Regular readers of my pieces will have come to know that contrarianism and value is at the very heart of how we operate our Titan funds. During our first year of operation, as can be seen from the returns below (YTD 2014), this has served us exceptionally well (statutory disclaimer: past performance is not necessarily a guide to the future).
Returns are before the application of Titan’s fees.
The thing with contrarianism and value investing however is that by its very nature, you are positioning AGAINST conventional “wisdom” and the herd. This is a lonely place to be and requires a few things – discipline with regards to position sizing, patience and conviction.
For much of the latter half of 2013 I was mouth agog at the market’s beating of copper miner Kazakhmys and indeed wrote a couple of pieces rather cheekily asking whether we were in a parallel universe (hence the blog title), see HERE & HERE. At the time, the stock price was trading around 190p. The final floor was just under 170p a few weeks after these pieces and within a few short months the stock then rallied to hit over 300p as we can see in the chart below. Lessons? Analysts as a group, as we have opined at length here before, are about as much use as a chocolate teapot and nobody ever rings a bell at the top or the bottom.
Kazakhmys YTD chart
In setting the scene here, we are now seeing immense value in many of the oil E&P stocks at present. Our favoured picks being Ophir Energy, Providence Resources, Bowleven and of course, Gulfsands Petroleum – the latter which was covered extensively HERE.
Usual disclaimer that we are “talking our own book here” (in the parlance), that being that patently, as we see value in the aforementioned stocks, we hold positions in them – ask yourself how many of these CFD trading advisory firms populated by twentysomething inexperienced, lowly qualified characters will put their money where their mouth’s are when urging you to buy their “idea of the day?” Not only do we “talk the talk” but we “walk the walk” here at Titan.
We start with this table here from Edison (I know, I know paid for research and so treat with a truck of salt). What I like about this table though is that it has very limited analyst inference with regards to perceived value (or otherwise). What I mean is that the table is a simple arithmetic breakdown of Bowleven stock on a per share basis where the base calculation input is a non-malleable number, that being the $241m (adjusted for the $9m payment to Petrofac to extricate itself from the former Strategic Alliance with them) of cold hard cash that will very likely be winging its way after the vote on the deal next week.
DCF calculations are generally about as believable as Tony Blair recounting his justification for involvement in the Iraq war given the expectation inputs in most of the cash flows but, as relayed above, the beauty of this dataset is that the primary figure (the $241m) makes up almost the whole of the “core NAV” and this cannot be disputed and requires no discretionary assumptions by our friend the “anal”ysts!
However I stare at the table, I simply cannot square the current stock price with even the most bearish assumptions; that being an oil price nearly halving and a discount rate towards the upper end of the extremes applied in the model. Even under such assumptions the supposed value is circa near 40% above the current stock price. My personal belief is that an oil price of $80-100 b/bl and a discount rate of 15% is appropriate. This results in a deemed price of 72p.
As with CYNK Technology (see my piece HERE) the market is, the vast majority of the time, anything but “efficient” and “rational”. I would proffer the view in relation to Bowleven, that the market is, due to the profound disappointments delivered by Kevin Hart and his board of merry men in recent years, applying an excessive discount to BLVN shares now. A discount that we believe will narrow as the months progress and commercialisation of Etinde continues apace. For cash rich players like Ophir, this discount has likely not gone unnoticed and so we see 10-15% downside in the stock and possibly 100-200% upside over the next few years. That, to us, is a good value orientated, contrarian play. Indeed one which displays a cracking risk/reward profile that you will not find in many other areas of the marketplace today.
A rather youthful looking Mr Hart
The final icing on the cake for shareholders would be if Kevin Hart did the decent thing and stepped down from his role to make way for new blood, new blood that would indeed be heavily incentivised given the clear value gap that is there for the closing.
