Deltic Energy is entering an exciting phase in its development based on its fully funded joint-venture projects with Shell. Preparations are now underway for an exploration well to test the Pensacola Zechstein prospect in the SNS (Southern North Sea). Deltic has indicated that it expects the current contingent well commitment to become firm on schedule by December 1, 2020. Drilling, according to Deltic, should follow in H2 2021. We see scope for positive news flow over the next few months, not least from the evaluation of Shell’s recently obtained processed 3-D seismic over Pensacola. Following Pensacola, the Selene prospect is scheduled to be drilled in mid-2022. The recent 32nd Round UKCS licence awards greatly expands Deltic’s exploration potential in the CNS and particularly the SNS Carboniferous fairway. Here some highly prospective acreage has been obtained.
Companies: Deltic Energy Plc
Deltic Energy’s recent announcement concerning an upgrade to the gas in place and the GCOS (geological chances of success) of the Selene prospect in the SNS (Southern North Sea) is highly encouraging. Selene’s updated P50 gas in place of 629 bcf is a 44% increase over the previous estimate which would suggest one of the most significant discoveries in the event of exploration success. The new GCOS of 70% is very high for this stage of evaluation pre-drilling suggesting that Selene is being considered as an appraisal well. It should also be remembered in terms of commercialisation that Selene lies close to infrastructure owned by its jv partner, Shell. The Pensacola project is advancing towards a firm drilling decision by end November. Shell has now delivered a full seismic data suite. Deltic is anticipating that Pensacola will be drilled in H2 2021.
Deltic Energy (DELT LN): Material uplift in gas volumes – Selene prospect | I3 Energy (I3E LN): i3 successfully raises £30m to fund Gain Energy asset acquisition | Westmount Energy (WTE LN): Rig arrives offshore Guyana ahead of Exxon-operated exploration well
Companies: DELT I3E WTE
Cairn Energy (CNE LN): Resolution of Cairn India proceedings could take place this year | JKX Oil & Gas* (JKX LN): 20-year extension granted at the Zaplavska field, Ukraine | Deltic Energy (DELT LN): Deltic board receives backing from largest shareholder | Reabold Resources (RBD LN): IMIC-1 well update, well requires acidization
Companies: CNE JKX DELT RBD
Deltic Energy’s recent operational update, importantly, confirms the commitment of its JV partner, Shell, to drill the promising Pensacola and Selene prospects in the SNS (Southern North Sea) gas basin. Drilling the former now appears likely in the second half of 2021 and will be followed by Selene in mid-2022. Significantly, we expect major news flow over the next three months or so. This will relate to the results of the 3-D seismic shot on Pensacola by Shell in August 2019, a possible well decision and the awards of acreage under the 32nd North Sea Licencing Round. As noted in our May note, the marked contango in North Sea forward prices is more significant for investment than the currently depressed spot prices. Deltic’s share of Pensacola and Selene well costs plus G&A through mid-2022 is well underpinned by the sizeable cash position.
Cluff Natural Resources (CLNR LN): Shell remains committed to drill two wells next year, fully funded | UK Oil & Gas (UKOG LN): £4.2m placing leaves the Company debt free | Angus Energy (ANGS LN): Pipeline extension application submitted
Companies: DELT UKOG ANGS
Not surprisingly, CLNR as a North Sea exploration junior has been unable to escape the growing malaise in oil and gas markets over the past three months and the sharp cutbacks in oil gas industry capital spending. We believe, however, there is a case for considering the contrary position. This reflects the sharp contango (futures prices higher than spot) in oil and gas futures prices and the continuing commitment of Shell, CLNR’s joint-venture partner, in pursuing exploration work on the promising Selene and Pensacola projects in the SNS (Southern North Sea) gas basin. Furthermore, CLNR has a healthy balance sheet and operates with low fixed overheads. As normality returns we continue to see scope for positive news flow in 2020 primarily reflecting a Selene drilling decision, the results of last August’s seismic shoot on the Pensacola prospect followed by well investment decision, a possible farm out of the Dewar oil prospect and the potential award of additional licenses in the latest UK licensing round.
Reabold Resources (RBD LN): Activity ramps up in Romania this year | Cluff Natural Resources (CLNR LN): FY19 Results, transformational year
Companies: Reabold Resources Plc Deltic Energy Plc
CLNR has the potential for extremely influential news flow in 2020 which will likely be a prelude to near-term drilling on the two Shell joint ventures. In the first half we believe a drilling decision is likely on the Selene prospect in the heart of the Southern North Sea (SNS) gas basin. We continue to believe Selene will ultimately be drilled in Q4 2020 or Q1 2021. There is also the real possibility in the coming months of a farm-out on the highly promising Dewar liquids prospect in the Central North Sea (CNS). Additionally, CLNR expects a drilling decision on the Pensacola prospect near the northern margin of the SNS by November 2020. A scheduled significant item of news flow in Q2 concerns the 32nd Offshore licence awards. CLNR has stated that the blocks applied for in the SNS and CNS are highly prospective and will significantly enhance resource potential. Importantly, CLNR has a pre-eminent farm-in partner for P2437 and P2252 in the SNS and has underpinned its financing needs through 2021.
