Energy & Materials Sector

• The New and Better (5mos old) A-H Premium Tracker has tables, charts, measures galore to track A/H premium positioning, southbound and northbound positioning/volatility in pairs over time, etc.
• SOUTHBOUND flows flat/light and NORTHBOUND flows a significant net buy, respectively, but liquid Hs with H/A pairs OUT-perform As on average by 200+bp.
• STILL time to go long Hs vs As for the new year. 52wk wide discounts were just last week. Wide A/H premia in renewables space look vulnerable.

• Anhui Conch Cement (914 HK) is trading at a historical low forward P/B of 0.5x, compared to an average of 1.2x for the last decade. 
• In the long term, China cement will likely see much lower volume and lower cement prices in the short term, but eventually rising cement prices due to better supply picture. 
• As the lowest cost producer, Anhui Conch stands a very good chance to win out in the long term and potentially more than double its current market share. 

• Global growth stocks that have significantly outperformed since the October 2023 lows are starting to pull back, and we believe a continued pause/pullback is likely in these growth areas.
• Meanwhile, we are seeing a clear shift into value and defensives, and we recommend adding exposure to these areas. This type of Sector rotation is common during bull markets.
• Major supports continue to hold, including $98-99 on MSCI ACWI (ACWI-US), 4600 on the S&P 500, 4400 on the EURO STOXX 50, and 2300 on the TOPIX

• The clouds of recession and economic slowdown loom over the horizon, casting a bearish shadow on commodity markets.
• Yet, despite many reasons for pessimism, commodity prices have begun to show signs of resilience last week.
• Even though a sustained long-term rally remains uncertain, the current environment seems ripe for a short-term bounce or mean reversion.

• Saudi Aramco and its Chinese partner Rongsheng Petrochemical Co. Ltd. have agreed to deepen their tie-up further by taking a stake in each other’s subsidiaries.
• China’s privately controlled refiner Rongsheng said it signed a memorandum of understanding with Aramco to buy a 50% stake in the Saudi company’s refining unit Saudi Aramco Jubail Refinery Company (SASREF).
• At the same time, Rongsheng plans to sell up to 50% stake in its unit Ningbo Zhongjin Petrochemical Co to Aramco, the world’s biggest oil producer, according to Rongsheng’s filing with the Shenzhen stock exchange on Tuesday.

• We doubt if PetroChina (857 HK) can sustain good performance in 2024. On historical patterns, it has never sustained as one of HSI’s best-performing stocks for two consecutive years. 
• Consensus growth forecasts of 4.4% and 4.3% for FY24-25 are likely wrong as this means FY25 will be the 5th straight year of growth. PetroChina does not behave like that. 
• Crude oil price has got back to the end-2022 level, but PetroChina’s share price is still 50% higher. A return to their high correlation before 2023 will lead to underperformance. 

Following our short update on the La Colorada Skarn preliminary economic assessment (PEA), we are revising our valuation of Pan American Silver (PAAS) to incorporate the Skarn’s risked NPV. We have also reflected up-to-date commodity prices and lower WACC thanks to the reduction in bond yields. Overall, our valuation of PAAS increases from US$22.7 to US$23.5/share. While the stock has recently been propped up by the strong gold price, we see the upcoming publication of the FY24 outlook and FY23 results as potential additional catalysts for the shares.

• Allkem Ltd (AKE AU) saw its last day of trading on 21 December. There was large volume at the close as one major index provider gave it the boot. 
• Another delayed their treatment at the last minute, and eliminated a cross-flow.
• But there is still a lot of net buy flow tomorrow (3 Jan) and the next day in the US. Perhaps more than I expected. 

• Happy new year guys – another chapter has arrived and it’s time to make the best out of it.
• First of all, let’s look at the past, the now and the costly mistakes we made during the past year.
• Soft commodities dominated the commodity front during 2023.

• Oil prices surge as tensions in the Red Sea escalate with new and strong provocations from Iran.
• Oil oversupply concerns and weak demand persist while ongoing geopolitical tensions support oil prices.
• WTI current implied volatilities still well below elevated levels seen in October 2023.

