Markets Live: Friday, 2nd May, 2014

This is the transcript of the Markets Live session ending at 12:05 on 2 May 2014. Participants in this session were: Paul Murphy Bryce Elder

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hi there

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Welcome to Markets Live

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I’ve been off for so long I’ve forgotten how to do this

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And so much news has happened

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I think I might never catch up

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Stuck, forever, behind the curve

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Further behind the curve

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Forever

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How the hell did this happen?

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Not me behind the curve

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This:

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Spainish 10 yr below 3%

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Italian 10 yr at lowest EVER recorded

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3% or just about

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Madness

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And what the hell?

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The drug sector

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Bryce tried to catch me up on that earlier

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Impossible

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I’m finished

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Just for going on holiday

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And leaving Bryce

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(For a month.)

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Catch me up Bryce

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Pleave

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Please

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Yeah, sure. You’ve not missed much really.

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All the drug companies are trying to buy all the other drug companies.

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( Pharma — i know he has. have been catching up on the transcripts

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Forming into one giant drug company, like a snake gorging on its own tail.

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Should we start there?

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Why not

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AZN rejecting just as we came on air.

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Duty bound to reject, surely

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Well, perhaps the speed of rejection is a bit of a surprise.

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I mean, this is the third offer. And it’s not on paper a bad one.

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Third offer? I really am behind

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First reaction from the market was a fear that AZN might talk. Shares actually pared losses on the rejection.

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It does look like they want more money.

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Should say, at least third offer. The January period’s a bit fuzzy on what specifically was offered and when.

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AstraZeneca PLC (AZN:LSE): Last: 4,796, down 19 (-0.39%), High: 4,844, Low: 4,717, Volume: 2.90mBlock
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Right….

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So people want 55 quid — and they reckon the americans can afford this with this tax dodge element

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But I don’t udnerstand this tax inversion stuff

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Catch me up Bryce, pleasee

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Im behind the curve

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(@Soundbuy: Kleinsclusive overnight. Rather forward looking.)

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Well …………

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The suggestion seems to be that the window may close to shift your base to Europe

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But Congress really is behind the curve here.

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This issue has only crossed their radar since Pfizer became news.

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And the buy-side pressure for Walgreens heading to Zug

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So it seems certain that we’ll get some bills introduced over the next month or two that make lots of noise about curbing this offshore flight of US corporates.

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Such as measures to limit government contracts to inverted companies

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Which has the benefit of being easy to talk about …

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… though, speaking practically, how a government embargo of Walgreens pharmacies would work is anyone’s guess.

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Then there’s a “tax the board” proposal.

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This sort-of happened in 2004, when Congress passed a law to charge an additional 15% tax on exec’s restricted stock and options in the event of a corporate inversion.

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It was entirely useless.

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Companies just let the stock vest early, or paid its suits in cash rather than paper.

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They’d have precious few places to buy drugs, cos they’ve allowed a near monopoly to take hold

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drug store wise

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Well, indeed. Or groceries. Or cigarettes.

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US drugstores are odd. Prescription drugs, sunglasses and tinned foodstuffs.

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Anyway ….

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Lastly, there’s the possibility of changing the Internal Revenue Code’s ownership test.

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Which has already been proposed in the 2015 budget.

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EmoticonEmoticon

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Moving the ownership from the current 80 percent threshold to a 50 percent threshold would make it a lot more difficult to be classed as foreign domiciled.

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But it won’t work, says Height Securities

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In our view this represents a meaningful alteration to the tax code and … we believe that this type of legislation cannot pass as a standalone piece of legislation. Instead it would require fundamental tax reform, primarily due to the revenue or “score” which the Congressional Budget Office (CBO) would likely apply to it. Nonetheless, because it has been offered in the past and has been fleshed out in the President’s most recent budget, it is likely that this too is offered by one or more members in the coming weeks.

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And nothing else will work either, says Height Securities ….

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We maintain that Congress is not capable of passing either meaningful tax reform this year or narrowly targeted legislation limiting corporate inversions. The fact that it is an election year and the two chambers cannot even negotiate the extension of traditionally bipartisan tax credits known as tax extenders makes tax related policy amongst the least likely pieces of legislation to pass this year.

