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Broker Roundup: Afren, Ophir, Rockhopper, Cove Energy, Chariot Oil, Severn Trent, United Utilities, Vodafone, Desire Petroleum, Stellar Diamonds, Synchronica
Royal Bank of Scotland morning provided an upbeat assessment of the oil and gas exploration sector after last week’s big sell-off. And it marked out Afren (LON:AFR), Faroe Petroleum (LON:FPM), Ophir Energy (LON:OPHR), Rockhopper Exploration (LON:RKH) and Valiant Petroleum (LON:VPP) as its top E&P picks.
Around 17 per cent was wiped off the value of the stocks RBS follows, which was unwarranted, according to analysts Phil Corbett and James Gardiner. “We see many of the moves as irrational given Brent oil prices remain above US$100 a barrel and, on the whole, balance sheets are in a more robust shape than they were in 2008,” they said in a note to clients this morning.
“Historical evidence suggests the E&Ps could bounce sharply if the market stabilises. However, if a ‘risk off’ mentality persists, investors may be more discerning on the upside case for E&Ps.”
RBS has also begun following Chariot Oil & Gas (LON:CHAR), Cove Energy (LON:COV), Encore Oil & Gas (LON:EO), Enquest (LON:ENQ) and Heritage Oil (LON:HOIL) with ‘hold’ recommendations.
In the shake-up RBS has pegged back the valuations of Afren (LON:AFR)(down 45p to 200p) Bowleven (LON:BLVN) (250p from 400p), Tullow Oil (LON:TLW) goes (1,375p from 1,525p) and Gulfsands (LON:GPX), which is nudged to 280 p from 400 p. However all of them remain on the RBS ‘buy’ list.
Igas (LON:IGAS) – target price 125p – and President Petroleum (LON:PPC) – target 42p – make up the remainder of the buys. One omission form the coverage is one of the market’s most heavily traded E&P stocks – Gulf Keystone Petroleum (LON:GKP) – which doesn’t rate a mention.
Elsewhere, in the utilities sector, Goldman Sachs analyst Fred Barasi is worried about valuations.
United Utilities (LON:UU.), Severn Trent (LON:SVT) and, to a lesser extent, Pennon (LON:PNN) have been among the best performing European utilities in the last month, with share prices broadly flat against an average fall of 9 per cent.
According to Barasi, following their outperformance versus European peers, the three UK utilities are trading at a significant premium to historical multiples, with all of them trading at a hefty 50-60 per cent price-earnings premium to the sector average.
On a sector-relative basis, the broker sees average upside potential of only around 15 per cent for the three water companies, compared to an average potential upside for the wider sector of 34 per cent. That discrepancy, coupled with their recent heavy outperformance has led Goldman to downgrade the shares of United Utilities, Severn Trent and Pennon to ‘sell’ from ‘neutral’.
After late July’s £2.8 billion dividend windfall from Verizon Wireless, Vodafone (LON:VOD) could see dividends from its subsidiary increase significantly over the next few years, according to JP Morgan.
Having conducted an analysis of Vodafone’s joint venture partner Verizon’s own cash flows, JP Morgan believes there will be pressure on its Verizon Wireless subsidiary to increase its dividend. The investment bank forecasts that Verizon’s fixed-line cash flows will be US$2.5 billion in 2011, but the current dividend paid by the parent company is US$5.5 billion.
Consequently, the bank said that since Verizon’s management is reluctant to allow the Verizon Wireless subsidiary to build up a cash balance “we see scope... to grow [Verizon Wireless’s] dividend from US$10 billion to US$18 billion medium term”.
City analysts have mixed views on South African miner Harmony Gold (JSE:HARJ) as its fourth quarter results missed the market’s consensus estimates. With a bearish view Morgan Stanley analyst Simon Kendal, whorates the stock as ‘underweight’, cut his earnings per shareforecasts for 2012 and 2013 by 24 and 20 percent respectively because of the ‘ratcheting up’ of Harmony’s costs.
“Harmony had guided unit costs would be up, but we find the magnitude disappointing,” Kendal said. He added: “We have been expecting evidence of operating inflection (volume, grade, unit cash cost) since mid-2010, but have so far only seen isolated evidence.”
