Scrutineer: Reasons to be cheerful

Published on Tuesday 25 August 2009 20:58

Cairn 2,586p -37p Punch 130.9p +23.3p

WHEN small oil explorers talk about the "potentially transformational" value in their assets, it often goes unnoticed, but when it comes from executives of an FTSE-100 explorer, the implications are much greater.

Yesterday, the management of Cairn Energy was outlining, rather excitedly, the early analysis of its new favourite thing, off-shore exploration blocks in Greenland.

Trying to be measured in their terms, chief executive Sir Bill Gammell and his deputy Dr Mike Watts, could not stop themselves from saying that any discoveries in Greenland – regarded as one of the final frontiers for the oil industry – could be "transformational".

It is something Gammell and Watts have seen before. Under the pair, Cairn rose from obscurity into the Footsie top flight when it uncovered massive discoveries in the Indian desert five years ago.

But "transformational" is a very different word for Cairn now. Whereas in the early 1990s the Edinburgh-based group was virtually a penny share, it now has a market capitalisation of about 3.5 billion, which could rise further if it hits its own ambitious – and increasing – production targets in India.

To transform from this point will take an even bigger hit, but yesterday Gammell and Watts were describing the feeling they have about Greenland as similar to the early days in India.

Despite its massive potential, Greenland has only seen a handful of wells drilled, although Cairn and others are actively exploring the waters after being granted major exploration blocks.

After spending about $30 million (18m) on seismic testing, the group has identified more than a dozen targets which it believes have the geology to contain billions of barrels of oil.

Having taken all the Greenland acreage it could get its hands on, Cairn will be sitting pretty if it – or even a rival drilling nearby – uncovers just one find of that size.

It is all still hypothesis. Greenland's proximity to other major oil producing nations, evidence that there is oil slowly but constantly seeping from the sea floor into the ocean, and supportive geological evidence, all point to its massive potential. Ultimately though, not a single barrel of oil has ever been found in Greenland.

Even so, the enthusiasm is starting to catch the attention of the market. Analysts at Royal Bank of Scotland noted yesterday that the "massive opportunity" off Greenland could sustain Cairn's recent share rally, adding that "it is important not to get carried away".

Quite so. But with the golden touch that Cairn's duo possess, the fact that the firm has the balance sheet to take such a major stake in a such a major frontier and the enthusiasm the company has towards Greenland, the market will certainly watch closely.

Punch Taverns

WHEN is 1 billion not enough? asks Erikka Askeland. In the case of Punch Taverns, one of the largest pub groups in Britain, slashing 1bn off its debt pile was only given a lukewarm response from some analysts.

Maybe it is decimal place fatigue – such big numbers get bandied about these days, who cares if it's 1m, 1bn, 1tr? It is only a decimal place or two.

Or it may just be that the debt that once flowed freely has turned to vinegar on some tongues. Certainly the finance-drunk party of a few years ago has turned into a conference of grim-faced abstainers.

Punch Taverns yesterday said the debt would be down to 3.5bn from 4.5bn – thanks to an unexpected 350m cash call in June and a 400m sell-off of some pubs.

And while KBC Peel Hunt seemed impressed with this being "faster than expected", Evolution Securities said it was still "perilously high" when compared with a market cap of around 700m.

It used to be so easy back in the early 2000s when its wunderkind founder Hugh Osmond was magicking up cash with his securitisation deals on the group's pub portfolio. By his reckoning, all you had to do was pay off the bond holders with income on sales and from tenants. It certainly funded the acquisition of 1,800 pubs from Spirit, creating the biggest pubs group in the UK. The banks liked that idea so much it nearly brought the Western economy to the brink of ruin.

Still, the recent fundraising meant the group could pay off part of the debt due in 2010, and meant it would still be seen as a good creditor – particularly after last March when Fitch, the credit ratings agency, downgraded one of Punch's debt tranches to junk status.