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If the bet is for Congress to actually do anything, bet against.

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So …… Back to specifics ….

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Actually, before doing sellside on AztraZeneca …..

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Here’s a good chart.

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That’s the spread of analyst recommendations on AZN over the past year

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As in, only one in ten rated it a buy before the bid.

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(Green is buy, red is sell.)

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And the average share price target (the yellow line) has been chasing the actual share price upwards since about August.

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Blimey

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Sellside were amazingly slow on AZN. It was the most hated European drug stock for ages.

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And that’s a crowded field.

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In terms of comment …….

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All of it doesn’t capture AZN’s rejection, but I’ll share anyway.

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The gist is that Pfizer needs one more bump.

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£55 seems to be the agreed level.

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Here’s Deutsche Bank.

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Pfizer has proposed an offer for AstraZeneca worth £50 per share which
includes slightly higher equity and cash elements than the deal initially floated
in private talks in January 2014 (the offer now stands at 1.845 Pfizer shares
plus £15.98 in cash per AstraZeneca share vs 1.758 Pfizer shares plus £13.98
cash previously). While we expect this to be sufficient for AstraZeneca to enter
into a dialogue, we strongly doubt this will gain the requisite AstraZeneca
Board recommendation given that the new offer is pitched at just 7% above
the January offer (which was dismissed in AstraZeneca’s press release earlier
this week as “very significantly” undervaluing the company).

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… but we think offer needs to be sweetened with higher cash to be successful
We expect Pfizer ultimately to have to sweeten its offer based on (1)
discussions we have had with investors (many citing a price within the £52-55
range and some above this) and (2) our analysis of the EPS accretion for Pfizer
which shows relatively limited sensitivity to increasing the cash component of
its offer (given the low returns on cash). For example, were Pfizer to retain the
equity component of its offer (ie, 1.845 Pfizer shares per AstraZeneca share)
but to lift the cash element by £5/share, taking the offer to £55/share (with
38% cash), we calculate that year three accretion would be lowered by just 2%
(from between 9-17% to 7-15%, based on hypothetical cost savings in the
range of $2-4bn and assuming AstraZeneca’s tax rate applies to the whole
group). By our calculations £55/share is roughly the point at which the NPV of
the cost savings (taking the mid-point of the hypothetical $2-4bn range
mentioned here) and tax benefits would equal the premium paid to the
unaffected share price of circa £38/share before the press reports surfaced.

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And here’s Barclays ….

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The financials. Running the numbers (merger model available upon request) at the new offer suggests the deal could be 4-6% accretive through 2015-2019E although it is not clear whether Pfizer would be able to realize the full benefit of a tax inversion strategy and over what time horizon. (We note on our numbers the deal could be accretive anywhere up to £56/share – without tax benefits beyond a mix effect). We forecast that Pfizer’s current 29% tax rate and AstraZeneca’s current 22% tax rate could be combined into a blended 26% offering c$600m in savings due to the proforma tax inversion. However, it is possible further tax savings could be achieved through reorganization of the businesses (difficult to assess at this time) every 100 basis point reduction in PFE’s standalone tax rate adds c$200m to pro-forma net income or 1% to EPS. Additionally, on the cost savings side we forecast $3.4bn in annual cost synergies from the deal (10% of combined OPEX or 26% of AZN’s current OPEX) to be fully recognized by 2018. We note when Pfizer bought Wyeth in 2009 it initially announced cost synergies of $4bn which equated to c12% of combined 2008 R&D/SG&A or 40% of Wyeth’s operating costs.

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The strategy. Logic of transaction is centered around five areas: 1) strengthening of oncology pipeline in lung cancer, breast cancer and immunology, 2) cardiovascular therapeutic overlap – Brilinta, Eliquis, and PCSK9, 3) integrated distribution of mature products portfolios, 4) diabetes, 5) enhanced global footprint in developing markets. Pfizer also anticipates significant cost synergies, greater capital efficiency and a more efficient tax structure. With respect to the latter we would expect the transaction, if consummated, to result in the combination of the two companies under a new UK-incorporated holding company. As a global corporation, Pfizer has said that it would expect the combined company to have management in both the US and the UK, and to maintain head offices in New York and list its shares on the New York Stock Exchange.

