Scrutineer: Risks of Ventura's caution

Published on Monday 24 August 2009 20:57

Venture 843.5p +1p Petrofac 906.5pp -7p

THE plight of Venture Production, now in the final throes of its hostile takeover by the owner of British Gas, may turn out to be an unusual lesson of our times: even in a financial crisis, a board can be too prudent for its own good.

Centrica announced yesterday that, before morning tea, its advisers had snapped up a further 12.6 million Venture shares, taking its effective stake in the gas-rich Aberdeen group to more than 50 per cent, despite Venture's board urging shareholders as recently as Friday afternoon not to give in.

While Venture has not yet changed its stance on the 1.3 billion takeover, insisting the bid undervalues it significantly, the company knows the game is up.

Many in the sector acknowledge that Centrica is getting a great deal through Venture (hedging its retail gas needs and improving its production capabilities), but the shareholders, in the main, have accepted it.

Two years ago Venture conducted a 200 million secondary fundraising to enable it mop up and dominate the North Sea. So where did it all go wrong?

Built on a low-risk business model, Venture's strategy has always been to buy up others' discoveries and profit from superior production skills, which for a long time endeared it to shareholders as production and profits steadily rose.

In 2007, when Venture was tapping shareholders for the cash, Centrica tried, and failed, to gatecrash the party.

Centrica chief executive Sam Laidlaw tentatively offered 950p a share for Venture, more than the stock had – or indeed has since – ever traded at in the market.

But Venture's board was able to reject the offer, presumably because shareholders were so engrossed in the story that they expected it to quickly move above that level.

Times have changed. Those shareholders, to a large extent, have grown restless, with a majority prepared to sell out for 105p a share less than Laidlaw was willing to pay two years ago.

In the case of Aberdeen Asset Management and Schroders, which sold out in March at 725p a share, the discount is even larger.

Economic uncertainty, lower oil and gas prices and falling dividends across the listed sector are obvious factors in shareholders' decision to take the cash now, but Centrica's approach, which could hardly have been more hostile, would probably have failed against a united shareholder register.

Venture's shareholders put it in a position to mop up the small players in the North Sea, but it never really fulfilled the ambition.

Had it all gone to plan, more deals would have been done, more oil and gas production would have been set to come on stream and the group's short-term growth prospects would have been better.

Venture did table a bid for the one major operator to be sold so far this year – Breagh, one of the largest undeveloped gas discoveries in the North Sea. But like its other deals in the sector, it failed, because German utility RWE was prepared to pay more.

In the end it seems that chief executive Mike Wagstaff, the former banker who led Venture's low-risk strategy, was simply too conservative, waiting too long for asset prices to fall to the level where he believed he was getting a bargain.

Although Venture's shares rose 275 per cent in the past five years, it has still become the bargain it was always seeking.

Like all lessons, and probably more obviously than most, this one should not be taken too far.

There was a time when Royal Bank of Scotland and HBOS were criticised for not making enough use of their strength and expertise.

But boards have to accept that, while shareholders back them to use the money wisely, they most certainly should use the money. Any fool can leave it in the bank.

While Venture will not emerge as the great consolidator it set out to be, someone else almost certainly will. Wagstaff, despite an occasionally fractious relationship with the City, may even play a part again, but if so, the deals will have to come thicker and faster.

Commodity cycle crucial

PETROFAC was in bullish form yesterday, reporting a major jump in cash, profits and dividend, although this is likely to prove the exception to the rule this week.

The London-based oil services group took advantage of the resilience of investment in the Middle East, allowing its first-half figures to rise. However, its rivals, and oil producers, are expected to report this week that commodity prices sent profits tumbling.

Crude prices have since recovered strongly, and executives are likely to predict that the outlook is improving, but investors should not look too far beyond what the latest figures show: that most of these companies depend wholly on the economic and commodity cycle.

Bryan Johnston of Brewin Dolphin

ONE TO WATCH

Eros International

185.5p unch

Scotsman says BUY

EROS International has four main divisions – theatrical, television, digital new media and home entertainment – and a music catalogue business. It is a global player in the rapidly expanding Indian media and entertainment arena.

The group produces and commissions film projects globally and distributes and exploits films across all formats. It has a three-year track record and is listed on Aim. There is a possibility that it will move to the London Stock Exchange main list and the management is exploring plans to list in India.

Full-year results showed an increase in revenues with group turnover up 38.7 per cent to $156.7 million (95.5m). The gross profit increased 13.4 per cent.

Within the television division, TV syndications provided an impressive boost to revenue figures of 94 per cent.

Revenues at the new media and home entertainment division jumped by 69 per cent to $46.2m.

Eros's partner channel on YouTube continued to gain popularity by crossing more than 100 million video views and driving strong growth in advertising revenues.

The outlook for Eros International looks encouraging, with some exciting projects in the pipeline, particularly a number of global film releases planned for 2009-10. The group will be focusing on the music catalogue and publishing area of the business in the short-term.

In addition, the company plans to release a further 50 titles in Blu-ray DVD format.

It is worth noting, however, that the group does not pay a dividend and does not plan to do so in the near future.

Overall, this seems like an attractive business and is certainly one to watch.

&#149 The value of your investment could fall and you may get back less than you invested. You should take professional advice if you have any doubt about the suitability of this company for your portfolio.

New shares set sail for Offshore Hydrocarbon Mapping

SCOTS STOCKS

OFFSHORE Hydrocarbon Mapping shares soared yesterday, after the cash-strapped oil services company reported a deal that cuts its future vessel costs.

The Aim-listed group provides electromagnetic testing of the seabed in the search for oil and gas, and yesterday announced that it had converted vessel charter liabilities into equity, with the new shares issued at a 150 per cent premium to the market price. Aberdeen-based OHM also said it was placing more shares to raise working capital, also at a major premium.

Its shares jumped 59 per cent to 13.5p, the highest level it has traded at this year.

Scotland's largest oil services company, Wood Group, rose on positive sentiment for the sector, after rival Petrofac predicted its earnings would rise by 20 per cent this year. Wood is expected to report a fall in first-half revenue tomorrow, but its shares rose 4.2 per cent to 329.9p yesterday.

Cairn Energy, which reports its interim results today, rose 23p to 2,623p. Temporary power provider Aggreko, which also half-year numbers today, eased 4.5p to 614p.

Wolfson Microelectronics, the audio component maker, rose to its highest level in more than a year, after Merrill Lynch increased its target price to 128p, but maintained an "underperform" rating. The shares closed up 6.9 per cent at 143.25p.

Half-year profits up at chemicals company

SMALL BUT BEAUTIFUL

YULE Catto, the chemicals company, expects its full-year results to be slightly ahead of expectations after a solid first half.

Underlying profit before tax, which excludes one-off items, rose by 14 per cent to 19.9 million in the six months to 30 June, figures yesterday revealed.

Operating profit at the group's polymer chemicals division was up 13 per cent, while the pharma chemicals arm boosted operating profit by 7 per cent.

The company, which has a market value of about 200m, said the performance by pharma chemicals was a little below expectations. The restructured impact chemicals division (William Blythe) also saw an improvement in operating profits, from 500,000 to 900,000.

Operating profit for the group as a whole was boosted by currency valuation gains of 2.9m, but the firm said that the favourable currency position had started to unwind at the end of the reporting period as sterling strengthened.

Total sales fell 9.9 per cent to 269.7m from 299.3m.

Chairman Peter Wood said: "Looking to the full year, we expect our pharma business and William Blythe to continue performing a little ahead of last year. The outlook for polymers is less certain."