Meanwhile Kane Slutzkin, analyst at UBS, still sees Harmony as a ‘buy’ although he too had to cut his forecasts for the future. “Harmony reported fourth quarter earnings below both UBS estimates and market consensus,” Slutzkin highlighted in a note to clients. “Production was in line with our estimates and prior guidance while costs, were higher than we had forecasted. We cut FY12 earnings by 4.3 per cent on the back of higher costs.”
However unlike Morgan Stanley’s Kendal, the UBS analyst stressed that Harmony’s growth mines are now gathering momentum. Slutzkin also emphasised that a future improvement in gold grades would be a key catalyst for the shares.
There are still many challenges facing Desire Petroleum (LON:DES) and the stock's 20 per cent rally is not justified, according to analysts at Evolution Securities. The stock was buoyed on Monday by news from fellow Falkland explorer Rockhopper Exploration (LON:RKH), which revealed that the Sea Lion oil discovery was much larger than it previously thought.
Specifically for Desire the seismic interpretation has positive implications because, according to Rockhopper, the SLMC extends into licence PL004 which is 92.5 per cent owned by Desire (Rockhopper own the other 7.5 per cent). In a subsequent statement today Desire said that while this is good news for the company it has yet to assess the seismic data itself.
Investors in Rockhopper’s downtrodden partner cheered the news and Desire shares have gained more than 20 per cent since yesterday. However Evo’s Keith Morris doesn’t share the market’s sentiments. “Yesterday’s rebound in DES’s share price is not justified by any significant change in the technical case for DES’s acreage valuation,” Morris said in a note to clients.
“We see no rationale for a change in valuation on the back of the possibility (no stronger than that) that Sea Lion extends into DES’s acreage. There is no prospect of drilling until 2012 at the earliest and there remains questions as to Desire’s ability to fund further exploration.”
Stellar Diamonds (LON:STEL), the diamond miner focused on West Africa, pleased analysts after it announced today it has begun resource drilling at its high-grade Tongo kimberlite diamond project in eastern Sierra Leone. The company says in a statement that it expects the 6,000 metre diamond core drilling programme will help define a maiden inferred resource estimate to at least 200m below surface.
Bulk sampling has already yielded 926 carats for an undiluted grade of 115 carats per hundred tonnes (cpht), with potential in-situ kimberlite value estimated at up to $220 per tonne. Northland analyst Andrew McGeary hailed the “encouraging consistency in the Tongo programme”, adding that diamond quality from the project “remains high”.
McGeary says the good newsflow on Tongo grades continues to support project development, although the resulting, positive implications for the company are not being reflected by the shareprice, which has experienced significant weakness recently. The recent appointment of consultant CAE Mining to oversee resource drilling and bulk sampling programmes to independently establish a maiden inferred resource statement estimate for Tongo presents “a major future catalyst”, says the analyst.
Ahead of that statement, McGeary expects a scoping study to be produced, for at least the management’s consumption, which should enhance confidence in the project.
McGeary, who rates Stellar shares a ‘buy’, adds: “Whilst the weak share price reflects a difficult market for small cap miners we continue to see substantial value potential in the company’s operations, with potentially two marque projects in Tongo and Droujba moving towards JORC status in the first quarter of 2012, and with significant confidence to be gained from on-going exploration.”
Over at housebroker Daniel Stewart, meanwhile, analyst Shamim Mansoor also presented an upbeat assessment of Stellar’s prospects. The company’s statement today, she says, indicates “all systems are go” with the Tongo project and augurs well for the group’s prospects. Daniel Stewart rates the shares a ‘buy’ with a target price of 15 pence, which is nearly 150% above the current price of the stock.
Google’s US$12.5 billion acquisition of mobile phone maker Motorola Mobility Holdings should have a “slightly positive” impact on next-generation messaging technology firm Synchronica (LON:SYNC,TSE:SYN), according to the firm’s house broker Northland Capital Partners.
“The move by Google is a direct challenge to Apple for a comprehensive smart phone offering... but it also has ramifications for Nokia and Microsoft that are trying to stem declines,” said Northland in a research note today. “The deal is likely to increase the pressure on Nokia to differentiate and this may mean more development work for Synchronica.”
The broker argued that there also exist obvious ramifications for other handset manufacturers who use Android and who will want to differentiate their offerings, possibly pushing up demand for Synchronica’s Mobile Gateway platform. Meanwhile, the broker added: “There is also potential from a carrier point of view. Carriers have suffered from the success of the iPhone being turned into a dumb pipe. A second integrated play would increase the pressure for differentiated carrier service. Synchronica offers this.”
