letter of intent to vote in
favour of the offer. The completion of the offer is expected in Q3.
Cable & Wireless is providing fixed-line services to the UK government and major corporations, which Vodafone
could use to relieve congestion in already-strained wireless networks. C&Ws Worldwide has been hit hard since its
spin-off from Cable & Wireless Communications nearly two years ago. The company has issued three profit
warnings, blaming Britain’s austerity budget for its financial woes. So the company is currently not expensive.
However, we believe this potential acquisition is a good opportunity, but not … strategic.
C&W Worldwide’s shares have fallen around 75% over two years while the company has also issued several profit
warnings. The speed of decline in traditional voice had increased and the pricing pressure on data connectivity
continued to be a feature in both the UK and internationally. The increasing customer appetite for more complex
solutions did not offset the margin loss from traditional voice.
So, before the announcement of Vodafone’s interest in the company, the share price followed a negative trend. This
offer is quite a good opportunity for shareholders.
Vodafone has stressed that the deal is commercially-led, enhancing its
market position in UK Enterprise and underpinned by the cost and capex
synergies by making use of CWW’s fibre network for mobile backhaul
and its international network for carrying Vodafone’s international traffic.
The deal is seen as accretive for both earnings and free cashflow post
synergies but pre integration costs. This assertion is less convincing
without the application of the tax losses and implies a rapid cost
restructuring process on deal completion (expected late summer).
Overall, we see the deal as an opportunistic move to secure a key asset
in the UK Enterprise market at a reasonable valuation. We expect tax
efficiencies to emerge in the medium term. The deal is consistent with
Vodafone making more of its differentiated position in Enterprise
generally, where it sees strong growth potential in the market for unified
communications. We see potential for similar acquisitions in other
markets in Europe, particularly as regulators do not appear supportive
for intra-market consolidation between mobile operators at this stage.
The complication in the UK is that this deal may force BT Group in the
arms of another mobile provider for its MVNO contract and draw BT out
as a more aggressive competitor in UK mobile over time.
Borders & Southern has announced a significant gas condensate discovery in well 61/17-1 (the Darwin East prospect). A good quality massive sandstone of 68m net pay, with average porosity of 22%, contains hydrocarbons. Crucially, the detail of the content is unknown, so it is impossible at present to gauge the all-important liquids content. Fluid samples have been recovered, which will be brought back to the UK for analysis.
The overall structure is large and the seismic anomaly covers 26km2, so the company believes Darwin East is likely to contain significant volumes.
The well will be shortly plugged and abandoned and the rig will then move to the Stebbing location for the second well in the programme, which we expect to take 45- 60 days to drill.
The discovery of hydrocarbons to the south of the Falkland Islands is a very positive step. However, there is clearly much to do to understand the liquids content of the samples and this find, and then to extrapoloate that information to the other nearby prospects and leads. That process is likely to take several months. In the meantime, the market can only speculate on the possibility of Darwin being a commercial discovery. What is certain, is that the company will seek to expand its exploration campaign (perhaps this year, but certainly next) and will likely need to appraise the Darwin East discovery. That would imply additional financing will be required. Investors may want to wait for that, or at least greater clarity on the find.
Valuation at present is nearly impossible. However, given the potential of Darwin and the remaining portfolio, we believe a revised and increased target price of 150p/share is reasonable (previously 100p/share). That equates to around 225 mmbbls contingent liquids resources based on the current market rating for Rockhopper (US$4.5/bbl).
We were assuming the prospect would be oil prone and the presence of
gas, rather than oil, mutes the upside somewhat with gas in the Falkland
Islands likely to be of significantly lower value on a per-unit basis and
requiring significantly more capital and infrastructure to develop.
Nonetheless, the success proves a working hydrocarbon system, the
presence of good reservoir and the presence of seals within the basin,
which is highly encouraging for future potential in the area.
A discovery with the first deepwater well in the basin is highly
encouraging, although the gas prone nature of the prospect is likely to limit
the upside somewhat from what we originally expected in an oil case. We
assume that gas in the Falklands is worth c. US$2.1/boe from the start of
development and c.US$1.5/boe as of today. If we assume pre-drill volumes
for Darwin of 760mnboe (including deeper potential) and a completely derisked
pure gas case, our valuation for the stock would be c.173p. On a
completely de-risked oil case, this would come to c.585p. Given the
apparently gas prone nature of the discovery, however, we would not
expect a complete de-risking at this point. The de-risking impact of this well
on the additional prospectivity in the area is a significant positive in our
view. We note that the stock has been a very strong performer in the last
week. Our price target is under review.
The read across for Falkland Oil & Gas is somewhat more positive to the extent that the larger scale prospects of Falkland Oil & Gas would make a liquefied natural gas project more viable. We also note that Falkland Oil & Gas has prospects which are deeper into the area that is conducive to oil generation.
