Hotlist Results – H1 review (sharehub picks up 41%+)

Time flies these days. Where have the last 6 months gone? It’s not been dull – that’s for sure.

How best to sum up H1? Well, it’s been a first half full of surprises and battles of the underdogs.

First we had PoO doubling off lows. The once unwanted and battered commodity came surging back, causing widespread embarrassment for the highly paid ‘so-called’ analysts from Goldman Sachs. They’ve made more wrong turns than an out of date Sat-Nav.

Then came Leicester City – crowned PL champions and deservedly so. But 12 months prior, they were indeed scraping the bottom of the barrel. A recovery story to put a smile on every supporters face.

And more recently, we have England’s exit from the Euro’s. Not Brexit, but the woeful performance against Iceland. Like Leicester, they dared to believe and executed a job like plan with fine efficiency. Unfortunately the same cannot be said of Brexit. Yes – the people have voted, but where’s the plan B? It’s a shambles. MP’s in power should not be entering into Referendum’s if they don’t have a cohesive plan in place to deal with the consequences. It’s school boy stuff which is not all that surprising considering the bulk of the headless chickens are indeed schooled from the very same farm. Just what do they feed them for school dinners? Eton Mess?

So where does that leave us all in H2? Well, it’s not likely to be as exciting as H1 but there are a few events to look out for. Top of the list is the US elections. Hilary vs Trump. Historically, by hook or by crook, stock markets tend to rise into US elections. And with EU market girations expected for the next 6 months minimum, any US interest rate rises (the arch enemy of the money markets at the moment) seems off the table. Can’t going upsetting the US electorate can we? PoO’s re-balancing looks in full swing, with many analysts getting excitable with predictions of $70pb towards end of the year. I’d be happy with $65pb but feel even that might be too far a reach until demand rises in 2017. So some major events to come in H2 and of course the new UK PM appointment to come. But don’t get too excited, it’s in the bag (the handbag) already if you ask me.

It’s been a few years before I can say this… but i’m delighted to report that TheShareHub 2016 hotlist has kicked some serious derriere’s in H1.

Results as follows: Jan 4th – June 30th 2016.

1. TheShareHub Hotlist top ten picks up 41%+ (booooooom!)

2. The Daily Mail top ten picks up 1.7%

3. Independent top ten picks down 9.5%

sharehub 2016 h1 DailyMail 2016 h1 Independent 2016 h1

 

Which stocks to watch out for in H2?

Currently the only two poor performing stocks (and in the red) in the sharehub top ten are XEL and OPHR. In late September (30th) XEL must agree terms with bondholders or seek a further extension if of course it is granted. The chances of the latter look slim so the next 12 weeks will be crucial for XEL shareholders. They have a terrific asset in Bentley. 260mmboe in reserves and 100% ownership. It would be a rare sight indeed to see a company holding that amount of oil go under or into admin. The debt problem involves a £90million loan. It’s not a huge amount but XEL find themselves in a tricky spot whereby buyers, farm in partners and financing players are all working off a very low price deck. At 8.5p per share and just over £25mil market cap, XEL is priced for failure. Long term holders will likely suffer (averages above 100p+) but risk on traders/investors might sense an opportunity here. If XEL pull it off it’s very likely that bondholders will seek some kind of equity. A debt free XEL or a debt ‘kicked down the road to 2018’ XEL is going to be worth possible 4 or 5 times today’s share price. It wouldn’t surprise me one bit to see the sp edge back towards 15p to 20p ranges if or when a deal approaches. Certainly one to watch but avoid like the plague if you don’t like big risk plays.

Ophir – this one is a puzzle. Yes, the bulk of exploration and development projects are a year or two away, so the paint drying treatment is fair to some extent. And the recent failed farm out deal on EG assets is certainly not great news. But this company has serious assets on its books. The tanzanian gas interests are worth in excess of $1bln using past sales. It’s one to watch in H2 simply because I think they will sell that stake soon and with the money gained, buy some bargains. And unlike the Salamander deal, I think they’ll get it right this time.

Others to watch are PMO. Premier have debt talks ongoing but once through that, should be testing 100p+ again. Not without risk of course. At 75p, they have recovered well from 19p lows.

Ithaca are the outstanding play of 2016 and the first sharehub multibagger to report. Currently up 150%+ from the 28p Jan entry price but a whopping 350%+ from 16p lows. At 74p the stock is soaring ahead of Stella first oil. Assuming all goes well with the new rig and PoO continues higher, IAE should be headed higher. That said, at 74p it has a bit priced in already.

Next up, HUR (Hurricane). The company is set to drill two wells in the next few weeks and assuming data is good, should then go on to achieve a decent farm out deal. If they are lucky, they will time those talks with PoO rebalancing in the $60’s and the market/sector in much better mood. At 17p, the stock has clear blue sky all the way up to 40p on the charts. To achieve this, they will need to prove up their OIP numbers to the high end, circa 250mmboe. If they achieve 300mmboe, then that really would be a big surprise.