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(@yogabba: heard it all before. Remember Cadbury?)

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Will it stick?

Pfizer has shown a willingness to increase the cash component. The 70%/30% equity/cash original offer left shareholders with a possibly unwelcomed high exposure to Pfizer shares. Today’s deal shows a modest move towards increasing that cash component to c32% and we expect this could be a point of negotiation going further. We note if no white knight comes to AZN’s aid (likely scenario) there is a potential for an additional sweetener to the deal, on our numbers any offer up to £56/share results in proforma accretion. Lastly, Pfizer appears to be seeking to gain political support for the proposed deal by committing to hold 20% of the combined company’s R&D workforce in the UK going forward and to retain the manufacturing facilities in Macclesfield.

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And Panmure ….

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The science bit is clear. The Maths adds up to £50 per share. We believe investors should wait for the ‘art’ bit of M&A – which should push the offer up towards £55. As expected, Pfizer has this morning increased its offer for AstraZeneca to c£50 per share. With tax inversion a significant motive, we await a higher offer before expected rule changes make re-incorporation more difficult. We re-iterate our Buy recommendation and 5,400p price target.

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Today’s events forces AstraZeneca’s board to open formal discussions with Pfizer. This is a significant new step along the way. If the base business is worth £39 (our previous price target prior to bid speculation on 23 April), and the value of synergies is worth £5 per share (see our research report of 23 April 2014) with the tax inversion worth the remainder to £50 (c£6 per share), it explains in perfect maths the value of Pfizer’s latest offer. (£39+5+6=£50). The offer represents some 39% premium to the price prior to the initial approach in January and many investors will be tempted. In our view the share price in January does not include an uplift that would have naturally occurred due to changes in the generic Nexium landscape and pipeline progress.

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So 55 quid it is then

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I’d suggest that, if AZN tried to fight £55, they might get some pushback from shareholders.

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Who were in at £30ish this time last year.

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More Panmure ….

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Tax inversion and overseas cash reserves optimisation (see our research report of 23 April 2014) aside, it is clear that AstraZeneca’s pipeline has turned heads at Pfizer. An attractive Biologicals infrastructure and pipeline (c40% of AstraZeneca’s pipeline at present), as well as its cancer immunotherapy pipeline, seem to have forced the hand of Pfizer to act now rather than miss out in these potentially lucrative markets. To boot, Pfizer (‘marketeer’ extraordinaire) may feel it can have better success with Brilinta. AstraZeneca’s respiratory business is also attractive and highly complementary to Pfizer’s. GSK will suddenly have a much more formidable opponent against Advair/Seretide. A strong footprint in China is also attractive and overall we can see why Pfizer is showing an interest. We cannot quite get to the required numbers (we believe the capitalised value of synergies will be significantly less than what had been assumed historically in the sector; see our research report of 23 April 2014 for more details) as AstraZeneca has been cutting costs for a number of years already, but a bid of £53-54 may tempt AstraZeneca shareholders.

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On Tax inversion, which seems to be a significant motive in Pfizer’s bid, one of the key themes remains the rule necessitating overseas ownership of greater than 20% to allow transfer of incorporation (re-incorporation). It should be noted that Pfizer may be under some considerable time pressure to consummate this deal, as President Obama is proposing a big move against tax inversions. In his draft 2015 budget – unlikely to pass in its current form; remember last year? – contains a provision designed to prevent inversions from happening by requiring a company to have 50% ownership outside the US to change its incorporation.

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The stock is trading on FY2014E PER of 17.3x, rising to 20.4x in FY2015E with no real visibility to trough year earnings (we assume this to be 2016). However, given the company’s transformation in recent months to resemble something more like a biotech, perhaps we have been looking at it the wrong way. Better late than never, we compute 5,400p as fair value based on applying a PER of 20.0x to the company’s sterling adjusted earnings of 270p (FY 2017E). It is not appropriate to look at the business on near-term valuation metrics as it will be undergoing significant changes to its portfolio with Nexium, Crestor and Seroquel XR expected to decline in coming months.

