Markets continue the sideways action as China/US trade war talks continue. Like Brexit, this seems to be dragging along with no obvious end. The Cheltenham Gold Cup is notorious for having a ‘quiet’ effect on markets. It’s as if all bankers and analysts are on a jolly all week, Surely not?
Week 10 Review:
Good news from Premier Oil and Amerisur. Both companies are adding value and growing which is precisely what investors like. Unfortunately, the share prices are still stuck in the mud and the lag between positive news and share price growth is notable for all to see. Often ‘rerates’ happen fast, whilst the drifting down of prices can take a painfully long period of time. One damages sentiment and the other repairs it in a whisker. Get caught on the sidelines and it’s easy to get left behind in this market despite the sideways action.
The Independent picks continue in pole position although the gaps below are shortening. It’s been an odd start to the year and one hopes that the end of Q1 (March 31st) will bring about a new impetus in Q2.
Tax planning (UK) is rife at this time of year with April 5th CGT deadline looming. Many investors will be looking to book losses and offset against profits. Some will have have clear outs. Some will be readying the ISA’s. This period isn’t just about Retail Investors, Large funds/II’s also ring in the changes around end of Q1. Lets hope volumes and interest across commodities improves in Q2 and sets up equities for a solid 2019.
A quiet week with Trump Korea talks taking the headlines. Markets appear to be treading water ahead of the much awaited China / US trade tariff discussions. With the DOW at lofty heights already, much looks priced in. Should further delays occur or the mood music change significantly, markets could be set for a hefty sell off. Global growth has slowed dramatically over the last 3 quarters largely due to Mr Trump’s trade war with China. Assuming Trade talks end amicably, global growth is expected to be modest at best. China have already downgraded growth projections to around 6% to 6.5%. That’s still extremely strong in the context of other leading economies. The chart below shows how the decline is expected to continue over the next 3 to 4 years.
Last weeks US oil inventory report showed another rise of 100kboped to 12.1mboped. US production is flying high. In Feb 2018, US production was 10.2mboepd. In just 12 months, US production has risen a dramatic 2mboepd. If it wasn’t for Venezuela’s woes, Oil prices would be under heavy selling pressure as supplies continue to flood the globe against a demand backdrop that looks stagnant at best. With US growth set to slow too (assuming reductions in fiscal stimulus policy), OPEC will be hoping that US shale is at peak levels. The problem for OPEC (and RoW) is the level of confidence in the US production figures in the first place. Many have suspected for sometime that these numbers are not quite what they seem. It might take another 12 months+ to test the US production peak production theory which is based more upon infrastructure constraints. It’s unlikely that OPEC will be changing course on recent cut levels/quotas while US production rises. It’s a wait and see game for now but with supply/demand balance very close to an even bias, any global risk, such as unrest in MENA region or with India/Pakistan issues could have dramatic effects on Oil prices. Trump’s lack of sanctions on Iran is also weighing on investors minds. It’s a delicate issue at present and the market is not pricing in any premium for a global risk events.
Market sentiment towards Oil and Gas E&P’s is weak at present. Many large institutional holders are staying away from risk assets. But not all. Schroders bought a sizable stake in Columbus Energy (CERP) last year at 5p and more recently at 3.5p. With the stock currently trading at 2.4p, it shows that Schroders (like many) often time their entry points wrong. But if all goes to plan with CERP, 2019 should be the year the company transforms itself albeit with the drillbit. With stock supply low, it often only takes a few high trading volume days to see the prices double and return to 5p again. Columbus investors should be due an update from the company at the end of March (3 weeks time). Many will be keenly looking for confirmed dates and plans for a summer exploration well in the SWP region, Trinidad. CERP is part of TheShareHUB picks for 2019.
Elsewhere among the 2019 ShareHUB picks, AMER and PMO edge closer to revealing news on their respective exploration wells. Watch out for news coming over the next few days on the above.
The 6 mining picks in TheShareHUB top 10 are struggling to find interest. Many have traded flat for the last 2 months. Petra Diamonds being the worst performer after a poor update and heavy hit from the rising RAND. SOLG remains TheShareHUB’s top pick for M&A this year. With the likes of Newmont, BHP, Barrick and others all doing their best to try and eat each other up, SOLG has attempted to bolster itself against cheap predatory offers by offering to take over Cornerstone Capital Resources 15% stake in their Cascabel copper-gold project, Ecuador.
It’s a smart move but will Cornerstone play ball? Will BHP or Newmont offer Cornerstone a better deal? Certainly one to watch.
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Week 09 Status below: All picks in positive ground. All to play for.
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.