Finally AMER, this one has been a headache. Management have done a fine job of building up expectations only then to dash them with missed deadline after missed deadline. It’s a torment as the stock has great promise but is going no where fast until Management can confirm pipeline is active and oil deals are in place to get decent output flowing through to Ecuador. The company can only deliver 5k to 7kbopd from their own licences. The pipeline really needs 20kbopd+ to make commercial sense and 50kbopd+ capacity is a boon. I would expect some kind of deal to be signed soon which boosts the pipeline volumes. The trouble is… AMER management have a habit of using AMER shares like candy. If they keep issuing shares like this, they’ll end up diluting the little man completely out of the picture. Market will likely rerate when it sees evidence of ‘pipeline’ revenues.

Enjoy the rest of H2, the sharehub will feature stories and commentary when discussion news arrives. It’s looking good for a blue ‘year’ but worth noting this is just the beginning. The commodity sector is long overdue some M&A and this normally brings with it a sector wide rally as market begins to speculate on who or what might be next for the buyers or predators.

9 thoughts on “Hotlist Results – H1 review (sharehub picks up 41%+)”

  1. Hi Hub,

    What’s your take on the recent announcement by the company that the terms of the restructuring have still to be agreed, the company now believes that there will be a minimal residual equity stake attributed to the company’s existing shareholders following the restructuring?

    1. It’s pretty ugly stuff and hard to believe that in this modern day that 260mmboe in booked reserves can be valued at near zero and debt holders holding £90mln+ in notes can swap for almost the entire assets. Bonds are a puzzle as they are usually granted based on a valuation of the assets for risk purposes. Of course those assets can change in value but PoO at $50pb does not render Bentley’s commercial story void. It’s the mechanics of finance i’m afraid. In theory, Bentley should have had an agreed value (with or without a partner) based on booked Reserves. In an ideal world bondholders would have agreed to this value and any d4e should be based on those numbers and not a beaten up share price etc.

      But it’s pointless talking sense as that’s not how things have been done. Rupert and co have allowed one of the north sea’s prime assets to fall from shareholders hands and into the bin. Whoever picks this asset up in the future will no doubt make a bucket load further down the line. Hard on shareholders, but it’s not as if the signs were not there. XEL has been up against it for the last 2 years now ever since OPEC deployed their low PoO games.

      I don’t think many would have thought that £90mln of debt could sink a 260mmboe reserve based company. In under a couple of weeks, I expect shareholders will hear the terms of the restructure. It’s not going to be pretty. But be clear on one thing. Rupert and co may be responsible for many errors along the way, but it’s the lower PoO environment that has sunk this one. And they will not be the last casualties out there. More debt heavy companies will fall or be forced into cheap mergers or sales if PoO doesn’t get passed $55pb soon and stabilise.

      1. Hi Hub,

        Do you feel that the shareholders will be diluted to say 5-15% like GKP or do you think this is the end of the road for shareholders and they will be left with nothing? I feel if the bondholders take about 90% equity for £90m then equity will retain 10% that will be valued at £10m, current SP is only £6m so looks quite attractive to new shareholders. I do think the bondholders will still leave some bonds unpaid as a guarantee but I believe current shareholders could get up to 15% of the restructured company. What are your thoughts?

        1. Hi J,

          News out this afternoon on Xcite d4e deal clearly answers your question. But it also raises a number of new questions which investors will be searching for answers for years. Why or how can a 260mmboe booked reserve field be allowed to fall into debt holders hands based on £90million of debt? The mind boggles. There was a story a few days ago about Mario and the EU bond buying QE programme. Apparently the ECB are buying bonds which help or benefit some major companies in one way or another. It would of course been nice if they had offered to buy out Xcite’s bond but you get the idea. The QE actions to date have all been about lining the banks pockets. Not the common man on the street. It is worth remembering that it is the latter that actually bailed the bankers out with tax payers funds.

          How or why the UKO&G authorities allowed this to happen is shocking. Yes they have to be careful about selective assistance etc but this was a 260mmboe field which would have led to 1000+ jobs being generated. Also today, the first tanker from the US arrived at UK shores carrying US shale Gas. Oh the irony! Yes you got it… UK is buying in GAS from the controversial shale market because they can’t seem to get their act together to fund or develop their own gas and oil fields. In Norway, the gov offers exploration companies a 78% refund on all exploration spend! Yep… that turns a £30m exploration well into just a £6.5m or thereabouts. Faroe petroleum have been benefiting from this system for the last 4+ years. It works as any future production then brings in taxes. It’s a very smart way of getting your Oil industry moving.

          Unfortunately for Xcite investors, there is no such support. Today’s deal is a shocker. And ultimately management have to take responsibility for not securing a partner deal or alternative funding sooner.

          As part of thesharehub picks for 2016, I was expecting Xcite to reneg debt comfortably but the Saudi’s and Russian’s have been pumping like mad and caused an even larger glut which is likely to take another 12 months to rebalance or work through. On that basis, I fear for companies with high opex/capex projects like Premier Oil and Enquest.