Gulf Keystone’s management and employees have achieved considerable growth with the increase in the Company’s share price from £0.05 pence in March 2009, before the first Shaikan well was drilled, to today’s levels, which would place Gulf Keystone within the FTSE 100 index by market capitalisation. While the AIM index fell by almost 20 per cent between the end of 2010 and today, the Company’s growth rate in terms of its market capitalization in the same period has been 76 per cent, reflecting our outstanding success in finding billions of barrels of oil.
This morning, Gulf Keystone announced Shaikan-4 test results, which achieved an
aggregate flow rate of 24,000 bopd over several intervals. Of note is the 14,000 bopd
achieved from the Sargelu formation following acidization and retest.
Shaikan-4 will now be completed as a producing well tied to the Shaikan-1 and
Shaikan-3 Extended Well Test facility.
The test results look to be a positive development for Gulf Keystone especially given
the single 14,000 bopd flow rate achieved from Sargelu. This is the largest test result
to date for the company, and while this suggests other zones may have achieved
much lower rates than previously expected, we believe the 14 kbopd will overshadow
these other intervals.
We are upgrading our rating to HOLD, from Sell following the share price decrease
last week. The decrease was due to negative sentiment caused by ExxonMobil’s
barring from the next Iraqi bid round. In our view, this market reaction is overdone
and at 211p/share we believe Gulf Keystone shares are fairly valued. We maintain
our target price of 210p/share.
We currently value Gulf Keystone on the basis of our calculated total NAV of
172p/share using a 15% discount rate and US$90/bbl flat real oil price. We arrive at
our 210p/share target price by applying a 22% premium, which accounts for a
potential takeout of Shaikan using a 12% discount rate.
Share performance catalyst
Possible sale of Akri Bijeel in the next one to two months, Ber Bahr exploration
results in May/June, and a further operations update from Shaikan.
Following the decision not to test portions of the well that appeared to be high
quality oil reservoir on the electric logs, and where proven commercial flow rates
had been achieved by testing previous wells on the Shaikan block, most of the
tests have been conducted in zones which looked marginal on the well logs.
Within the total maximum aggregate number, flow rates of about 4,500 bopd have
been achieved in a new zone in the Jurassic Upper Sargelu, previously untested,
and producible oil has been established in the Cretaceous Chia Gara for the first
time, albeit at relatively low rates (130 bopd).
Following the conclusion of the Shaikan-4 well testing programme, the well is
being completed as a producer and will be tied to the Shaikan-1 and Shaikan-3
Extended Well Test facility.
The Discoverer-4 rig will move to the drilling location of the Sheikh Adi-2
exploration well, north of the Sheikh Adi-1 exploration well, which is expected to
spud in June 2012.
We increase our target price to 232p (was 191p) and have not changed our
financial forecasts, or underlying production estimates. Our Shaikan base case (assuming a 30% recovery factor) is 3.1bnbbls. The company is set to move
forward with a full development programme and this announcement will provide
the government with an assurance that Gulf Keystone is proving up the resource
base to achieve this objective.
The Mail on Sunday has reported that Al Jazeera ‘is unlikely’ to bid for the FAPL
rights when the tender process kicks off in the next couple of months. According to
the paper, only BSkyB and ESPN (owned by Disney) will be actively involved in the
auction for the major rights. Outside this, the article does not reveal anything
particularly new. There is still uncertainty on the structure of the auction process –
whether rights will be sold on a pan-European basis or country-by-country, nor is
there any clarity on the timing of the auction process.
We view the reduction of emphasis on Al Jazeera’s possible bid as likely to be
welcome for BSkyB.
Al Jazeera has made a dramatic intervention in the French TV space having
acquired rights to the domestic league, the Champions League and the European
Championship. In this context, it is/was understandable that investors are
concerned about a potential bid driving sports cost inflation in the UK, even if Al
Jazeera’s commentary indicated a bid was unlikely (the Director of Al Jazeera Sport
in France indicated that the company will want to see how the French venture goes
before rolling out across Europe in a report in Le Figaro on 12 December 2011).
This all being said, while it is undoubtedly welcome that Al Jazeera may not push up
costs, it is premature to dismiss the risk to BSkyB from the FAPL auction entirely.
As the Mail on Sunday article indicates, ESPN is still very much in the running and
while we consider ESPN a more ‘rational’ bidder, there is still a risk of disruption
from this quarter.
Putting this together, we think the bidding process around the FAPL will potentially
have more twists and turns, making the process more and more complicated to
analyse. In general, though, the direction of travel is favourable for BSkyB: the
move to pan-European rights, if that happens, would raise the barriers to entry into
the auction while reports of Al Jazeera’s non-involvement, if confirmed, suggest the
bidding process will stay rational.
The key point we come back to is that it is important to remember that the main
football rights for BSkyB, standalone, are barely profitable with the company
recouping its investment via periphery activities – advertising around the games, the
HD charge, the high gross margin on the basic buy through. The fact that ESPN
does not have similar routes whereby it can monetise its investment, suggests that
bidding will not be extreme outside potentially a couple of key packages.