An exceptional week for TheShareHUB picks with a whopping 12% gain. The majority of gains can be attributed to PetroMatad – The first to multibag in 2019. With equities lagging behind the recent resurgence in Oil Prices/Gold Prices, TheShareHUB picks had experienced a quiet period over the last few weeks. Short termism has turned the markets into more of an entertainment circus rather than the usual casino with flashing lights. Investors today become impatient all too easily. Like an addict looking for the next fix, Retail investors tend to seek news nearly every other day. Investing can be a rollercoaster, but it wouldn’t hurt a few to take a page out of Mr Buffet’s book and look to mid to longer term expectations. PetroMatad is probably a classic example of the current herd mentality out there across many AIM listed stocks. Last year the share price was trading at 6.5p before the last exploration well hit dust. A disappointing result, granted. But the drop in share price from 6.5p to 1.7p was heavily overdone. PetroMatad at the time had over £15m in cash which equated to approx 2.2p. That priced the multi-well exploration plan in 2019 at zero. But try telling that to a Retail investor in mid November 2018 and the answer you would get would be simple… “Yes.. attractive, but there’s nothing happening here for at least 6 months so I’m off “… is the usual mantra. Followed by… “I’ll come back later next year.” There is nothing wrong with trying to make cash work elsewhere while some stocks go into a dormant period. But is Mid Nov18 to Mar19 really that long to wait? Of course not. PetroMatad’s rise from 1.7p to highs of 6.5p in just under 5 weeks is not a surprise to some, but a mystery to many. The ‘many’ being those that thought they could buy back in weeks before the next drill plans get underway. The trend of late is a telling one. Retail investors are beginning to realise that ‘getting in early’ really can be rewarding and help derisk going into quite volatile share price periods as exploration wells get underway. Other examples like Providence Resources 8p to 16p prove that point. Investors would be wise to seek out stocks that have communicated ‘active’ high impact exploration plans for Q2/Q3 2019. There is always a risk that plans change and the focus on exploration reduces so risk is very much on the early birds side. But the rewards can be significant although it can test the patience of news hungry investors. Many of those seeking constant signs of progress through share price movements can become frustrated and should perhaps look more closely at the company / business and concentrate on the calendar of events/catalyst ahead.
Look out for potential drill result news from Premier Oil (ZAMA-2) and Amerisur Resources (Calao-1). The latter has been treading water around the 17p level and the market appears to be pricing in zero for the Calao-1 well which seems odd considering the proven success at Mariposa-1 and more recently with Indico-1. With more wells to come in and around the CPO-5 block, a duster would not be the end of the world. Infact, the importance is more about discovering (or not) the OWC (oil water contact) as well as seeking potential borders of the oil resource. The next few wells on the CPO-5 block will help define the development plans going forwards and the discoveries to date are already very significant and sizable. Something the market has yet to pick up upon.
Another stock frustrating investors is Columbus Resources (CERP). The stock has drifted down from 6.5p levels to just 2.5p over the last 8 months and this is despite the company doubling production. Dilution has taken place but with an active planned Q2/Q3 exploration phase, the company should soon see some ‘herd mentailty’ return as Retail investors begin to get in ‘early’. CERP need to confirm in more detail the plans for 2019 and that’s the problem at present. Not enough commitment or detail from the company. Solve that, and investors will come. With a market cap of just £21m and approx 1000bopd production, near zero debt and approx £2m in cash, CERP could be the next stock to Multibag from TheShareHUB picks for 2019. Risks remain as always so make sure you do thorough research.
Another almost motionless week for TheShareHub picks. Commodities are stuck in the middle of a market reluctant to take on risk while easy pickings are available. Trump v China appears to be coming to a close, although one imagines that it will likely require 6 monthly or 12 monthly reviews. The outcome is almost baked in already with the DOW just 4% shy of all time highs. It wasn’t that long ago the index was trading at 22000, some 3500pts lower. Around the corner, Brexit fast approaches. It is tempting to ignore this debacle but unfortunately it is a headwind that needs addressing. Mrs May needs to get her skates on as she’s fast becoming known as Mrs Delay. We are at the sharp end now yet ask any politician what happens post 12am on March 29th and not many will be able to tell you. Of course there will be a transition period, a period of ripping up old rules/regs and a period of creating new ones. Based on Parliaments performance to date, one imagines that to be just as chaotic as Brexit itself. So get used it. Uncertainty will be around for much longer than many would like you to think. There is no quick solution. It’s going to take years. Moving on to the hall of shame… this week it’s Sergio and Tusk that take the headlines. Sergio sought out the devil in the greens and after hacking a few to bits with his shoe spikes, gave up on his hunt. He was later disqualified. Golf seems to be one of those sports that just turns a blind eye to such abuse, unless you’re a local club player and the penalty would be more than a few drop shots. Cancelled membership and booted out the door is the norm and quite right too. Perhaps a ‘ban’ for misbehaving professional golfers might be an idea? Mr Tusk may have stepped over the line with his headline catcher but as many have highighted… he has a point. When David Cameron delivered a referendum, the British Public assumed he and his party had done due diligence on how to exit and identified the main issues or hurdles ahead. The Irish border was, has always been and still is the elephant in the room. It’s now approaching 2.5 years and the solution has been left to the last 30 to 40 days? Of course, it takes two to tango and what Mr Tusk seems to be missing is that he and the EU are just as culpable. From day one, the EU made it clear that they would make any exit process feel like HELL. They would make it as difficult as possible. They had to. Why? Because they had to teach the UK a lesson. They had to set an example to other potential ‘leavers’ within the EU. They had to send a message. So in answer to Mr Tusk’s… ‘a place reserved in hell’… for certain individuals, that will be the seat next to yours then Mr Tusk?