          We can only hope that the Saudi’s and Iran see some sense during the next few days and get a deal done albeit informal. Nigeria and Libya production will come flooding back in once rebel issues are sorted. That could add another 800kbopd into the mix. And so it goes on.

          But it’s over for Xcite. Too late now. Any rebalancing had to happen in mid 2016 for them to stand a chance. PMO’s debt talks are ongoing but will have to be sorted soon or they will default if deadlines not rolled over.

          Thesharehub top ten picks (or should that be 9 top picks) is doing well (up 60%) despite Xcite’s near 99% decline.

          An update on thesharehub top ten performance will be posted at the end of this Month.

          HUB

        2. Hi Hub,

          Xcite were never going to get a debt restructuring deal away. Bentley is a heavy oil field and that is key. Financing a field containing containing oil at around 12° API was always going to be a challenge when there are so many light oil fields yet to be developed.

          Regarding your comment on exploration costs in Norway. Yes, they do have a fantastic rebate on exploration expenses but they nail developments with tax so all considered Norway isn’t any better than the UK for a full cycle field from exploration to maturity.

  2. Thanks for the detailed response Hub, much appreciated. I agree that an open offer pr rights issue would be the way forward if we are unable to find a guarantor for the finance.

    1. Hi J,

      Remember, sorting the debt holders out is only half the battle. It’s chicken and egg stuff. On one hand they need to sort debt holders out before they can finalise partner/funding deals. On the other hand, they need to tap shareholders for equity but can’t do that until they can prove the business has a viable future… eg; has a partner/guarantor that can placate O&GA’s concerns over decomm liabilities.

      In my opinion they need to sort the debt holders first, buy some time and then seek Far East funding or something along those lines.

      If they can get through this very dark tunnel that they are currently in, then there’s life in this one yet. But as I said before, it is high risk and could easily go bust too.

      HUB

  3. Hub,

    Any more thoughts on the future of Xcite – it does seem likely that heavy dilution is likely through a debt for equity restructuring.

    1. Hi J,

      Unfortunately Xcite Energy has been the worst pick of the sharehub top ten for 2016 thus far. Glencore, Hurricane Energy and Ithaca have all multibagged and if was not for Xcite, the top ten picks would be up by almost 50%. That growth rate hasn’t been seen before on a top ten pick list since the 2009 rebound. So it shows just how undervalued the commodity sector has been and how much room there is for recovery.

      But that doesn’t answer your question regarding Xcite’s future does it? Well, perhaps it does a little. For instance, I would rather be negotiating with my debt holders at a time when the commodity sector feels it is close to bottom and a recovery is clearly in sights going forwards. Xcite has found the funding/partner ground very tough going mainly due to the fact that all their talks since early 2015 have been plagued by the worst market backdrop in the sector for decades.

      So lets try and be optimistic here. Here is a company with 260mmboe in 2p reserves. Not resources or 2c, but ‘reserves’. That’s significant. Secondly, Xcite have a 100% interest in Bentley. And finally, for a company to be so advanced and close to development / FID approval, Xcite have just over 300 million shares in issue. Most small companies would have 3 x that amount in issue. Most companies would also have around 3 x the debt levels. At £90million, the debt pile is not excessive when compared to the assets NPV. Last numbers suggested around $2.5bbillion I think but I could be wrong.

      So here’s the summary…

      1. The market is in a better condition than it was 8 months ago which bodes well for positive outcome on debt talks.
      2. Debt holders will want their pound of flesh – they will not be keen to take debt 4 equity on in my opinion and instead prefer to take equity in leu of interest payments via free warrants or another vehicle like that.
      3. It’s going to be dilutive to existing holders but then at 6p, the stock is already priced for failure.
      4. The bondholders would stand to gain more by simply taking a nice wedge of Xcite shares whilst retaining some or all debt. It’s in their interests then to give Xcite another 12 months to get a partner deal done. If this time next year they have failed to do so, then it’s curtains and the bondholders take the lot on and seek a buyer themselves.
      5. Prior to point 4, it’s likely that bondholders would have sold their warrants thus realising cash and lowering their debt exposure in real terms.
      6. With an asset like Bentley, Xcite could command a market cap of near £150mil to £200mil if debt issues and partner discussions are positive. Assuming an issue of around 1 bln shares at 5p, Xcite could raise £50million and pay off 50% of the debt. 1.3bln shares in issue x 10p equates to £130million which look cheap even in this market. At 20p a share 1.3 bln shares equates to £260million.

      So even with a large dilutive cash raise or debt deal – 1.3 bln shares in issue would not be the end of the world for holders near 20p or 30p ranges. Anyone holding stock with 200p averages are in trouble but then they would know this already.

      An open offer or rights issue may be the best way forwards to raise the funds required to get past debt issues and gain another 12 months+ negotiation with partners/buyers at a time when the market backdrop should be better.

      Or… bondholder pull plug and company goes into admin.The latter is very possible and caution is important.

      Hope that helps with your own thoughts.

      HUB

Comments are closed.