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Northland Capital Partners View on the City Global Energy Development, Kirkland Lake Gold, Flybe Group and Aveva Group

Published: 08:22 26 Jan 2015 GMT

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Global Energy Development (LON:GED)*: Reserves downgrade   

Market Cap: £15.2m; Current Price: 42p; Target Price: Under Review

  • Reserves downgrade to reflect low oil price and Llanos sale
  • Group proved and probable reserves reduced from 101mmbbl to 24.3mmbbl. This comprises proved developed and undeveloped reserves that are reduced to 19.8mmbbl from 46.7mmbbl and Probable undeveloped reserves that are reduced to 4.6mmbbl from 54.4mmbbl.
  • This reflects the sale of the Llanos producing assets, the elimination of anticipated improvements in recoveries from the Catalina shale test and the lower oil price which will cause a write down in the Bocachico contract area that is currently considered sub-economic and will be impaired.

NORTHLAND CAPITAL PARTNERS VIEW: The downgrade should not be a surprise given the current low oil price. Our target price is under review to factor in the new oil price environment and pending an understanding of forward plans, however, we have no concerns about reiterating our BUY rating. The Llanos deal which was a c. 35% premium to our valuation of the assets brought in cash of $50m to c. £33m (with $7.9m to be used to pay down debt) almost double the current market cap, placing the company in a very strong position at this stage in the cycle. 

 

Flybe Group (LON:FLYB): 3Q Update

Market Cap: £195m; Current Price: 90p

  • Break-even at pre-tax for FY15
  • Passenger revenue reduced by 3.8% to £127m YoY despite an increase in passenger revenue per seat +2.4% to £50.23 and load factor improving by 550bps to 74.3%. Group costs were -7.4% YoY to £134m. 
  • 4Q15 forward bookings ahead of prior year; seat capacity +14% to c. 2.6m seats; number of seats sold as at 20 Jan 2015 was +2% to 36% YoY and passenger revenue per seat -3%. Management expects to achieve breakeven at pre-tax level for FY15, prior to the cost of the E195’s (Project Blackbird, c. £26m) and impact of the USD loan revaluation.  
  • NORTHLAND CAPITAL PARTNERS VIEW: The 3Q15 shows core UK business making progress where load factor and passenger revenue per seat has improved YoY. Furthermore, investors will find operating from a lower cost base and exiting the loss making Finland JV encouraging. Finally, new code share agreements and the recent news on the MRO contract with Airbus bodes well for future business. However the exit timing of Project Blackbird (E195’s) which is costing the business c. £26m a year could be a drag on the share price over the near term.   

  • Aveva (LON:AVV) – Q3 IMS
  • Market Cap: £894m; Current Price: 1399p
  • Lower oil price impacting Enterprise Solutions
  • Trading in Engineering and Design Systems (EDS) division broadly in line with expectations. Recurring revenue on track with the revised plan with a number of rental renewals completed at similar levels to last year. In Enterprise Solutions, some customer contract wins but backdrop more challenging due to budget constraints among Owner Operator customers in the Oil and Gas industry.
  • Increased uncertainty and reduced visibility in the Oil & Gas market, which accounts for c. 45% of revenue. This has been exaggerated with the recent decline in the oil price. Trends in other end markets persist – steady growth in Power and Marine subdued.
  • On track with H2 cost efficiency programme.
  • Acquisition of 8over8 in January (£26.0m in cash) has extended Aveva’s capabilities into operations through enabling customers to manage the impact of changes on their project costs and scheduling. Integration progressing well.
  • Net cash of £120m at December 31st.

NORTHLAND CAPITAL PARTNERS VIEW: Unsurprisingly subdued Q3 IMS given that the Oil & Gas market accounts for c. 45% of revenue. Engineering & Design continues to perform in line (expectations reduced at the interims in November) with the boost from AVEVA Everything3D as customers continue to migrate over. Enterprise Solutions continues to struggle to make headway with the lower oil price impacting Owner Operators’ spending plans. Aveva remains well capitalised to ride out the current environment and take advantage of consolidation opportunities. Q4 remains critical to the FY performance and risks to the revenue line look most likely to the downside. Shares trading on 19.4x FY15 and 18.1x FY16 consensus forecasts.  

 

Kirkland Lake Gold Inc. (LON:KGI): Directorate change

Market Cap: £187m; Current Price: 250p

  • Eric Sprott to become Chairman
  • Kirkland Lake Gold Inc. has appointed Eric Sprott as Chairman.
  • Once regulatory approval has been received Harry Dobson will retire as Chairman.
  • Mr Sprott holds around 11.3% (8,143,466 shares) in Kirkland Lake and a $1,550,000 convertible debenture.

NORTHLAND CAPITAL PARTNERS VIEW: Eric Sprott becoming Chairman is massive appointment for Kirkland Lake Gold. Mr Sprott is largely considered to be one of the world’s top precious metals investors and he is widely respected in the industry. He founded both Sprott Securities (now Cormak Securities Inc.) and also Sprott Asset Management. An acquisition could potentially be on the cards for Kirkland Lake with the CEO, Mr George Ogilvie, mentioning diversification within and outside the Kirkland Lake Camp in his closing remarks. With Mr Sprott’s experience and connections, he is likely to prove to be an important asset to the Company as it grows both organically and through potential acquisitions.

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