CLNR’s recent operational update points to significant progress in advancing to drilling its two leading prospects, Pensacola and Selene, in the Southern North Sea (SNS) Basin. We believe Selene is likely to be drilled in Q4 2020 or Q1 2021 and Pensacola in Q4 2021. Shell, the operator of Pensacola, is likely to make a well decision on the prospect by end November 2020. The reported ONE-Dyas hydrocarbons discovery at its Darach Central-1 well has positive implications for Pensacola about 40 km to the west. Seismic evaluation is underway at Selene. We believe a drilling decision here is likely in the coming months. The highly promising Dewar liquids-focussed prospect in the Central North Sea (CNS) has attracted significant potential farm-in interest. CLNR is expecting such interest to gather pace in the coming months now that the 32nd Licencing Round is complete and given the approaching finalisation of the Dewar farmout process. We continue to see excellent potential for news flow in the months ahead and believe that CLNR is at a transformational stage of development.
Cluff Natural Resources (CLNR LN): Multiple applications submitted in the 32 nd UK Offshore Licence Round | PetroTal (PTAL LN) – Another upgrade to production guidance | Mosman Oil & Gas* (MSMN LN) – 16% increase in production at Stanley
Companies: DELT TAL MSMN
CLNR has made impressive progress in 2019 technically, strategically and financially in advancing the commercialisation of its Southern (SNS) and Central North Sea (CNS) asset portfolio. The key developments have been the farm-outs to Shell of P2252 and P2437 in the SNS, the initiation of the P2352 farm-out process in the CNS and the recent £15m gross raise that secures development funding through 2021. CLNR is at a potentially transformational stage in its development. Over the coming months we see the potential for major items of news flow. The key ones are a firm drilling commitment on the highly prospective Selene prospect and a farm-out of the promising liquids-focussed Dewar prospect on P2352. We believe there is a possibility of drilling Selene in late 2020 or early 2021. The Dewar prospect could also be drilled in late 2020 with Pensacola following perhaps in Q3 2021. CLNR will also apply for additional licences in the 32nd UK Offshore Licencing Round with awards made in Q2 2020. This could significantly expand the asset portfolio.
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To achieve YoY revenue growth over H1/20A despite the challenges of Covid-19 and its impact on the travel sector is testament to Equals' resilience and increasing focus on B2B and International payments services. While weaker gross profit and EBITDA margins have impacted profitability in H1/20, we see potential for an earnings recovery in H2/20 given cost reduction measures currently being undertaken. This should lead Equals to cash breakeven in Q4/20 and FCF positive by early FY21.
Companies: Equals Group Plc
Litigation Capital Management has announced FY20 results with gross profit up 7% to A$21.7m and PBT of A$9.2m, slightly behind expectations albeit the Group had already flagged that delays to 3 cases during the year would result in resolutions in FY21, thereby impacting FY20 results. That said, excellent strategic progress through the year and good news flow as well as increasing scale suggests more value to come. Reiterate buy
Companies: Litigation Capital Management Ltd.
In June, faced with the task of replacing its longstanding portfolio manager, Alistair Mundy, Temple Bar Investment Trust’s (TMPL’s) board reiterated its commitment to a value style of investing. The board has now opted to hand the management contract to Nick Purves and Ian Lance of RWC Partners, two managers with considerable experience of managing income portfolios using a value-style approach. Value investing, where managers buy stocks that are valued more cheaply than market averages – based on measures such as price/earnings, price/book and yield – is deeply out of favour. The RWC team says that value stocks have never looked more unloved in the 30- odd years that they have been managing money. In their view, this makes it imperative that TMPL investors keep faith with the strategy and it also means this is an attractive entry point for new investors. One important change, however, is a cut to TMPL’s dividend to a level that the RWC team believes will be more sustainable.
Companies: Temple Bar Investment Trust
FY20A results largely reflect a period prior to the Covid-19 lockdown, yet show Duke entering a more challenging FY21E with momentum. Yesterday's trading update demonstrated another notable rise in quarterly cash receipts for Q2/21, as royalty partner trading continues to improve. As some partners' forbearance measures will expire this month, Q3/21 receipts should continue this upwardly momentum. This opens the door to a return to cash dividends at some future point. Today, Duke also confirms it is now seeking new royalty partners, alongside follow-ons.
