ShareHub Hotlist 2019 Review – Week 08

Oil focussed equities continue to look sluggish against a strengthening Oil price. An odd situation indeed. Normally, if PoO moves up 5%, equities would follow but with gains double that level or triple it. Premier Oil as an example, was trading at 145p the last time the DOW was in the 26000’s although that was with PoO above $80pb Brent. Today, PMO trades at virtually half that price in the low 70’s. Does a near 50% drop really justify the $15pb drop in PoO from highs? Of course not. But that seems to be the trend of late. Equities get hit hard on any retraces in Oil Prices yet fail to bounce or firm strongly upon Oil Price rebounds. The market is in no rush to get this disparity resolved. Ophir’s recent woeful sale at a huge discount to asset values has done very little to help. PMO has proven assets such as Zama, Tolmount, Sealion and more. Yet the market is pricing these at near zero. It’s a harsh environment despite many debt laden companies trimming capex, reducing debt, boosting production and through streamlined measures increasing their margins. In this kind of market, Oil companies need to think differently about shareholder returns. Reducing debt used to be (and still is in some cases) the main objective, but many of these businesses are cash flow positive and capable of reducing debt while also dishing out Dividends. Tullow recently confirmed a return to dividend payouts (or special dividend). After years of capex investment, exploration wells, boosting production and so on, Premier Oil last issued a dividend in 2013 to shareholders. It’s been a long slog and near life death experience for the company since late 2014’s Oil bubble popped. But after 6 years of hanging on by the toenails, Premier Oil should be looking at returning some cash again whilst paying down debt. Growth companies have long stood by their stance of reinvestment is the key to greater growth. Well… history shows this is not true and perhaps the Oil company growth strategy needs rethinking for the 2020’s. To get investors back into Oil stocks, companies need to deliver incentives. A return to divi’s for some might just be the answer, or at the very least…some form of share buy back system.

Week 8 Review: TheIndependent remains firmly at the top with solid gains helped by the FTSE’s climb from January lows. A combination of Trump/China trade talks and North Korea issues have helped US markets return to near all time highs. And that’s despite the demise of Apple’s iphone and subsequent poor sales figures. Apple’s share price was $140 just a few months ago and rightfully so. Yet today, the price has risen back to $175 a share. $35 gain a share doesn’t sound too much to get excited about but in the context of Apple’s market cap, it equates to a whopping $166bln. And that’s a business that is on the decline due to slicker and faster products via competitors like Samsung and Huawei. Crazy… you have a market that is at ease dismissing 300mmboe+ oil reserves for ZERO (Sealion/PMO/Rockhopper) and yet completely satisfied to see a poorly performing company jump $166bln in market cap for no reason at all. In fairness, it’s not quite that simple. One of the reasons why the likes of Apple get bought into, is down to the algo’s/bots/ETF’s/Trackers and so on. There’s so many other market products out there based on buying into top tier stocks, that if the DOW goes up, then generally speaking so does Apple despite its Nasdaq listing. Some might say it is too early to say whether Apple has peaked. But looking back, Nokia, once king of the mobile phones fell away quickly. Sony… king of the Walkman…unthinkable at the time, but soon left behind. Apple might be able to stop the rot but that has to come through pricing. Selling phones for £1000 is ridiculous. Selling phones for £200 looks fair value today. Plasma screen tv’s that sold for £5000 some years ago, now sell for £500 and they are more advanced and better quality today.

So in summary, If the DOW goes up, resources/commodity stocks stay where they are. If the DOW goes down, then Resources/Commodity stocks go down. If Oil rises, Oil focused stocks improve but barely match PoO’s rises. If PoO falls, equities fall harder in percentage terms. Damned if you do and damned if you don’t! Suffice to say, it’s tough going out there for commodity stock investors. Not much reward at present and plenty of risk. But that should change in time… and would certainly be helped by a dividend or share buy back by a few cashed up sector players out there. But managing debt piles should remain the number one goal for many. With Saudi Aramco IPO still very much in the mix, the Oil market/price looks like heading for a period of stability somewhere… in the highs $60’s to $70’s. That bodes well for the sector.