As per previous years, the Hotlist picks for 2015 are 100% commodity focused. So let’s get something straight right away… if you think 2015 is going to be another poor year for commodity stocks, look away now. Read no further. However, if you believe the world and global recovery simply cannot live with Oil at sub $55 for very long, then read on.
2014 was a shocker. And 2015 can continue to deliver more shocks to the sector. A bounce back or recovery is not a certainty by any means. There’s an OIL price war going on at present and with powers like the US, Saudi’s, Russians and Chinese all getting stuck-in in some form or another – it’s a fight that will surely carry casualties but may also see the bold and powerful grow stronger. Key events in 2015 to watch out for that could see sharp changes in Oil prices are:
1. Greece set to vote on new party/leaders in January.
2. US/UN Iranian Talks in March which are expected to then be pen’d formally in late June or early July.
3. UK elections set for May.
4. OPEC’s next meeting due in July.
5. US interest rates ‘predicted’ to rise in H2.
Of course, there are many other events to look out for but with DOW and S&P just shy from all time highs, the path of least resistance would appear to be to the downside. Just about on every occasion the markets expect a rate rise to come, the major indices dip. The ‘Can’ has been kicked down the road longer than many thought. QE keeps on comin’ whether via Far East or Via Europe. Each major player steps up to the plate and keeps flooding the markets with easy low cost cash. That’s gotta end at some point. Is the patient fully recovered enough to take the pain?
It’s not all bearish. Company earnings have been relatively solid. As you would expect after some many rounds of QE. January will see Q1 earnings season start with a bang as some major players report numbers. It’s going to be a quarter or two before the commodity stocks start to show the damage done by lower oil prices as many have hedged in advance softening the blow. But it’s the forward guidance that the market wants to see the most. Who’s cutting back on projects? Who’s cash rich? Who’s cash poor? Who’s production numbers are falling and Who’s debt is rising? Etc etc.
Hence, Q1 and Q2 could be rocky periods for commodity stocks as reality filters through to the balance sheets. But equally, markets are renowned for pricing ahead – 6 months in advance. So the question is… are today’s share prices reflecting the worst case scenario’s?
It’s like a battle field out there at present – many walking wounded, some looking dead and buried and others looking like they are set to gain from weaker prices through cheap M&A. You could throw a dart at the sector and pretty much hit a stock that is on or close to 2009 post Lehmans levels. Are things really that bad out there? Have oil supplies really exceeded global demand?
Selecting the Hotlist picks for 2015 has been a challenge as there are so many stocks out there that look just too good to miss. But investors are weary and risk appetites have waned. Hunting multi-baggers in this market is not hard and some daily gains are 25% or 30% on average as share prices bounce around amongst volatility. But just as they bounce 30% – they fall 30% days later. Gains are more shortlived. Traders rule the roost at times like these. Being nimble and short term can pay well but it’s not a game that many can play well.
Picking stocks that have some stability boxes ticked is paramount. Limiting downside risk but maintaining upside profit opportunities is key.
Asset rich stocks could be the first to go when or IF M&A kicks off. It’s a catalyst like this that the sector needs most. If Afren or XEL or IAE etc were to be snapped up by a major or mid tier player, then it’s likely many other sector favourites would rally in sympathy.
The following picks for 2015 have been selected based on M&A potential, production and exploration upside. Some need key events to fall into place to see significant upside. Others look oversold and punished with a broad brush. But all desperately need OIL prices to recover back to $70+ ranges to enable real progress to return.
Up first is…
1. Afren. TP = 140p
Debt woes but asset rich. Seplat need to make an offer before Jan 19th and if/when they do any other predators might be flushed out soon after. Rothschild seem to be spinning their magic on this company. At 47p, the stock has a 2 to 3 bagger upside based on a decent Takeout offer. Thesharehub (TSH) target is 140p.
