ShareHub Hotlist 2018 Review – Week 47

Another tough week for commodities as Oil continues to get pummeled ahead of the OPEC meeting on Dec 6th. Heavily debted stocks like PMO and ENQ have taken hefty hits. PMO has practically halved from 2018 highs. That’s a serious correction. Markets being fairly unsophisticated places of late, wild swings are aplenty. Equity prices are open to abuse on a daily basis when there is no real focus on fundamental valuations. Until of course a buyer steps in and offers a cash price like that seen by DNO on Faroe Petroleum. Faroe’s share price had dropped from 160p+ to settle around 120p during the recent Oil Price reversal. Not many brokers were issuing buy notes. Yet hours after DNO’s 152p offer, analysts and brokers were out in voice claiming the DNO offer undervalued Faroe. It seems the market wants it both ways. It wants a share price that has no basis or valuation and is more to do with algo bots, ETF trading and shorting. In this situation, the price can go anywhere. But when it comes to a real genuine cash offer, the market suddenly decides on what is undervalued and what is not. Surely in a functional market the value of the business would be the price paid per share. Of course there is some room for some fluidity. But today, the markets biggest problem is that it simply doesn’t value stocks correctly in the first place. Amerisur Resources recently announced a farm out deal that effectively values some assets in the folio at the same price as the full market cap. Meanwhile, a cash pile of over $60m along with a folio of further prospects is valued at zero. The strategically important OBA pipeline valued at zero. And 20mmboe in reserves along with the 5kbopd production valued at zero. If the farm out deal wasn’t a wake up call to the market, then the £1m in cash Director buy certainly should have felt like a second wet fish slapped across the face. More director buys have since followed, yet the share price is still hugely discounted. It seems in today’s market, you actually have to have cash offers tabled before a realistic valuation is arrived at. That’s pretty poor and just shows how far this market has moved away from reality. M&A is the one thing that brings back that much needed reality. Whether DNO’s offer is acceptable or not, the market can’t have it both ways.

Trump has been on the tweet machine again spouting more headlines that read well but actually carry no weight at all. Quite embarrassing for the USA. Nothing meaningful has come from Iranian sanctions. Nothing has come from North Korea talks and much of the trade war with China still seems to drifting along with no real sign of progress. Trump endorsing or supporting Pro Brexit campaigners is just as meaningless. Trump will likely not be around in 2 years time. The UK will likely be dealing with a more open minded US President. Same applies to OPEC and Saudi Arabia. Trump might rant and rave about oil prices but he knows very little about the complex world of Oil&Gas. The Saudi’s have ruled the roost for over a century now. I don’t think they will be dictated to by a man that will likely be of no importance in around 2 years time. Yet again, it is just headlines with no real muscle. The Saudi’s and Russian’s have been over producing now for 2 or 3 months. Production levels have risen beyond the OPEC agreed levels set earlier in the year. So if the Saudi’s and Russian’s simply return to previously agreed levels… is that a cut? Of course it is. But that won’t necessarily be portrayed that way across the media or via Trump. The truth is, the Saudi’s and Russian’s historically reduce supplies from time to time simply to do maintenance/workovers and manage refineries. They can’t NOT do maintenance. In a nut shell, there will be cuts coming but they might not be communicated that way. Trump saving face is an issue that can be spun across media headlines. When OPEC announce the outcome on Dec 6th, I would expect it to go along the lines of maintaining current production as per last agreement… although in reality that actually means a cut of 1.4m barrels!

Week 47 review:

TheShareHub picks are hanging onto positive growth for 2018 which is quite an achievement considering the commodity bear market that seems to be in full swing. The newspaper picks are going sideways or down and mirroring the FTSE100. A poor end to Brexit deal discussions will surely end any dreams of a Santa Rally, but the way things are going, the only thing the EU and UK are consistent at thus far is delaying the inevitable so do not be surprised to see Brexit decisions pushed into 2019. The man or woman on the street has yet to see the deal but listening to some remainers recently, most have turned into pro brexiteers. Why? Simply because of the way the EU has behaved. School-boyish tactics and a desire from the outset to delay for as long as possible has changed many remainers minds. They don’t want to be part of this kind of EU anymore. If a second referendum was to be called, I think it’s now odds on to return the same verdict but with a bit more conviction this time. The UK is better off dealing with grown ups. Tusk and Barnier will be long gone in a few months or years time. The time to do business with the EU is when Merkel steps down in 2021. A new refreshed EU should appear then with many of the stalwarts gone. Then is the time to return to discuss trade deals. The UK can get along just fine without a constant supply of diesels by VW, BMW or Mercedes… some fiddled with and some not!

Watch out for OPEC meeting next week. WTI currently at $52pb which is about $24pb down from highs. With US shale struggling at $50pb, it would not surprise me to see a halfway house agreed and Trump’s face saved with WTI capped at around $60pb for the next few months. Trump can claim prices are down 20% from highs, while the Saudi’s can gain an extra $8pb from todays levels. Win win? Eitherway, a return to $60pb on WTI looks the most likely as the idea of WTI at $45pb makes little sense at all. And in these markets, it’s all about swings and volatility. So do not be surprised to see WTI swing 20% higher from recent lows ($50pb).

Stock to watch: Amerisur Resources. At 13p a share, it’s trading below the value of the recent farm out deal. That’s absurd! A rise back to 21p looks likely but may need a headline success on Indico-1 exploration well to enable a swifter rise.

ShareHub 2018 picks – week 47
DailyMail 2018 picks – week 47
Guardian 2018 picks – week 47