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Northland Capital Partners View on the City: TXO Plc,Tower Resources, Union Jack Oil and Gas, Eland Oil & Gas and others

Northland Capital Partners View on the City: TXO Plc,Tower Resources, Union Jack Oil and Gas, Eland Oil & Gas and others

OIL & GAS : TXO  (LON:TXO)

ACQUIRES 30% IN MARKETING JV OIL TECH ROYALTIES 

  • TXO has acquired a 30% interest in a marketing JV named Oil Tech Royalties (OTR). Consideration for the deal is $74.25k.
  • OTR has secured the intellectual property rights for an oil technology that incorporates a proprietary acoustic flow reactor valve (RAP) capable of changing the aggregate state of heavy crude.
  • The JV has the right to commercially exploit the technology in the Middle East, the EEA, Switzerland and the Bahamas and is currently engaged in discussions with a major Middle Eastern state to install multiple valves.
  • The JV will commence with the acquisition of one RAP unit and has the right (but not the obligation) to purchase a further 19 units at cost. 
  • The first unit will be shipped to GBG for incorporation into the second and third phase development of a hydrocarbon recovery plant.

NORTHLAND UK VIEW: The RAP is expected to bring transportation savings, enhanced efficiency and lower emissions to heavy oils distribution. The ORS revenue model is expected to be based on sharing in the commercial cost savings from the use of RAP. Whilst initially a small deal, ORS looks to be a complementary low-cost bolt-on and offers a potential future income for TXO. 

 

OIL & GAS: TOWER RESOURCES (LON:TRP)

DRILLSHIP ARRIVES IN NAMIBIA

  • The Rowan Renaissance Drillship arrived in Walvis Bay, Namibia, yesterday.
  • The vessel will now undergo scheduled preparation and final testing by Repsol and is expected to commence operations on or around 11th April with spud of the Welwitschia-1 well expected on or around 11th April.
  • We have made a revision to our 2013 cash forecast to reflect the company’s recent statement on its cash balance (largely a factor of timing of capex commitments).

NORTHLAND UK VIEW: 2014 is all about the Welwitschia-1 well and shares have risen to within proximity of our price target range (5.6p-9.4p) on anticipation of the spud. The key Delta prospect is still high risk but with a GCOS of close to 40% is a very highly rated prospect with multiple potential pay zones. Despite Tower’s strong recent run, the well maintains potential to be a company maker. Conversely, whilst a negative result would not entirely destroy the company, a dry hole could remove the majority of value from the shares. 

 

TMT: SQS SOFTWARE (LON:SQS)

FINALS: GOOD PROGRESS ON OFFSHORING AND LARGER CONTRACTS

  • Revenue +7.5% to €225.8m, gross margin +80bps to 32.0%, Adj. PBT +34.5% to €12.4m and adj. EPS +25.0% to €0.30 – in line with consensus. Net debt reduced to €2.9m (FY12: €7.9m) and proposed dividend of €0.09 (FY12: €0.07).
  • Acquisition of majority stake of Thinksoft Global Services for up to €17.5m and associated placing to raise £11.4m (gross). Integration is progressing well and it will make a full contribution to FY14 (less minorities profit share). Acquisition has increased offshore resources (and thereby improve margins) but also expanded geographic presence and penetration of the Financial Services industry.
  • Revenue from Managed Services contracts increased 24.1% to €91.1m and now represents 41% of total revenue (FY12: 35%). Increased gross margin a function of increased test centre share of delivery and higher utilisation rates. Order intake of €112.5m (FY12: €101m). 
  • Average revenue per customer increased 23% reflecting strategic focus on larger clients. Fully loaded costs per fee earning consultant fell 7.1% to €90k reflecting a stronger staff mix towards test-centres and the benefit from weaker cost currencies (India and Egypt).

NORTHLAND UK VIEW:  The software testing market continues to grow faster than the rest of the IT services market at 7% and SQS’s revenue growth at 7.5% suggests it is taking some market share. The focus on larger customers and managed services increases revenue visibility and there is scope to drive margins. The acquisition of Thinksoft has increased SQS’s offshore resource but also expands its presence in the Financial Services industry. Thinksoft should also boost margins as it reported a 23% PBT margin in FY13 compared with SQS’s 5.5%. Shares have doubled on a 12 month basis but the rating of 15.6x FY14 EPS is not onerous.

 

MONTHLY SUMMARY – MARCH 2014

Optimism returns

Investors shrugged off the concerns that blighted January’s share price performance and pushed indices back into record territory. The developing situation in Ukraine initially did little to unnerve though there was some specific stock and currency weakness and the unpredictable situation could halt the bull run. The renminbi weakened substantially as the central bank intervened after steadily rising over 18 months. Bulls seized on comments by Janet Yellen that the tapering in monthly asset purchases would continue in measured steps. Data out of the US has been relatively weak of late but it is unclear how much is weather related. Either way, markets are assuming growth rates will improve and central banks will remain dovish. IPOS continued to garner headlines. AO World (LON:AO.) enjoyed a euphoric first of dealing that saw shares surge by as much as 44% to leave it trading on c. 110x FY15 EBITDA, a substantial premium to internet retail darling ASOS (LON:ASOS). The pace of IPO activity showed little sign of slowing, however, and there was also some substantial secondary selling including the founders of Plus500 (LON:PLUS) selling £100m of stock. Appetite looks sure to be tested with valuations appearing stretched on many measures.