Now this really is a perplexing one. On the one hand we have a reverse situation to the usual one that attracts me to a stock. Namely that I look for our friends the “anal”ysts being near universally bearish in unison with a good asset backing. In PVR’s case we have the peculiar situation of those analysts that follow the company closely putting out price targets of near 7-8 times the current share price. Not what I usually like to see. However, in PVR’s case there is one particular reason for this disjoint. That reason is Mr Tony O’Reilly, formerly Ireland’s first billionaire and now near bankrupt after the financial crisis of 2008/09 laid his debt piled empire low.
“Sir” Tony O’Reilly
Mr O’Reilly in fact owes his creditors some 195m euro’s – not an insignificant sum and it is AIB (ironically that were themselves bailed out in the crisis by the Irish taxpayer) that is being particularly aggressive, winning an enforcement order for just over 22m euro’s only weeks ago. Suspicions are that AIB will look to sell this stock (16% of the co) into the market although as yet there is no evidence of that. Once active seller has been JP Morgan and this goes some way to explain the decimation in the stock price which is down over 50% YTD and the chart below relays so succinctly…
Providence Resource YTD chart with volume
So, aside from a forced seller, what does PVR actually have and why do the likes of Liberum Capital believe the stock worth upwards of £8 a share?
PVR’s primary asset is an oil field offshore of the south of Ireland called Barryroe in which it has an 80% interest and is said to hold upto 2bn barrels of oil. The group also has interests with varying degrees of operator ownership in other fields around the UK as the map below illustrates.
Providence Resources areas of operations
One broker even went as far as valuing Providence’s portfolio of assets at over £30 a share with the Barryroe field accounting for £10 of this. You have not, I would add, read these figures wrong. “Anal”ysts usually are wrong but generally, collectively, certainly when it comes to NAV based plays, they are not THAT far out in their calculations of asset worth relative to current market valuations.
Here’s BMO’s valuation of the component fields EXCLUDING Barryroe:
It is delays in the farmout process of Barryroe that is also weighing heavily on the stock price. The market is reasoning that the longer this goes on the less likelihood there is of the company receiving fair value for the assets. We have some sympathy with this rationalisation. However, it is the degree of discount and dilution that the market believes that PVR shareholders will have to swallow that we take issue with.
If we assume the farm down to 40% does actually occur then this still leaves value of multiples of the stock price for shareholders and gives the company cash to finance out their drilling program later this year and into 2015. If I were sat at the helm of an oil major flush with cash, as with BLVN, I’d be looking at the PVR situation very closely and bidding AIB for the lump of stock it is holding as collateral for Mr O’Reilly’s loans. That would provide a very useful platform for a bid for the balance.
Here’s what BMO Capital Markets had to say about the situation just recently – “Based on 2P reserves, a start-up in FY19, capex of US$15/bbl and opex of US$14/bbl (which we accept is indicative given the lack of a development plan) we estimate Providence’s 80% interest in Barryroe could be worth 2,626p/sh (NPV10). Of course this assumes Providence is fully funded, and we would also not expect the market to give full credit for the development at this stage, but it does however highlight the material disconnect between the market’s valuation and Barryroe’s potential.”
From a pure sentiment basis, there seems to be little in the way of speculative money in the stock too with a continued institutional seller providing liquidity for the few buyers. We have been personally buying into this in recent weeks and learnt many years ago that where an asymmetric risk/reward profile is in place that you should be thankful for the liquidity that a seller provides as it allows you to get a lump of stock on board. It looks like JP Morgan are down to the last couple of million of shares left to go now and if and when this stock overhang is cleared, any news on the farmout could propel the stock price £1-2 higher in our opinion (big disclaimer: remember we are talking our book!).
One final thought, reflect upon the comment around 12 months ago that ONGC (Oil & Natural Gas Corp) of India were rumoured to have been prepared to bid upto 1.1bn euros for the company. That equates to £17 a share. At the current stock price of 122p we’re in.
ADDITIONAL CLEAR DISCLOSURE – RICHARD JENNINGS (THE WRITER) AND TITAN FUNDS ARE LONG THE STOCKS MENTIONED HERE.
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