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outlaw makes an interesting point — what if there is restrospective legislation. Won’t bother selling shareholders I guess…

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Guess there might be retrospective legislation, but I’m struggling to see how that could be effected.

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How far back?

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Would they go after Alliance Boots for moving to Zug ten years ago?

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Though, personally, I’d like to see a bit of panic about the possibility that Pfizer might walk,.

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Seems to me there’s a lot of hope in the Astra price now, not least on its immunotherapy stuff that’s likely to be fourth to market for many indications.

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And if Pfizer isn’t the buyer then who?

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Glaxo says it’s not interested. Sanofi unlikely.

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Hmm

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Not sure what the right price is for AZN any more. Suspect we’ll never find out though.

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I’m also behind the curve on GKP

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this Kleinman exclusive…

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Taht Todd is being edged towards the door

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Roundly denied apparently

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But I bet Mark K is on the right track here

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Yeah, odd sort of story from Kleinsclusive overnight.

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I’d even suggest that this is his best story for some time

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Certainly carries the most risk

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Given the GKP army…

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More than masturbatory

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Yeah, read that too.

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There’s a sort of non-denial denial on all the wires about Todd’s future.

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Suspect the Kleinman story’s bang on but might have been better written as something other than a news story, as it wouldn’t have needed quite as much hedging.

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As in paragraph two …. “could step down within months” …. Paragraph three: “The timing of Mr Kozel’s exit is not guaranteed.”

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There’s a push to get him out. That’s the story. It’s a good one.

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The next supermajor, potentially sitting on 60bn barrels of oil in Kurdistan. Loved by muppets across the globe.Block
Gulf Keystone Petroleum Ltd (GKP:LSE): Last: 102.18, up 5.43 (+5.61%), High: 107.00, Low: 95.50, Volume: 4.17mBlock
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And, as you can see, a popular one.

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*CAMERON SPOKESMAN: ENGAGING DIRECTLY WITH PFIZER, ASTRAZENECA

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Coo. Engaging directly.

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That’s the kind of thing we’d slaughter France for.

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Cameron’s spokesman needs to be careful. There are Panel rules to follow here…

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Indeed.

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Anyway, housebuilders mentioned on the right.

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Redrow PLC (RDW:LSE): Last: 309.80, up 18.4 (+6.31%), High: 309.80, Low: 297.70, Volume: 175.17kBlock
Barratt Developments PLC (BDEV:LSE): Last: 373.50, up 5.1 (+1.38%), High: 376.60, Low: 370.00, Volume: 1.43mBlock
Taylor Wimpey PLC (TW.:LSE): Last: 109.00, up 3.7 (+3.51%), High: 109.50, Low: 106.90, Volume: 14.04mBlock
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Had the selloff, not having the rally.

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Citi among those to see a buy opportunity.

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 Sector View — Valuation has become less stretched as share prices have fallen
significantly over the last month and performed poorly YTD. Seasonally the sector
typically runs out of steam into May and negative sentiment around higher UK
interest rates may continue to weigh on sector share prices in the near term.
However, looking out on a 12-18 month horizon and assuming that the macro
backdrop remains favourable, we expect the sector to continue to deliver good
growth in net assets and see more attractive valuations post the recent sell-off as
offering opportunity. We believe investors with a more medium-term view should
revisit the sector, which now offers, based on 2015E estimates, a number of stocks
at a discount to long-run average valuation multiples despite the attractive recovery
potential, strong balance sheets and prospect of capital returns. We upgrade Taylor
Wimpey and Redrow as they now look more attractive on valuation.