Companies: Duke Royalty
HSBC’s future should be clarified as soon as the US and China come back to the negotiation table. This will not happen before the US elections are over. In the meantime, HSBC will continue to be instrumentalised and its share price will remain under pressure.
Companies: HSBC Holdings Plc
Mercia’s FY20 results reflect continued progress, delivering on management’s three-year strategy. AUM climbed 58% to £0.8bn, while FUM rose 73% to £658m. Following the acquisition of the NVM VCT fund management business, the company is operationally profitable on a monthly basis, with annual revenues exceeding operating costs for the first time in FY20. Net assets rose 12% to £141.5m, with the direct investment portfolio stalled at £87.5m reflecting the impact of COVID-19 fair value adjustments and a £15.7m net investment. The group remains well-placed for a downturn with £30m of unrestricted balance sheet cash and £320m of group cash. Post period end the group exited The Native Antigen Company, with £5.2m in cash (8.4x return, 65% IRR) expected. Despite the group’s progress, Mercia’s shares continue to trade at a material discount to NAV (0.60x), even before considering the embedded value of the third-party fund management business (> 4.5p at 3% of AUM).
Companies: Mercia Asset Management Plc
L&G reported an operating profit from continuing divisions (excluding Mature Savings and General Insurance businesses) of £1,128m, -2.2% yoy. The COVID-19-related cost was £129m. LGR posted a growing operating profit to £721m. Net profit amounted to £290m vs. £874m a year before, being affected by the reduced discount rate used to calculate LGI reserves. The Solvency II ratio stood at 173%. The Board recommended an interim dividend of 4.93p/share, stable relative to H1 19.
Companies: Legal & General Group Plc
S4 Capital had an extraordinary week with strong interims and an impressive CMD accompanied by a further merger and topped off with winning its third Whopper. Interims were ahead of our expectations and we were particularly encouraged by LFL Gross Profit growth of +18% in July. The group announced the merger with Dare.Win, an award-winning digital creative agency which extends the geographical presence of MediaMonks to France. BMW and MINI consolidated its Pan-European account into a team led by MediaMonks, which is the third whopper account for S4 Capital, and notable in our view for being won in a pitch, rather than by land & expand, and being an automotive rather than technology client. The group held a three day CMD and our summary would be i) Day One demonstrated the compelling strategic logic and strict financial discipline underpinning the group ii) Day Two illustrated the already formidable partner/client list of S4 Capital, including Adobe, Amazon, Google and CAA and iii) Day Three highlighted the chemistry between the individual agencies brought together to form S4 Capital and the outstanding work that they produce. To reflect BMW and Dare.Win we raise our FY21 EPS forecast by +8% to 10.8p (was 10.0p) and continue to view 15p as a realistic target with further whoppers in prospect and the balance of the recent equity raise to deploy. On a 30x multiple, we raise our target price to 450p (was 375p) and retain our Buy recommendation.
Companies: S4 Capital Plc
Today's news & views, plus announcements from VOD, POLY, SMDS, BLND, BYG, WEIR, DC, SNR, SHI, INTU, IHR, CNC, ARE, INCE
Companies: INTU SHI INCE
The impressive full year 2019 results included some eye-catching numbers, including a record PBT of £40.1m (nearly 3x FY18 @ £14.3m), £620m of reserves acquired over 16 legacy deals, and $842m of (estimated) Contracted Premium in the Program business – on track to breach $1bn in FY20 as previously guided and $1.5bn-$2bn in 2022-2023.
Companies: Randall & Quilter Investment Holdings Ltd.
The COVID-19 pandemic has had a significant impact globally in many areas. While primarily a health issue, it has had wide-ranging implications for stock markets, which have now rallied after the plunge in share prices in mid-March when the full severity of the emerging pandemic became more widely appreciated. Nonetheless, the FTSE 100 Index remains almost 20% off its late February 2020 figure.
Companies: AVO ARBB ARIX CLIG DNL GDR ICGT NSF PCA PIN PXC PHP RECI STX SCE TRX SHED VTA YEW
Secular stagnation refers to the economic theory that growth will be persistently low for some time to come, due to an imbalance between savings and investment. If capital is saved rather than invested productive capacity lies idle, while the drag on consumption reduces demand in the economy. As a result GDP growth is reduced. As we have previously discussed, there is no historical evidence that GDP growth has a direct impact on stock market growth – in contradiction of the theorised linkage via earnings. However, in a world of secular stagnation in which there is a glut of savings, corporate earnings will be muted as demand for companies’ wares remains sluggish, which should negatively impact stock market growth. High rates of savings would also push equity valuations higher than they would otherwise be and thereby reduce future returns. Investors can respond to this situation in a number of ways. One is to try to find active strategies, which either seek to harness certain factors likely to boost returns or to generate high stockspecific alpha. In the first case this could mean looking to harness the small cap premium or to the emerging markets which should see greater earnings growth over the long run. It could also mean looking to the tech sector, where earnings are dependent more on secular changes within the economy than the growth rate of the economy. In the second case this would mean looking for highly active stock pickers who run concentrated portfolios and aim to pick the winning companies which can steal market share from competitors. We believe the investment trust universe is the perfect place to find such strategies, as the structure allows managers to focus on managing their strategy and not inflows and outflows, while being able to take exposure to relatively illiquid assets and harvest the premium for doing so. Another way of responding is to look for alternative assets which offer comparable or superior returns to the equity market as a whole. In our view, when we look at likely equity returns over the next ten years, some alternatives look compelling. In the below we sketch a rough idea of likely equity returns over the next decade and then introduce some trusts we think have the potential to generate similar returns from more predictable cash flows and potentially less volatile NAVs.