Week 06 Review:
The Newspaper picks continue to do well as the FTSE focussed stocks ride the wave of US/China trade talk positivity. Brexit… what Brexit! Commodity stocks continue to tip toe around as global growth worries cancel out higher Oil/metals prices. A weaker dollar would help too but that seems artificially assisted these days. The Saudi’s appear to be keen in seeing WTI above $60pb and it would not take much to get the price there based on recent cuts and Venezuela issues. It should be just a matter of time before PoO rises back to 2018 ave levels circa $71pb for Brent. This bodes well for the likes of Tullow, Premier Oil and Enquest. These big producers have big debt too but the cash being thrown off at $70pb+ is huge. As debt reductions kick in, share prices should rise strongly assuming production levels and oil prices remain firm.
TheShareHub’s first heads up of the year – Echo Energy delivered the first duster of the year. Disappointing but the company has an active plan going forwards, solid production of circa 850bopd and around $20m in cash (assuming some spend over last 6 months). A poor result was already priced in at 8.6p (price down from 12p placing), so the fall to 4.3p yesterday looked utter madness, but that’s AIM for you. As many ShareHUB followers know, Amerisur Resources struck black gold with the Indico-1 well in CPO-5 block, Llanos basin Colombia last year. Early in Jan 2019, the well flowed at 5100bopd. This was put immediately on short term testing and will then go onto long testing with all production being sold at the well head. It’s quick payback and instantly delivers reserves. And the markets reward… about 1p to 2p a share at present based on 16.8p. That’s around £20m improvement in market cap. That values the added reserves (approx NET 6.2mmboe) at around £3m per 1mmboe. The industry standard is nearer £10pb or £12pb for light oil offshore with infrastructure. After all costs, AMER’s profit on a well like Indico-1 is around $10m per year. (Note: Other issues like security and development performance also come into play when valuing reserves.) Clearly undervalued and with another 5 to 6 wells due in the basin this year, Amerisur shares should be in hot demand. Of course, risks remain and success with the drill bit needs to translate into higher production and stronger cash flows. The latter is perhaps Amerisur’s weakness of late. Exit rates of 7000bopd seen in 2017 have slowly reduced to rates of around 5400bopd and that’s including the recent approx 1500bopd contribution from Indico-1. That said, assuming all goes well in 2019, Amerisur could be entering 2020 with over 10kbopd. Plenty of success required to get there but fully funded, debt free and cash generative even at oil prices below $25pb, Amerisur looks ready to finally rock and roll.
Elsewhere, PetroMatad looks odds on to become The ShareHUB’s first multibagger of the year. An active drill plan in 2019 should keep investors happy and the share price lively.
Wishbone and W Resources are both suffering from warrant overdoses. Get past these and the share prices should benefit if or when the good news flows in. Both are approaching key target operational milestones for their mines and the next stages should be a significant step up.
Columbus Energy is suffering from the traditional ‘no news’ AIM drift. Whilst management have already said that 2019 is the YEAR they have been waiting for, progress and communication to shareholders has been slow. As highlighted last week, news should be forthcoming as plans to drill in the SWP region likely requires lengthly planning, permits and rig acquisitions. With the share price drifting from 6p to 2.4p, the pain for long termers has been severe. Dilution has not helped through several placings but debt is now under control and almost reduced to zero. CERP are now in a strong position to push on which begs the question why the sp is at such lows. Management need to outline clearly the plans for 2019 and give shareholders some dates to look forward to. The share price should rerate back to 4p levels assuming all plans look good.
Upcoming news? Watch out for news from Premier Oil on Zama-2 DST results (est. next few days or week) and Amerisur Resources Calao-1x well est. to TD in about 2 weeks time.