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 Macro View — Citi economists’ expect GDP growth of +3.5% and +3.6% for this
year and next with unemployment falling towards 5% in 2015. Base rates are
expected to see the first hike in Q4 of this year with the first stage of the tightening
cycle to see rates move up to 2.5% in late 2015. They recently wrote that they see
the current housing trends as far more like a long housing boom just getting going,
as in 1996-98, rather than the end of cycle excesses of 1988-89 and 2006-07.

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 Company View and Changes — We have modestly upgraded our estimates for
Persimmon, Taylor Wimpey and Redrow on the back of the recent trading updates
and continue to see upside risk for sector consensus earnings for the full year. We
move Redrow’s target price to 350p and upgrade Redrow and Taylor Wimpey to
Buy ratings on valuation. We highlight Bellway and Bovis as the cheapest stocks in
the sector on 2015E P/NAV multiples of c.1.15 times. Persimmon, Berkeley Group
and Taylor Wimpey offer attractive dividend yields of c.7% for 2015E.

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(@Tom: cash return.)

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 Valuation — Sector resides on a 2014E and 2015E P/NAV multiple of 1.58x and
1.46 times (c.1.25 times Excluding Persimmon and Berkeley) respectively. Sector
average dividend yield is c.4% and 5.5% for this year and 2015E respectively.

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 Upcoming News — Barratt is set to publish a trading update on 8th May and there
are a couple of upcoming site visits in the sector. First half trading updates at the
beginning of July will confirm the outcome of this year’s Spring selling season.

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Still don’t understand why a housebuilder should ever trade above NAV, but perhaps that’s because I’m not clever enough.

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The call likely to get more press, though, is from Brewin Dolphin

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Which has sent round a press release quoting its analyst Stephen Williams

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Former head of small companies at Williams De Broe, if memory serves …

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Now, there doesn’t seem to be research attached to this. Just a press release.

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Which is odd.

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But they’re calling the top.

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Friday 2nd May 2014- As the Bank of England reveals a fall in mortgage approvals, wealth manager Brewin Dolphin thinks that the next downturn in new housebuilding could be on the horizon.
Equity analyst Stephen Williams believes that the recovery phase in the sector is nearly complete as companies start to plan for the next downturn.
“Any suggestion that the current upswing is different from the last should be viewed with caution,” warned Mr Williams. “The sector is inherently cyclical and the next cyclical downturn could occur at any time from 2016.” He added that many management teams in the housebuilding sector are already preparing for this eventuality as they return surplus capital to their investors.

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“The housing cycle will turn down in due course and that, when it does, it could do quickly. With the potential risks of rising interest rates, tightening mortgage lending criteria and falling demand from overseas buyers, we believe that the upside is now limited.”
He said that the consequence of the mortgage market review (MMR) could be a hiatus in lending as mortgage companies ask further questions about how customers will pay for their home loans if rates rise. The Bank of England figures this week, showing a further fall of mortgages approved in March 2014 are an early sign of this, he said.

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For those who have been invested in housebuilders, Mr Williams suggests selling and investing in companies that have other construction interests as well, allowing them to benefit from the next stage in the economic cycle – increased spending on infrastructure projects. He likes Kier Group, which is yielding over four per cent.

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Not sure there’s much to argue about in there.

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The point with investing in housebuilders, I’m told, is that you have to call the top of the market first.

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As in, if you see it two years from now and sell, you’ll do better than the person who sees it 18 months from now and sells.

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Er, ok

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It’s a bit like the Keynesian beauty contest. It’s more important to call when everyone else will call the top than to call the top.

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Anyway. That’s those.

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So explain IHG to me

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Up 8.5%

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Sudden growth business? Hotels?

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It’s cash back.

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More, and earlier, than expected.

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New $750m special div to be paid in July.

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That’s 175p per share.

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Explains a lot

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Funded by debt though.

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And trading’s above expectations, but for a quite quiet quarter.

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Oh, and we’ve got another asset review going on.

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This company has seemingly returned $10bn over the past decade

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Which will likely mean the Paris hotel’s on the block.

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Le Grand is the one it owns, right? Sorry, I forget.

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Not sure

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But it does sound like more special divis are in prospect

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On l’Opéra. The restaurant’s Café de la Paix, which is nice in a very touristy way.

