In this briefing:
- Weekly Oil Views: Another Crude Rally Fails to Stick as Technicals Signal a Pivot Point
- Kosmos Energy: The Standout Internationally-Focused E&P Company
- Medco’s Bump For Ophir Won’t Sway Petrus
- Weekly Oil Views: Crude Rallies to Four-Month High but Lacks Staying Power
- Vodafone Idea Needs a 55% Price Increase to Return to Viability
1. Weekly Oil Views: Another Crude Rally Fails to Stick as Technicals Signal a Pivot Point
Oil remains in a tug-of-war between fundamentals and a fickle sentiment in the global financial markets.
Brent and WTI futures settled at fresh four-month-highs of $68.50/barrel and $59.98/barrel mid-week, but had erased all the gains — and some more — by Friday’s close. However, technicals point to a pivot point in crude futures, with the 50-day moving average crossing over the 100 DMA last week. That’s typically a buy signal, but a sustained rally from the current levels is hard to see in the near-term.
Meanwhile, there were some interesting and unexpected outcomes from a high-profile OPEC/non-OPEC monitoring committee meeting in Baku on March 18. Among them were signs of a divergence in the views of Saudi Arabia and Russia, de facto leaders of the 24-producer alliance curbing supply to rebalance the market.
What explains Saudi Energy Minister Khalid al-Falih’s new hawkish stance and is the OPEC and non-OPEC partnership under some strain? Our short answer: No. We lay out our perspective of the evolving dynamics in the producers’ alliance, which is important to understanding the likely path of their collaboration.
2. Kosmos Energy: The Standout Internationally-Focused E&P Company
We think that Kosmos Energy (KOS US) offers everything that is required from an internationally focused E&P company. It has a highly rated management team, strong balance sheet and free cash flow generation from its existing producing assets, low risk / high value near field exploration potential, selective high risk / reward frontier exploration in which it has a proven track record, it has done recent value accretive acquisitions with room for more, it has demonstrated the ability to farm-down its assets on multiple occasions and is currently in the process of a major asset sell down, which could surprise the market to the upside. Despite this the stock trades on a significant discount to risked NAV, making it a potential acquisition target and has plenty of catalysts coming up this year to close the valuation gap.
3. Medco’s Bump For Ophir Won’t Sway Petrus
The boards of Medco Energi Internasional T (MEDC IJ) and Ophir Energy (OPHR LN) have agreed to increase the Offer price to £0.575 from £0.55, representing a 73.2% premium to the undisturbed price.
All other details of the scheme remain unchanged. The court meeting is to take place on the 25 March, while the long stop is the 20 June – unless both companies agree to an extension.
On Petrus
Petrus has yet to respond to the Offer increase; however, it would be surprising if its stance against the takeover has altered.
In its prior letter to Ophir on the 14 January, Petrus recommended selling the South-East Asian (SEA) assets to Medco – excluding the Tanzanian and Mexican investments – with a low-end fair value, before synergies, of £0.64/share, through to £1.42/share on a blue sky basis.
Shortly before the increase, Petrus was quoted (paywalled) it would vote its 3.95% against the takeover, while adding “Our satisfaction with the value our board deems as satisfactory has decreased further“, with reference to the release of Ophir’s full-year results on the 12 March.
On Sand Grove/Coro
Subsequent to the bump, Coro Energy PLC (CORO LN), which had previously submitted a non-binding cash/scrip reverse takeover offer on the 8 March, declared it has no intention to bid.
Sand Grove has also announced it has given an irrevocable undertaking to vote its 18.73% in favour of the scheme. Coro held discussions with Sand Grove before abandoning its bid.
Trading Tight – Upside Less Assured
Medco’s Offer is conditional on 75%+ approval from Ophir’s shareholders, which appears less tenuous following the 4.5% bump and Sand Grove’s irrevocable undertaking. While I consider the offer for Ophir sub-optimal – and shares have closed above terms on 30% of the trading days since Medco’s initial offer – Petrus alone cannot disrupt the vote. Of note, the next three largest shareholders behind Sand Grove have reduced their holdings since end-December 2018.
The gross/annualised spread is tight at 0.7%/2.6%, assuming early-July payment. The risk/reward in punting at or just below terms is now less attractive following this Offer Price increase and the irrevocable undertaking.
4. Weekly Oil Views: Crude Rallies to Four-Month High but Lacks Staying Power
Tightening supply fundamentals are starting to take centre-stage in the oil market, and briefly sent crude to a four-month high last week. But just as Brent crossed $68 during intraday trading and market watchers began to wonder if it was going to breach $70, the benchmark slipped down a few notches.
Crude’s jagged ascent has become a feature since the start of this year, making every upward surge feel tentative. The selling pressure that seized the crude market in the fourth quarter of last year is not yet done. Every rally seems to have plenty of skeptics waiting to sell into it.
Aside from OPEC’s output curbs, which surpassed 100% compliance in February, production from at least two producers not bound by quotas is under threat. Crude output in Venezuela, crippled by a major power outage for more than a week now, has plummeted, while the US says it wants to force Iranian crude exports to below 1 million b/d when the current batch of sanctions waivers expire at the start of May.
A US-China trade deal looks certain, even though the signing may be pushed back to April…or maybe June. However, economic worries elsewhere continue to weigh on oil market sentiment and demand growth expectations.
OPEC appears determined to stay the course with its production cuts in conjunction with its non-OPEC allies. But it sees non-OPEC supply growth this year dwarfing demand growth by nearly 1.1 million b/d, and is feeling the burden of rebalancing the market once again on its shoulders.
This week, we also discuss:
- What jumped out at us in the IEA’s annual report
- US EIA lowering its production forecasts
- WTI Houston’s emergence as US crude benchmark
We note the controversial decision by Norway’s sovereign wealth fund to unwind its holdings in the upstream oil and gas sector, a topic we will be tackling in the next edition of Weekly Oil Views.
5. Vodafone Idea Needs a 55% Price Increase to Return to Viability
Underlying profitability continues to deteriorate at Vodafone Idea (IDEA IN) (IDEA). Chris Hoare has updated his liquidity analysis, and estimates that IDEA needs prices to rise by over 50% to hit cash flow break-even in the medium term. That needs market behavior to change from Jio in particular. Bulls will point to IDEA’s current capital raising and the large capital raising planned at Bharti Airtel (BHARTI IN) as signalling a possible end to hostilities. However, the math at IDEA is such that even a $3.5bn injection gives only temporary relief. What they really need are price increases. Without them (and even with the capital increase), Chris thinks IDEA runs out of cash in about 2 years. We retain our Reduce recommendation and cut our price target to INR16.
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