The group said it was back on track with its A and B securitisations which is probably why its shares were trading a rather healthy 22 per cent up last night, belying some of the grumblers.

Martin Todd of Swip

ONE TO WATCH

Berkeley Group

969.5p +25.5p

Scotsman says HOLD

THERE can be no doubting that the UK housing market has been faced with one of the most severe downturns in its history over the past couple of years. Mortgage approvals have fallen to record lows, accompanied by dramatic falls in house prices.

Throughout this tumultuous period, Berkeley Group has reinforced its reputation as one of the highest-quality operators in the industry. While competitors saw profit margins collapse and took huge writedowns on land values, Berkeley's business model allowed it to respond quickly to a rapidly deteriorating end market. Margins have been broadly resilient and the company has taken no writedowns on its land bank.

Looking forward, there are early signs that market conditions are starting to improve, albeit slowly. Most importantly, having survived the downturn, Berkeley Group is now perfectly positioned to benefit from a recovery. The 50 million of fresh capital it raised in February positions the company with more than 300m of cash. Management will use these funds to take advantage of distressed land sales.

Shares in the group were hurt recently by the forced sale of stock by the firm's largest shareholder. Now that threat is out of the way, investors are able to focus on the potential for a sustained recovery in volumes and profits as we return to more normal market conditions.

The confidence that management displayed as markets collapsed turned out to be well placed. Investors would do well to back management as we await the recovery.

&#149 Martin Todd, investment director, UK equities at Scottish Widows Investment Partnership.

&#149 Investment markets and conditions can change rapidly and as such the views expressed should not be taken as statements of fact nor should reliance be placed on these views when making investment decisions. Past performance is not a guide to the future.

International success helps Aggreko to power ahead

SCOTS STOCKS

AGGREKO shares soared yesterday after the Glasgow-based temporary power provider reported continuing strength in its international power business.

While the group's results were in line with expectations, and some of its markets showed weakness, analysts upgraded forecasts as the group signalled that the international business, which provides major generation contracts in the developing world, was continuing to grow.

Aggreko's shares closed up 56p or 9.1 per cent at 670p.

Cairn Energy dipped on fears that a key Indian oil pipeline faces problems, despite assurances that any delay would be a matter of "weeks not months". The shares closed off 37p at 2,586p.

ProStrakan, the fast-growing Galashiels pharmaceutical outfit, dropped back from Monday's all-time high, after analysts at Noble changed their stance on the shares from neutral to negative. Shares in ProStrakan closed down 4 per cent at 133p.

News distributor John Menzies rose as finance director Paul Dollman bought more shares in the group, despite a strong recent rise on better-than-expected results. Edinburgh-based Menzies climbed a further 5.8 per cent to 315p.

The Fife-based interiors group Havelock Europa fell 18 per cent to 45p, after it reported an 8 per cent slide in first-half revenue and warned that restructuring would cost it an estimated 2.7m this year.

Student housing giant Unite Group to buy new sites

SMALL BUT BEAUTIFUL

UNITE Group, the UK's largest provider of student housing, sees attractive development opportunities emerging, particularly in London, and plans to buy new sites.

The company, which manages more than 36,000 student beds across the UK, reported its adjusted fully diluted net asset value per share – a key industry measure – fell 12 per cent to 286p as at end-June, and will withhold an interim dividend to save cash.

However, chief executive Mark Allan was upbeat about the outlook.

"The group is now positioning itself to take advantage of these (market] opportunities and intends to secure sites for 2012 delivery over the next six to nine months," he said.

Student housing has held up relatively well amid the severe downturn in the commercial property market, with rentals forecast to rise about 10 per cent this year as demand outstrips supply.

Unite, which has a market value of about 260 million, said 89 per cent of its student beds have been reserved, and like-for-like rental growth is anticipated to be between 10 to 11 per cent for the upcoming UK academic year, which begins next month.

The group shrunk its adjusted net debt to 504m, down 80m, from 584m as of the end of June.