A tough week for TheShareHub top ten picks for 2019. Commodity prices are up over 20% in most cases from Oil to Gold. So question is… why are commodity focussed equities slow to react? In the Oil&Gas sector, the market is still unsure of how OPEC and NON OPEC are going to get along. Trump’s sanctions on Venezuela came as a bit of a surprise and undoubtedly have led to stronger oil prices over the last week or two. Russian oil cuts have yet to be felt after the Russian Oil minister admitted that it takes time to reduce production safely. Funnily enough, it doesn’t actually take them much time to boost production when allowed. Cynicism aside, the Russian’s are not part of OPEC and as such do not need to comply with cuts. A ‘deal’ between the Saudi’s and Russian’s is very much ‘open’ to intepretation and it’s because of these vagaries that the market is so against pricing ‘in’ a full supply/demand rebalance. Furthermore, Iraq and Iran are still very much the wild cards. Trump promised heavy Iranian oil cuts via sanctions some 6 months ago and ended up delivering very little on that promise. That said, the recent Venezuelan sanctions are helping and the data over the next few weeks should begin to turn quite bullish for PoO. That bodes well for the likes of Enquest, Premier Oil and Tullow. All big debt holders, and all needing top dollar a barrel to ensure meaningful debt repayments can be made whilst still continuing to grow and support production levels. That’s the biggest problem for Enquest and Premier Oil near term. Many producing fields are heading towards plateau rates and many are now very much on the decline. Expensive workovers, pipeline repairs and so on…all await around the corner. That’s E&P for you.
Week 05 Review: The FTSE100’s strong recovery has benefitted the two newspaper top picks which both lead the way. Barrick Gold has been dropped from the Independent picks and funds redistributed amongst the other 11 stocks. Based on the Rangold Resources tip, TheIndependent picks would be around 15% down on that stock bringing their total growth thus far to 5.5%. The Guardian top picks are not far behind. TheShareHUB picks are carrying the wooden spoon for the moment which is quite a slide from the opening 11.5% gain in Week 2. It’s likely to be a bit of a roller coaster in 2019 so get used to wild swings.
Drops in AMER, MATD and SXX look a bit over done but there’s nothing wrong with a bit of consolidation. Stocks often go on to test higher highs once support levels have been tested and short term trading interest has departed. For many smallcap stocks, the lack of institutional interest is frustrating especially as some assets are reasonably derisked compared to a decade ago. The wash out that followed OPEC’s ‘flood the market’ decision in late 2014 has left a long tainted mark on the sector. Ironically, many of the mid tier and lower tier E&P’s have become more streamlined. Debt reduced or renegotiated and overheads/costs reduced. Many are leaner and meaner than they were in 2010. Yet the II’s still resist the temptation to get involved meaningfully. Add to this the impact of new margin rates and equity trading restrictions on normal PI’s and you have a market that looks and feels more more like a ghost town. Volumes are down for the above reasons and brokers/spreadbetting firms are having to work twice as hard to gain the interest seen some years ago. M&A has been disappointing too. Ophir’s recent sale at 55p was a blow for the sector. Faroe’s sale valued a little higher yet still well below the expected fair value price. It’s a buyers market at present so expect a few more cheeky bids to come in over the next few months. If you don’t ask then you don’t get. Fighting off predatory offers requires a strong institutional investor base that are onboard with valuation benchmarks. Amerisur’s John Wardle is currently in London to bolster II interest in the stock after a number of transformational events have left the share price looking healthier but a long way from where it should be. If he can get some large II’s stakebuiding at 17p to 20p levels, then any cheeky takeover approach at 25p becomes less likely. II’s generally want double bubble for their risk vs reward when dealing with the smaller cap stocks. They like to have maximum upside and limited downside. At 17p today, AMER certainly offers that scenario assuming the drill bit performs of course. Fortunately, AMER has approx 6 to 7 wells due to be drilled this year with one underway right now with an expected TD date of end of Feb. So a duster is not the end of the world by any means.
All quiet over at CERP.L. If the company is to get plans for an SWP drilling phase underway in Q2/3 2019, then action will need to be seen regarding drill targets/permits/rigs and potental partners brought in. With bread and butter production of 850bopd to 1000bopd in place, CERP can afford to take their time and build up the cash balance. But leave it too late and they could miss the drilling season slot in Trinidad. News might not be too far away for CERP investors who have had to be painfully patient over the last 6 months+. But as the CEO’s says… 2019 is the year they have been waiting for. Well, Mr Koot… it’s time to deliver. Assuming he does, then the share price shoud recover very quickly.
The first ‘Heads up’ of the year (Echo Energy heads up price 8.65p) went out to ShareHUB subscribers last week, with a target price of 25p upon well works/stimulation success. No guarantees of course and risks remain. The full article will be posted on TheShareHUB website for all non-subscribers later this week.
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