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Here’s what Caz makes of it all.

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InterContinental Hotels reported better than expected Q114 trading with the
incremental positive surprise of a $750m special dividend. Group RevPAR
accelerated to +6% in the quarter (JPMe +5.2%, co. cons +4.8%), after +4.4%
in Q413. This consisted of 2.4% occupancy growth and 1.9% rate growth. The
strong Q1 has been driven by a robust portfolio performance in the US and in
parts of Western Europe. Positive momentum appears to have continued into
Q2 to date, with management commenting that current trading gives them
“confidence for the rest of the year ahead”. The pipeline remains strong (+1%
QoQ) and IHG has today announced a $750m capital return to shareholders by
way of special dividend with share consolidation (which we expect to be MSD
EPS enhancing on an FY basis) to be paid in July ’14.

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 Americas RevPAR was up 6.6% in Q1 (JPMe 5.8%, cons +5.7%), after 4%
in Q413. US-listed hotel companies Marriott and Starwood reported 6.3%
and 6.4% RevPAR growth respectively in Q1 in their North America
divisions, in-line with IHG at +6.4%. Americas RevPAR growth was driven
by mid to high single digit growth across all of the brands and, overall,
consisted of 2.5% occupancy growth and 2.4% rate growth. We forecast
4.7% RevPAR growth for Americas in FY14E.
 Europe RevPAR was up 6.1% in Q1 (JPMe +3.4%, cons +3.2%), after
+4.9% in Q413. The strong beat in European RevPAR was due to double
digit growth in the UK and a strong performance in Germany. Occupancy
was up +3.1% YoY with rates up +0.8%. We forecast 2.7% RevPAR
growth for Europe in FY14E.

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 AMEA RevPAR was up 3.8% in Q1 (JPMe 6.2%, cons +4.4%), after 6.4%
in Q413. Excluding Thailand, Egypt and Lebanon, where there has been
ongoing political unrest this quarter, AMEA RevPAR growth would have
been +7.1%. Growth consisted of +0.2% occupancy and 3.5% rate growth.
We forecast 5.7% RevPAR growth for AMEA in FY14E.
 Greater China RevPAR was up 3.9% in Q1 (JPMe 2.2%, cons +2.1%),
marking an improvement from 2.4% in Q413. Greater China RevPAR
growth consisted of 2.6% occupancy growth with a rate decline of -1%.
There was a strong performance in Tier 1 cities with IHG commenting that
they significantly outperformed the industry in the quarter.

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 System growth was +2.2% YoY in Q1. System size increased by 0.2%
between December and March (JPMe +0.3%) as IHG added a net 1,644 rooms.
Pipeline remains strong +1% QoQ with 96 hotels added in Q1, with particular
strength in Americas and Greater China.
 Outlook. Management comment that current trading gives them “confidence
for the rest of the year”.
 Special Dividend. IHG is to pay a $750m special dividend with a share
consolidation in July ’14. We expect the share consolidation to be MSD EPS
enhancing at the FY basis and believe that the notional amount of the special
dividend is higher than expectations. We would also note that the company is
reviewing opportunities for further asset disposal.

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… which doesn’t do much other than summarise the results.

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How about Jefferies instead? They’re cautious, and have been for a while.

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Capital return bigger than expected. The most important news is that IHG intends
to pay a $750m special dividend, with share consolidation, in July. This is larger than the
market expected.
New room growth continues to be relatively lacklustre, with net growth of just
2.2%, following 1.6% last year – below its peers.
We do not expect to see any material moves in consensus forecasts, but the market
will be happy with the special dividend and we expect the shares to trade well today.
The question is: what next? Trading is solid but in line with expectations, rooms growth
remains subdued and the capital return is done, although the company says it is reviewing
its opportunities for further asset disposals.
We think the shares continue to look expensive on 20x 2015E PE and 12.7x EV/EBITDA.

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And Merrill.

