Week 02 of 2015
What a start to 2015. It’s been rocky from the off, but last week really was a rug puller. Oil stumbled to test low 40’s before bouncing in days back to test early 50’s. Volatile is an understatement. The dust clearly has not settled on that commodity. But the real story of the week was all about the Swiss currency. My o’ my. You’d think that the plethora of autobots and algo’s would have at the very least modelled in the chances of the Swiss taking action ahead of any moves by the ECB. Well, looking at the number of hedge funds that seem to be going under – that theory is shot. Currency speculators or ‘gamblers’ were virtually wiped out in one of the busiest days seen in the markets since Lehman’s went pop. The ramifications of the ‘currency’ war are probably yet to show themselves fully as when the dust settles there is bound to be some knock on effects.
Moving back to Oil&Gas. I remarked last week that the moderate drop in some E&P’s looked generous considering the inevitably weakness in POO and with many still away from the desks after seasonal hols, volume was light. But week 2 saw the market back to normal and the full brunt was felt across the sector.
Rig counts continue to fall, projects are being shelved and jobs are being lost. The Industry is winding down faster than many thought and yet very few brokers seem willing to acknowledge this. The reality is, if this continues, then the POO should be rising and not falling. Markets are forward looking and regardless whether oil is $50 or $80 – many of these projects and jobs will not be back on again for sometime – certainly 12months+ in many cases. Projects take planning and budgets are mostly done on a yearly basis. Hence even if the POO recovers in H2 the rig count and reserve numbers will continue to suffer.
All this points to a stronger recovery in POO when it finally arrives. But short term, companies with large debt piles are under pressure to ensure they avoid breaking covenants and meet debt repayments. This is prime M&A ground. When companies look to make cost savings – they also look at ‘combinations’. These may be JV’s or asset swaps/sales or complete mergers.
Looking for indicators in volatile markets is not easy. But one thing that cannot be hidden easily is stock ownership. Just look at the II’s buying up stock. AMER, HUR, TLW and others have all seen increased holdings by a few II’s/Funds. There are many more out there adding rather than off loading. Don’t get me wrong… plenty have downsized and managed exposure. But evidence of ‘buyers’ is clearly out there.
A virtual portfolio has been set up using the 2014 final trading day close figures as a starting point and £1000 has been invested in each stock. This does not include buying fees or stamp duty and is purely intended to be used as a benchmark or summary for each week. One newspaper top ten picks for 2015 and one Broker Top Ten for 2015 picks have been included to help monitor/compare against.
Week 02 stock picks summary:
Week 2 was brutal for commodity plays but the broader markets performed ok. Charles Stanley leads the pack and the Independent follows a close second. The TSH Hotlist was always going to have a tough beginning to the year but the theory/hope is that H2 delivers a strong bounce back. If Oil remains at sub $50 for the bulk of 2015 then the wooden spoon prize may as well be handed out now. A bit of M&A would do wonders for the O&G Sector – Afren/Seplat could set the ball rolling when or if an offer is made on Jan 30th. Certainly one to watch for all sector followers. Counter offers and a bidding war would be even better.
Current standings / Week 02 Results
1. Charles Stanley’s Broker Top Ten 2015 +0.82% (Weekly gain of 0.62%)
2. The Independent’s Top Ten 2015 -1.13% (Weekly gain of 0.04%)
3. TheShareHub’s 2015 O&G Hotlist -14.31% (Weekly loss of 12.51%)