• SDRL ended 2023 with a contract that is poised to set the course for day rates moving higher in 2024. Prior to Christmas, SDRL announced two new contracts with PBR
• We estimate one of the contracts has a day rate of $500,000 and should result in other bidding activity to reach and eventually exceed this level in 2024
• We are not making changes to our earnings model and believe there is now greater potential for our estimates having to be revised higher

Following an extensive drilling campaign, on 14 December, Alkane announced an update to its Boda mineral resource estimate to include Boda Two and Three, as expected in Q423. The result of the update was a 30% increase in the gold grade and a 22% (or 1.17Moz) increase in contained gold at Boda, which we value at US$28.2m (4.7 US cents or 7.0 Australian cents per share). The Boda deposit remains open at depth and along strike and a subsequent resource update at Kaiser is anticipated in late Q1 CY24 as well as a conceptual mine plan at the combined Kaiser-Boda deposit in due course.

• On 29 December, Ecopro Group announced large selling of Ecopro Co Ltd (086520 KS) and Ecopro BM (247540 KS) by Daisy Partners worth 272 billion won in December.
• Daisy Partners is a company 100% owned by Chairman of Ecopro Group Lee Dong-Chae and his family members.
• Daisy Partners is likely to sell more shares in Ecopro Co and Ecopro BM in the next several years to increase the foundation’s capital to about 500 billion won.

• Happy New Year everybody and welcome to this year’s first edition of the Energy Cable.
• Crude oil prices started rallying into and over the Christmas holiday period with focus on the Houthis’ attacks on vessels in the Red Sea which prompted us to have a look at the numbers.
• The developments over the weekend have increased tensions, and we are eagerly awaiting the initial price action of the year to see how nervous the market is.

• The discounts to NAV of covered holdcos have mainly widened during December. Discounts to NAV: C.F.Alba, 49.1% (vs. 47.1%); GBL, 36.6% (vs. 34.9%); Heineken Holding, 16.7% (vs. 14.5%);
• Industrivärden C, 5.4% (vs.4.9%); Investor B, 13.5% (vs. 14.6%); Porsche Automobile Holding, 37.1% (vs. 39.9%).  The spread of Rio DLC widened to 24.2% (vs.17.2%).
• What seems interesting: in holding trades, Porsche SE/vs. listed assets and the Rio DLC: long RIO LN/short RIO AU.

• What you need to know: • ADF reported stellar Q3 financials that largely beat our estimates. • Revenue came in at $82.1M (+26% YoY) vs. our estimate of $73.0M and EBITDA came in at $17.8M (+146% YoY) vs. our estimate of $7.7M.
• This morning, ADF Group (DRX:TSX, ADFJF:OTC) reported Q3/24 financial results that largely beat our estimates across the board.

• • The Anshof-2 well encountered high quality Eocene sands with at least 12 metres vertical thickness and porosity of ~20%. • The top of the Eocene sand was encountered ~40-50 m higher than expected, suggesting a much larger and flatter structure than expected in the P50 case. • The better-than-expected reservoir quality and thicker sands suggest better well deliverability and higher flow rates, which result in a higher production plateau and lower development cost with a positive impact on NPV.

• • ADX has farmed out a 50% interest in an exploration area with in the ADX AT I licence to MND in return for a A$0.73 mm back costs payment plus A$7.34 mm funding in exploration drilling. • The exploration area farmed-out to MND includes the LICHT and IRR gas prospects. • The LICHT prospect location (16.2 bcf gross best case prospective resources) has already received a drilling permit including the environmental clearance.

• • The transaction consists of two tranches.
• Energean will initially acquire 45% and 37.5% interests in the Lixus and Rissana licences respectively for US$10 mm on closing plus US$15 mm on FID.
• Energean will also fund US$85 mm of gross costs including drilling the Anchois East well and up to US$7 mm seismic at Rissana.

• This is our first report on oil and gas behemoth, Coterra Energy.
• The average daily production volumes in the second quarter amounted to 665 thousand barrels of oil equivalent.
• In contrast, the average daily oil production reached a significant high of 95.8 thousand barrels daily, marking a significant milestone for Coterra.

• • Criterium has signed a letter of intent to sell its 42.5% interest in Bulu for US$7.75 mm. • The company acquired the interest in Bulu for US$1.6 mm. • Criterium has previously announced a C$18.9 mm capital raise comprising a C$12.2 mm (~US$9 mm) convertible debt and C$6.7 mm (~US$4.5 mm) of new equity.