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We have factored in the special dividend and share consolidation, with EPS
enhancement of 3.5% in FY14 (half year impact) and 7% in FY15. We have also
made a modest (c.1%) upward revision to our EBIT forecast reflecting a higher
group FY14 RevPAR forecast of 5% vs. 4.5% previously. Strategically we continue
to believe IHG is well placed for LT structural growth in its core fee business. Our
PO values owned assets at US$1.85bn with US$0.45bn for IC Paris and US$1.0bn
for IC Hong Kong, equivalent to FY15E 5% EBIT cap rate or 15.5x EVEBITDA. It
also values the fee business at US$8.6bn (13x EV/EBITDA, 20x P/E in FY15E).

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Enough?

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Enough.

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What else do i need catching up on?

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Everythign I guess

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Technical selling in Pearson, i see

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RBS

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Surprised on the upside

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I see

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And Nathan Bostock has been allowed to leave with no payoff

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Cos he’s giong to Santander of course

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Outrage avoided there

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Results wise, it’s the same story as Lloyds yesterday, really.

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Royal Bank of Scotland Group PLC (RBS:LSE): Last: 330.70, up 24.1 (+7.86%), High: 347.70, Low: 325.00, Volume: 32.66mBlock
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Beat at earings, bad debt easing back, margins not terrible, capital looking okay.

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Though longer to wait for a divi, clearly.

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Sandy Chen is rather relieved by all this. Think he was feeling rather lonely as a “buyer”

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He eyes a belated re rating

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RBS (RBS LN, mkt cap £38bn, 338p, Buy) On the analyst call, management tried to tone down Mr Market’s enthusiasm – but there really do seem to be grounds for optimism:

(1) we think the drop in the Expected Loss over impairments deduction (from £1,731m end-2013 to £1,092m end-Mar 2014 for the 50% EL in CET1 capital) indicates that the BOE believes in the improving trend in REILs (risk elements in lending), and although some LGD (loss given default) floors may begin to cut in, we’d regard the drop in EL as a sign of increased regulatory confidence in RBS;

(2) there weren’t any changes in guidance on litigation/regulatory provisions; and

(3) although management did warn that restructuring cost and litigation/regulatory cost headwinds would be greater in the remaining quarters, they struck a reasonably optimistic tone in terms of the prospects for the core banking businesses – and there wasn’t huge pushback on the market notching TNAV expectations upwards slightly – implying that there are improved chances of RBS making a small profit for the full-year 2014.

Improved prospects for a return to profits could be the trigger for a (long-awaited) re-rating of RBS; we’d felt rather lonely with our earlier forecast of £0.9bn in pbt for 2014, but we feel more comfortable given today’s 1Q14 results. On our forecast 2014E price/tangible book multiple of 0.9x, maintain Buy.

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I havent had time or stomach to catch up on barc btw

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Leave that for today

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I’m also a buyer of RBS, in my entierly theoretical long-term buy-and-forget portfolio, for the simple reason that the government needs out and I’d be happy to travel on its coat-tails.

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But, yeah, Chen says all that needs to be said. Let’s move on.

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11:51AMBlock
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To oil, perhaps?

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Another M&A wave ….

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Sure

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An entirely fictional one on three unrelated events, but an M&A wave all the same.

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Go on

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Well, there was Caracal (which is a Glencore special sit), then Heritage (which is a take-private by Tony and backed by Qatar royalty) and then Salamander (which was already priced for the bids it’s been soliciting for years).

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Doesn’t suggest to me much hunting around the £1bn-ish E&Ps, but it seems my view is in the minority.

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RBC talking sector M&A this morning …