2. Antrim Energy. TP = 14p
A cheeky offer by Sound Oil was rebuffed pretty sharpish but at today’s sp, still presented 50% upside to 2014 closing price. Antrim has a key interest in Skellig licence as well as having a decent wedge of cash circa £10mln. Their huge Tax losses are worth a fortune to a producing company like Parkmead or Ithaca etc. It wouldn’t surprise me to see Antrim approached by another player – one more credible than Sound Oil. Target price of 14p. That’s around a 6 bagger if it gets there. Management need to show investors that they can make the cash pile work in 2015. If they can’t, then it’s surely a case of seeking the right kind of buyer.
3. Circle Oil. TP = 32p
Management change at the top resulted in one director moving on and selling out the bulk of his shares. This undoubtedly contributed to the dip to sub 10p. The sharehub gave a heads up on the stock a few weeks ago and has since bounced back (to 12.5p) an increase of 25%. The company has made some major discoveries in 2014 and these have not been noted properly by the market. With a decent wedge of production coming in as gas sales, lower oil prices does not effect Circle OIl in the same way as other Oil producers. This stock looks a gem and after the last gas discovery, could be on Dragon’s watch list post PCI.
4. Faroe Petroleum = TP 140p
This stock really is a corker. The share placing at 120p in spring 2014 was a masterstroke. With cash of around £100mln and very low debt levels, FPM looks well set to ride out low oil prices. Like Circle Oil, a decent wedge of production is indeed Gas sales. At 60.5p, it looks a great value play based on any future oil price/sector rebound.
5. Hurricane Energy. TP = 60p
2014 was a huge success after the Lancaster flow test delivered 9.8kbopd (with ESB’s and constrained by equipment) and provided data to support a flow rate much higher at 20kbopd from just one horizontal well. Not only that… the black stuff was more like Peroni. Light sweet and very fine API oil. In a nut shell, Lancaster and other assets are one of very few that have such great commercial stories. Fewer wells means lower costs and higher rates mean greater ROI. The chances of a lucrative farm out deal to a major partner only get better as other oil projects get shelved or become uneconomic.
6. Lansdowne Oil & Gas. TP = 45p
This Irish minnow has a sizable wedge in a number of very nice assets. Barryroe is the largest but there are more. Any farm in deal could see this stock re-rate fast. It’s already bounced from 7p levels to test 10p in last 2 weeks as rumours are abound that a Barryroe farm out deal is soon to be signed.
7. Lek Oil. TP = 85p
The stock got beaten up after Afren’s decline as hopes of appraisal work on 310 licence faded leaving very little to get excited about in 2015. That’s not been confirmed as yet but matter little now as the company has decided to fast track production plans on its marginal field acquired earlier in the year. This may not be reflected in the sp but when the cash flow rolls in (expected in H2) then the market could and should re-rate the share price. Lek (like Afren) may also find interest from predators and if Afren gets taken out by a major player with deep pockets, then the 310 licence could be explored/appraised sooner than the market thinks.
8. Providence Resources. TP = 210p
Like Lansdowne Oil & Gas, PVR has Barryroe central to its key asset worth. Any farm out deal should unlock a number of future projects as incoming cash could / should sort debt repayments and offer hopes for a busy 2015 exploration/appraisal program.
9. Tethys Petroleum. TP = 36p
Out with the old and in with the new. New management have already made an impact and the business looks set for a solid 2015 as costs are managed well and deals are inked. Kaza sale is key and should complete in next few months but market is unsure or uncertain of this until officially announced and cash is in the bank. New Gas contract looks good and management are expected to reveal an increase in production in coming weeks. It’s been a tough year for investors but the corner looks to have been turned. Any progress on the Total / Chinese JV could see a further re-rate.
10. Xcite Energy. TP = 140p.
It’s taken a long while for XEL management to get the business into a position where finance can be secured and FDP approved. They may only be a few months off now and whilst the market is taking a dim view, 255mmboe is not going to be left on the shelf. Statoil can enhance their own projects in the region by doing a JV and saving huge costs. Any M&A across the sector should see Xcite do well in sympathy. 2015 should at last see the long awaited FDP approved.
As before, the Independent top ten picks will be included and this time a broker top ten selection. A sharehub B-list will not be included this year.
Good luck to all investors in 2015. May it be a prosperous year for all.