Oil & Gas: The Ukrainian crisis has reversed recent oil price weakness driving Brent back up to $109/bbl. With no looming solution, the price could be sub-normal for some time. The EIA expects price to moderate to and an average of $105/bbl this year and $101/bbl in 2015 consistent with expected growth in global surplus. Overall, February was a quieter month, as we prime for results season. Eland Oil and Gas (LON:ELA) achieved long-awaited first oil from its Opuama field in Nigeria. This was a key milestone event that should help expedite development activities given the availability of debt finance. The month’s standout performer was Heritage Oil (LON:HOIL) that broke through 237p price target after a positive operational update and has gained 93% since our initiation last July. Union Jack Oil and Gas (LON:UJO) raised £650k to accelerate exploration of the shale oil and gas potential of its four existing licences as well as examining new onshore opportunities in the forthcoming 14th Onshore Licensing Round. Magnolia Petroleum (LON:MAGP) reported a number of high density wells it will participate in as we await a revised CPR that should provide a good indication of current production progress. 

MINING: The improvement in the performance of London listed mining and exploration companies see in January (44%) continued in February with 42% of companies’ share prices moving in to positive territory since the end of January. This is a substantial improvement on 2013 where only 20% of companies finished the year with higher share prices than at the start of the year. In February, we visited the Middle Orange River operations of Rockwell Diamond’s (TSE:RDI) and were impressed by the quality technical team on the ground. The visit emphasised the scale of Rockwell’s achievement in bringing online the Saxendrift Hill Complex and Niewejaarskraal Mines in nine months. Even more impressive was the “shoe string budget” that the Company used to build both the plants. Rockwell has achieved this impressive feat by recycling equipment from previous operations and using its considerable in-house engineering capabilities. The plants, despite the small construction cost, are by no means substandard and have already proven their quality with Saxendrift Hill generating an operating profit, while Niewejaarskraal is performing well during ramp up.

SUPPORT SERVICES: Holders Technology (LON:HDT) announced FY results from continuing operations that were in line with forecast with revenue +4.7% to £14.3m and a £0.1m PBT. The German PCB and LED businesses made good progress whilst the UK was tougher with contraction in the aerospace and defence sectors hitting PCBs while the LED business lost a major customer. The outlook is better with the benefits of a reorganisation coming through plus new products.

TMT: Anite (LON:AIE) confirmed press speculation that it was considering the disposal of its Travel division. The business does not sit comfortably with the Network and Wireless Testing businesses but management has focused on reaping the rewards from its heavy investment in the @com reservation system and there has been no pressing need to sell. Starcom (STAR.L, BUY*, PT 27p) announced the official launch of the award-winning WatchLock. Assa Abloy, the world’s largest lock maker, will now market the WatchLock under the Assa Abloy, Mul-T-Lock and Yale brands. This follows the successful £2m placing.

1. Northland Capital Partners Limited (“Northland”) acts as Nominated Advisor and/or Broker to the company.

2. Northland) and/or its affiliates companies do beneficially own 1% or more of any class of the issuer’s equity securities, as of the end of the month immediately preceding the date of issuance of the research report or the end of the second most recent month if the issue date is less than 10 calendar days after the end of the most recent month. 

3. The authoring analyst or any associate of the authoring analyst does maintain a long or short position in any of the issuer’s securities directly or through derivatives, including options or futures positions.

4. Northland, its affiliated companies, partners, officers, directors or any authoring analyst of Northland has provided services to the issuer for remuneration during the preceding 12 months other than investment advisory or trading services.

5. Northland or any of its affiliated companies has performed investment banking services for the issuer during the 12 months preceding the date of issuance of the report.  

6. A partner, director, officer, employee or agent of Northland or any of its affiliated companies is an officer, director, employee or advisor of the issuer.  Disclosures are applicable for all companies

7. The authoring analyst, or any associate of the authoring analyst, has viewed the material operations of the issuer. 

8. The authoring analyst, or any associate of the authoring analyst, received reimbursement for travel expenses.

9. Northland makes a market in the securities of this company.

 

 

DISCLAIMER

This document is provided solely to enable clients to make their own investment decisions. It may therefore not be suitable for all recipients and does not constitute a personal recommendation to invest. It does not constitute an offer or solicitation to buy or sell securities or instruments of any kind. If you have any doubts about the suitability of this service, you should seek advice from your investment adviser. This document is produced in accordance with UK laws and regulations. It is not intended for any person whose nationality or residential circumstances may render its receipt unlawful.

The past is not necessarily a guide to future performance. The value of shares and the income arising from them can fall as well as rise and investors may get back less than they originally invested. The information contained in this document has been obtained from sources which Northland Capital Partners Limited believes to be re¬li¬able. The Com¬pany does not warrant that such information is accurate or complete. All estimates and prospective figures quoted in this report are forecasts and not guaranteed. Opinions included in this report reflect the Company’s judgement at the date of publication and are subject to change without notice. If the investment(s) mentioned in this report are denominated in a currency different from the currency of the country in which the recipient is a resident, the recipient should be aware that fluctuations in exchange rates may have an adverse effect on the value of the investment(s). The listing requirements for securities listed on AIM or PLUS markets are less demanding, also trading in them may be less liquid than main markets.

Northland Capital Partners Limited and/or its officers, as¬sociated entities or clients may have a position, or other material interest, in any securities men¬tioned in this report. Northland Capital Partners Limited does not provide recommendations on securities of firms with which it has a corporate relationship. More information about our management of Conflicts of Interest, Investment Research Methodology & Definition of Recommendations can be found at www.northlandcp.co.uk 

Northland Capital Partners Limited is authorised and regulated by the Financial Conduct Authority and a Member of the London Stock Exchange.

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