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Having enjoyed a burst of M&A-led newsflow – which appears to have generated new interest in the
UK-listed stocks (which jumped 11% in April) – we expect attention to return to the exploration drillbit
in May. This month Ophir Energy could complete important wells offshore Gabon (Affanga Deep)
and Tanzania (Taachui); Tullow Oil and Africa Oil are busy in the Lokichar Basin onshore Kenya and the
Chew Bahir Basin (Shimela) in Ethiopia, Africa Oil is also seeking to open up the Anza (Sala) and Ogaden
(El Kuran) Basins; Faroe Petroleum is expected to deliver results from the Pil and Butch East wells in
Norway; and small-cap explorers President Energy and Mediterranean Oil & Gas are scheduled to begin
high-impact exploration drilling this month onshore Paraguay and offshore Malta, respectively.
Q1/14 results season will also be in full swing, with updates scheduled from the North American and
European names; the FTSE-listed companies will continue publishing Interim management statements.
Investors looking for greater detail could be sated by Pacific Rubiales’ 13th May ‘Investor Open House’
in New York and RBC’s 2-3rd June Global Energy and Power Conference.
More generally we expect Venture Exchange-listed Africa Oil to publish a reserves report ahead of a
possible move to the Main Board, a positive commentary would also help partner Tullow.

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As is Numis, with specific reference to Soco.

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SOCO International PLC (SIA:LSE): Last: 420.00, down 4.6 (-1.08%), High: 427.60, Low: 418.10, Volume: 116.18kBlock
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Which has been a bid rumour for about as long as Imperial Tobacco.

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This is all a bit frothy from RBC, no?

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Above

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It’s all a bit frothy in this sector right now.

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As said yesterday, you have the large-cap guys saying “capital discipline” and “shareholder value” and “no more pouring money down holes off the coast of Alaska ….”

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And you have the mid-cap guys saying “exploration’s now cheaper to buy than do therefore everyone’s going to buy exploration.”

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One or other of them is wrong. And, given the first set of companies have made promises to shareholders, I’m going to suggest they’re more likely to be right.

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Back to Numis …

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■ A flurry of E&P M&A: April14 – Salamander announces talks with a number of
potential buyers relating to asset divestments and offers for the company. March14 -
Heritage Oil offer from a Qatari fund. March 2014 – PTTEP purchases HESS SE Asian
assets for $1bn. March 2014 – Caracal offer from Glencore. Nov13 – CEPSA acquires
Coastal.
So why SOCO? 2P reserves stand at over 130mmbo, largely proved developed. It’s
assets are geographically concentrated in Vietnam with resource upside as Rf is
increased over time. It remains cash generative play on oil price with 50% of FCF being
returned to shareholders. There is also low risk upside through the Litchendjili
Extension well this year targeting the southern extent of an ENI discovery to the North -
easily sold to ENI in the success case.

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■ Vietnam oil ouput under scrutiny: SOCO is often misunderstood as its main fields
(TGT and CNV) are operated by the HL Joint Operating Company (HLJOC) – the state
oil company (PetroVietnam) remains a majority shareholder. Historically, PetroVietnam
have been conservative on field-wide reserves and production potential due to political
pressures. We believe this has led to conservative consensus valuations but this is
changing. Vietnamese production is falling and PetroVietnam is under pressure to
ramp-up output from its existing asset base. NPV positive producution enhancement at
TGT remains a possibility

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Also likes Enquest on the same argument.

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EnQuest PLC (ENQ:LSE): Last: 138.00, up 0.1 (+0.07%), High: 138.70, Low: 137.70, Volume: 179.79kBlock
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Thanks for all that

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Two minutes left.

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I note Tom Albanese is having an effect at Vedanta

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Or at Cairn India to be prcise

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Cairn India Ltd. announces that Mr. P Elango, Interim CEO & Whole time Director has decided to step down for personal reasons. The Board has accepted his resignation. Mr. Sudhir Mathur, CFO, has taken over the additional responsibility of leading the organization in the interim.

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Mr. P Elango is leaving after 16 years…

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Dunno the repurcussions of that

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But somehow i suspect there is a backstory here

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Vedanta Resources PLC (VED:LSE): Last: 943.50, up 18 (+1.94%), High: 947.50, Low: 921.50, Volume: 74.45kBlock
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Yeah, worth noting that Vedanta directors have been buying since the start of the year.

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Which is the opposite of what you’d expect, given the tightness to FTSE liquidity rules.

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Plenty of people theorising around a take-private, on which I have absolutely no information.

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We are done

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Thanks for all that catching up Bryce

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And goodbye LYO

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Again

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Bank Holiday weekend

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Seeya Tuesday

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Bye

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