• • The completion payment by Criterium on the closing of the Mont d’Or acquisition has been reduced by 60% to US$4.5 mm. • Only US$4.1 mm will now be repaid to Mont d’Or debt holders on completing the acquisition (US$9.6 mm previously) with US$0.5 mm being written down (US$4.3 mm previously). • On completion of the acquisition, Criterium is expected to hold US$25 mm of debt and US$8 mm in cash (including US$4.5 mm of new equity) resulting in US$17 mm in net debt (excluding US$3.0 mm of Mont d’Or residual debt to be converted into equity in 2025).

• Devon Energy Corporation delivered mixed results for the previous quarter, with revenues well below analyst expectations but managed earnings beat.
• Their disciplined capital management during the quarter maintained reinvestment rates above 50% of cash flow, doubling free cash flow compared to the previous quarter.
• We have added reasonable forecasts of the annualized income statement and cash flows and carried out a DCF valuation of the company using its Weighted Average Cost of Capital (WACC) to determine a forecasted share price.

• Eastman Chemical delivered a mixed set of results for the previous quarter, with revenues well below analyst expectations but managed earnings beat.
• The primary contributor to the decline in earnings this year was attributed to volume and mix, resulting in a variable margin decrease of approximately $450 million.
• Eastman’s management is cautiously optimistic about market stability, particularly in non-discretionary sectors like pharma and medical, anticipating some modest growth.

• What you need to know: • ADF announced the signing of a series of new contracts totalling $234M, adding to its backlog of $339M reported for Q3.
• This morning, ADF Group (DRX:TSX, ADFJF:OTC) announced the signing of a series of new orders totalling $234M.
• Contract Announcement In May 2023, ADF announced the signing of a large-scale contract for the first phase of a major project in the pharmaceutical sector in the Midwest.

• The New and Better (5mos old) A-H Premium Tracker has tables, charts, measures galore to track A/H premium positioning, southbound and northbound positioning/volatility in pairs over time, etc.
• SOUTHBOUND flows flat/light and NORTHBOUND flows a significant net buy, respectively, but liquid Hs with H/A pairs OUT-perform As on average by 200+bp. 
• STILL time to go long Hs vs As for the new year. 52wk wide discounts were just last week. Wide A/H premia in renewables space look vulnerable.

• Oil has been one of the few movers during the quiet days of Christmas and therefore we thought we would run down the news driving crude oil markets and deliver our takes.
• We start with crude oil exports where the latest m/m numbers reveal that the US has seen a 4.65% drop in export numbers in line with seasonal effects.
• The fewer seaborne barrels paired with tensions in the Red Sea have added to the momentum for oil prices, but we also note that the EIA has started to ramp up SPR buying again with contracts signed for the purchase of 3 million barrels.

• Covestro AG (1COV GR) has been the subject of a potential takeover from ADNOC since Bloomberg reported on 20 June. The last reported potential offer is €60/share (c.€11.3 billion).
• ADNOC could be willing to offer €64.5 (7.1x EV/EBITDA on mid-cycle €2,110 million EBITDA), but Covestro is rumoured to seek €70/share (typical chemicals 6x on €2,675 million EBITDA, likely demanding).
• Considering a takeout price of €60, gross spread is 11.7% and the shares are pricing a 64% probability of deal completion. I’d be long at €53/share, as downside seems limited.

• On 27 December, Kum Yang announced that its shares will be listed on the US stock market in the form of DRs, resulting in its shares rising by 11.7%.
• The listing of Kum Yang ADRs is likely to have a short-term positive impact on its share price as this is likely to reduce free float of local common shares.
• Nonetheless, over the next 6-12 months, we expect Kum Yang’s share price to trade much lower (30% or more) as its shares are highly overvalued. 

• Silvercorp Metals (SVM US) has switched to an off-market takeover offer. The Orecorp Ltd (ORR AU) consideration remains unchanged at A$0.19 cash and 0.0967 SVM shares per ORR share.
• The takeover offer is conditional on a 50.1% minimum acceptance condition, achievable in the absence of a superior proposal. 
• The crucial question is whether Perseus Mining (PRU AU) is comfortable with SVM effectively controlling ORR. We think that there is a low probability of Perseus launching a competing proposal.