ShareHub Hotlist 2017 – Week 43

It’s ‘selectively’ good out there at present.

Records are being broken across the major indices with news highs being punched out on a weekly basis of late. Sterling looking strong. Dollar looking weak. And best of all PoO back to highs last seen in 2014. Looking across the bellwethers/bluechips like Shell and BP, both are trading at almost Aug 2014 levels (pre Saudi/OPEC war on US shale). That’s a solid recovery. It suggests the market believes that Shell and co are out of the woods and back to oil market balance levels. Of course, this is not quite true, PoO is still a whopping $46pb below levels seen in Aug 2014 ($100pb). Astonishing really. So here we are today with Shell trading at close to Aug 2014 levels yet PoO is $54pb (WTi) vs $100pb WTi? Doesn’t make much sense does it? Yes costs have come down and companies have realigned to lower PoO environment, but even then surely the market has some questions to answer over such high valuations. As an example of my opening ‘selectively good’ comment, take a look at Premier Oil as an example. In Aug 2014, the share price was just shy of 350p. Today the share price is 66.5p. Yes, the metrics/business profiles are different to Shell and larger players but lets get real here. You can’t price an oil recovery into SHELL and ignore small caps and mid caps. It’s not just Premier Oil that is showing huge disconnects, take a look at Tullow Oil. Share Price in Aug 2014 was 730p. Today it is 183p. If you apply the same system to Feb 2016, then prices reduce further. In fact, prices were at capitulation levels. It was a very dark period for the commodity sector. PoO touched $28pb (wti) and companies like Tullow Oil were struggling. What was the share price for Tullow when PoO was $28pb? I’ll tell you… it was 190p+ which is roughly 5% higher than where the stock is trading today with PoO at almost double the level. Now regardless of rights issues / dilution, it’s a diabolical mismatch to price any stock at capitulation levels when in tandem the market is pricing oil&gas focussed companies like Shell at levels last seen when PoO was $100pb or 3.5 times above the lows of Feb 2016. I urge all investors to look back at historical prices between Aug 2014 and Today. Align with PoO’s progress and other larger bellwethers likes Shell, BP etc. See the disconnect. See the huge valuation gaps. Now undoubtedly QE and ‘selective’ buying of stocks by the ‘city’ and the algo’s bots is directly responsible for this huge one sided correction. The hand-outs via QE do come with some handcuff’s for the trading houses. Don’t over speculate and avoid high risk stocks. That’s fair enough. But what happens when the risk vs reward ratio’s flip and higher risk stocks become lower risk stocks due to valuation vs profit forecasts or brighter commodity backdrop (supply/demand)? With such huge disconnects and valuation gaps across many small caps and midcaps, it’s hard to see how the market can ignore the bargain basement prices. Now, PoO’s recovery is still in doubt and no one is saying the market’s concerns are over. But it’s not Feb 2016 now – those dark days look well gone. We are 3 years down the line and recovery signs / stability are evident for all to see. So in summary, a ‘selective recovery’ has already kicked in for the blue chips pumping Oil & Gas. The mid caps and smaller caps should have their day soon. The biggest signal of all that a broad rerate is underway is if M&A kicks off again. That’s still missing at the moment but I get a feeling might be underway again soon as the bigger players pick off the cheaper minnows. It’s a quick way to load up on resources and cheaper than exploring from scratch. If the big boys are beginning to worry about replenishing reserves, then the faster way to deal with this is via the cheque book. Interesting times for the sector and a long time coming.

Week 43 Results:

Much of the same for the newspaper picks and share hub top ten. A quiet week. The remaining 9 weeks will hopefully see some recovery across sharehub picks and save some blushes. But after last years whopping 130%+ gain, the sharehub picks is still some 100% ahead of the newspaper tips on a 2 year basis. A tad contrived I know… but always worth a mention!