Companies: USF HICL NESF TRIG UKW NBLS
Activity was limited by housebuilding shutdown in H1 as a result of COVID. Sigma remained profitable and, with a strong balance sheet, has weathered the storm. With yesterday’s launch of the £1bn EQT London fund, a material step change is expected for the coming financial year. We reinstate forecasts; updating for EQT and revised expectations post-COVID. We revisit our valuation: a “sum of the parts” approach, assuming no additional AuM, implies an intrinsic value of 200p/share.
Companies: Sigma Capital Group Plc
Trident Royalties Plc (AIM: TRR) has, this morning, announced the acquisition of a 1.5% Net Smelter Royalty (NSR) over the resourcestage Lake Rebecca Gold Project located in the highly prospective Eastern Goldfields province in Western Australia. The royalty package is being acquired from a private seller for a total consideration of A$8.0 million (c. US$5.63 million), comprising of A$7.0 million in cash and A$1.0 million in new ordinary shares in Trident. The acquisition is Trident’s fifth overall and its third gold deal. As per strategic guidance the company is moving fast assembling a diversified portfolio with a paying cashflow stream from iron ore and copper production and several strategic gold royalties with the potential for near term revenues. The market is paying attention with TRR shares up 49.8% since its IPO on AIM in June this year. There is clearly more to come with c. US$7.5 million of uncommitted cash as well as the potential for debt funding and the ability to use equity as acquisition consideration. The Lake Rebecca Gold Project operated and wholly owned by Apollo Consolidated (ASX: AOP), is located 150km ENE of Kalgoorlie in the Eastern Goldfields Province of the Yilgarn Craton. The Project, envisaged as a simple open pit operation, is close to existing gold infrastructure namely Saracen Mineral Holdings Limited’s (ASX: SAR) Carosue Dam Operation whose processing plant is in the process of being upgraded to increase throughput to 3.2 Mtpa.
Companies: Trident Royalties Plc
Top decile total returns continue.
Financial results. The March 2020 NAV increased by 3% to 285p, continuing the company's strong NAV record since flotation in 2016 (compound growth rate of 16% or total return CAGR of 18%). Adjusted PBT rose by 10% to £2.41m, benefiting from last August's purchase of Concorde Park in Maidenhead, partly offset by higher irrecoverable service charge costs. The final dividend of 2p gives a total of 5.3p, 16% lower than 2018/19, reflecting the Board's decision to maintain liquidity.
Investment Portfolio. 99% of the £140m portfolio is invested in regional offices, with more than 50% by income and value in business parks close to Milton Keynes, Bristol and Maidenhead most notably. We believe that high quality, well located business parks are likely to outperform in terms of rental and capital values during the COVID pandemic as tenants focus on the combination of easier transport access and the well-being of their employees.
Robust rent collection. The company has collected almost 90% of its rent roll in respect of H1/20-21, 91% in Q1 and 87% in Q2. This positive data reflects the quality of both its portfolio and its diverse tenant base. The portfolio has been individually selected, based on asset location and letting prospects, and the company's strategy is to minimise voids by letting at economic rents with minimal tenant incentives.
Forecasts. H1/20-21 has been positive in terms of rent collection but we are withholding our PBT and DPS forecasts for now. Further positive rent collection following next Tuesday's Rent Quarter day will provide additional confidence for the current year. The statement refers to the target of reducing gearing by selling assets where significant value has been added – sales at close to Savills latest valuation will provide confidence in the robustness of the NAV.
Share Valuation. The shares are trading on a 48% discount to NAV yielding 3.6%. Regional REIT and Palace Capital are peer companies which focus primarily on regional offices and both have reported NAV falls in their most recent results, yet trade on lower NAV discounts (but with higher yields and greater liquidity). Circle shares look undervalued, trading just below their IPO price despite a near doubling of NAV since early 2016.
Companies: Circle Property Plc