Only registred members can create thier own customized alerts.
Trader Talk is produced by a team of active traders, analysts and various derivatives professionals from multiple organisations. Trader Talk provides comment on equities, commodities, and other financial instruments based on both technical and fundamental analysis.
Growth pumping at Afren
The failure of Greek politicians to agree on the formation of a new government weighed heavily on the demand for risk assets, with equity and commodity prices falling across the board.
Greece’s decision to call a second anti-austerity election has taken the country one step closer towards a hazardous exit from the Eurozone, sending the single currency to a four-month low against the dollar, the FTSE 100 to its lowest level since December 2011 and copper to a four month low.
Spanish and Italian bourses also suffered as fears of contagion from Greece reverberated around the region, with the Spanish 10-year yield climbing to 6.46% and the spread over the German bund extending to record levels.
The overall negativity was tempered to some degree by tentative signs of resilience in the German and US economies. European powerhouse Germany saw its economy expand in the first quarter of 2012, at a robust pace of 0.5%, helping the Eurozone as a whole avoid falling into a technical recession.
The 17-nation single currency area showed zero growth in the first three months of the year, above analysts’ consensus forecasts of a 0.2% fall in output, following a 0.3% contraction in the final quarter of 2011.
In the US, the Empire State index of manufacturing activity in the New York region expanded more than forecast in May. The index increased to 17.1 this month from 6.6 in April, ahead of analysts’ forecasts of a rise to 9, as auto sales grew at the fastest pace in four years. Industrial production also jumped 1.1%, the strongest monthly gain in more than a year in April and nearly twice the pace expected by economists.
Meanwhile confidence among US homebuilders jumped more than expected in May, reaching a five-year high that signals an improving outlook for construction. The National Association of Home Builders rose to 29, the highest level since May 2007, although a reading below 50 indicates negative sentiment towards the housing market. Housing starts also increased 2.6% to an annual rate of 717,000 in April, above consensus expectations.
On the domestic front, UK unemployment fell by 45,000 to 2.63 million in the first three months of the year, raising hopes that Britain’s recession-hit economy is on the mend.
Technical analysis highlights the downward trend evident during recent months, with the FTSE 100 falling over 600 points. Major historical support at 5400 is now under threat and a close below this level could trigger further weakness towards the 2011 lows of 5100. The oscillators are, however, acutely oversold, illustrating the propensity for short-term aggressive moves higher.
In conclusion, markets continue to oscillate around different economic developments. Whilst in general the underlying global data is improving, the on-going Eurozone debacle continues to impact confidence impeding progress.
Markets hate uncertainty and Greece potentially exiting the Eurozone is unprecedented, causing wide-spread risk aversion among investors. Despite the improving global trends, the near-term outlook is largely in the hands of European policymakers that have the ability to reduce the contagion risk and create a firewall around Greece, shifting the Greek situation from a debt-crisis into a country-specific crisis, facilitating a smooth exit from the region.
Weak commodity prices have pushed related equities lower, with the 15% decline in Brent Crude Oil over the past few months weighing heavily on the sector. A related equity I have been monitoring is Afren (Epic: AFR), a leading independent exploration and production company.
Afren first floated on AIM in 2005, raising £8 million, which it used to buy its first asset, a 4.4% stake in an offshore exploration block just off the coast of Nigeria. The area accounts for about 20% of US oil imports - more than Saudi Arabia and has since become Afren’s real engine for growth, with over $1 billion in revenue forecast this year. Other strategic acquisitions in Kurdistan, combined with new frontiers in East Africa, where only 500 wells have been drilled compared to more than 20,000 in West Africa, could be transformational.
An interim management statement on 15th May revealed first quarter production has been in line with expectations, over four times higher than the previous year, significantly lifting revenue and profit. Pre-tax profit rose to $143.2 million from $2 million a year earlier, with revenues up to $386.7 million from $73.4 million.
Net production in the first quarter rose to 41,308 barrels of oil equivalent a day generating $300.2 million of net operating cash flow, helping the company end the first quarter with $399 million cash compared to $333 million a year earlier.
The outlook also looks strong with significant discoveries at the Okoro East, Ebok North fault block and Ain Sifni, targeting production in line with previous guidance at 42,000 barrels of oil equivalent a day. Its geographical exposure comes with higher risks associated, but trading on 5.1x earnings the company looks undervalued given its exploration portfolio.
The above chart of Afren illustrates the growth experienced over the past three years, although recent market weakness has triggered a 25% correction since April. The shares are now within close proximity of historical support at 110p, which combined with the oscillators starting to rise out of oversold territory could indicate an interesting buying level for medium-term growth.
At the time of writing the share price is 109p, with near term targets are seen at 115.5p, 123.1p and 147p and a stop-loss at 103.5p.
This report was written by Mark Allen – Head of Derivatives at Simple Investments Stockbrokers. The writer does not hold a position in Afren, but client accounts may. The material in this report has come from Simply Charts and Afren’s corporate website.
This report was written by Mark Allen – Head of Derivatives at Simple Investments Stockbrokers. The writer does not hold a position in Afren, but client accounts may. The material in this report has come from Simply Charts and Afren’s corporate website.
