Wednesday 20 February 2013

Tanfield (TAN) ... woefully risible

I rang up ETX and sold a small amount short in Tanfield (TAN, mkt cap £26m) at 20p/shr. The borrow is limited, otherwise I would do more. The prospects for this company appear hopeless. A cursory glance at the accounts infer that since 2007, the company has burnt through c. £76m in free cash flow. I assume that it has burnt c. £10m this year alone in free cash flow. Therefore the company has chalked up an average burn rate of £12.7m pa during the period 2007-12. Further, shareholders' equity has declined from £165m in 2007, to £30m in 2011. Talk about destruction of shareholder value. 

Trading wise, the company's update this morning was both woeful and risible. FY 2012 revenue is likely to be flat, while losses are expected to be similar to H1, i.e. a FY loss of c. £14m. However, the group  is banking on achieving its first full year of profit in 2013, since 2007. It is my understanding that its revenue would be required to almost double to achieve break-even. Somehow I do not see that happening. 

The update also contained some witterings about Tanfield receiving bid approaches. Given the history of cash burn in the business, I would expect it is more likely that Tanfield approached others to rescue it. Either way, I do not expect any bid to materialise at a premium to the share price. 

And another thing ...
Tanfield's house broker, WHIreland, in its morning commentary suggested ...

"Thus in the absence of a bid, in our view the balance sheet requires additional funds (at present the balance sheet is ungeared and working cap facilities have now been secured) in order to benefit from the continuing market upturn for AWP equipment (this evidenced by peers)."

I read that to be pretty clear that a potential fund-raising could be imminent. I expect at least £8m would be necessary. In the light of the destruction of shareholder equity over the last six years and considerable cash burn, I doubt any bank would oblige. That means shareholders are likely to have to step up. I reckon 10p will be the going rate, which would be quite some dilution. 


Tanfield share price
Source: Bloomberg
Disclaimer: The information, discussions or topics referred to on this blog should in no way be considered “advice” to buy or sell anything. The information which may be referred to is freely available in the public domain and where required the source of information is referenced to for verification. While every effort has been made to ensure the veracity of any information contained within this blog, the author accepts no responsibility for the accuracy of any information contained within this blog or for the sources of information which may be referred to. Readers are responsible for their own actions and interpretation of the information contained within this blog. 

Thursday 14 February 2013

Mediterranean Oil & Gas (MOG) ... optionality

I've bought some Mediterranean Oil and Gas (MOG LN, mkt cap £42m) on the basis that the upside here could be rather high. Further, I reckon any potential downside to be limited due to strong support from cash and producing assets. I like that combination.
 
The group already has:
  • A solid producing asset (Guendalina) chucking off €9m or so in operating cash pa, to which I place a value of 5p/shr;
  • Other smaller producing concessions, I reckon to be worth 1p/shr;
  • Retains c. £6m of cash on its balance sheet, worth 1.4p/shr;
  • Is scheduled to receive $10m in cash from Genel (GENL LN, mkt cap £2.2bn) upon contract completion, equating to 1.5p/shr.
All this tallies to 8.9p/shr as compared to its current share price of 9.5p/shr.
 
And another thing. Under the terms of the agreement for MOG's Maltese asset with Genel, MOG is also in for free on 100% carry on an initial exploration well and 100% carry on the cost of a secondary exploration well up to a cost of $30m. I.e. it is exempt from capital expenditure of what is likely to be up to $75m for the development of its Maltese asset.
 
Ombrina Mare
 
MOG has a 100% interest in its Ombrina Mare development on the east coast of Italy, which is estimated to contain 40mmb 2P oil reserves. Were it to be developed today, then it is widely estimated to be worth US$400m or 60p/shr. This is derived by assuming an unrisked 2P reserve multiple at US$10/bbl.
 
What is holding up development is the Italian authorities, which are awaiting the result of the general election on 24-25 February 2013. There is some concern that Silvio Berlusconi will win and that he and his apparatchiks will block any development of Ombrina Mare and other prospects on the coast. Given that the development will bring with it tens of billions of euros worth of investment, thousands of jobs and greater energy security, I reckon whichever party claims power will rubber stamp approval for development quicker than expected.
 
I hope for EIA approval shortly after the elections, followed by the award of production concession and a pilot well drilled later this year.
 
Malta
 
MOG's other key asset is its 25% interest in Area 4 offshore of Malta. As highlighted above, the group has signed a deal, due to complete soon, whereby it receives US$10m in cash and has the first exploration well paid for and up to $30m of a secondary well also covered.
 
The unrisked prospects of offshore Malta are estimated to be in the region of 1,500 mmb oil. Any success there and the result could be multiples of the current share price.
 
In summary
 
I like MOG because:
  • It has no debt and its current share price is supported by cash and cash producing assets;
  • It has a strong management team;
  • It has two prospects, potentially worth many multiples of the current share price and are seemingly priced in at somewhere between 0-1p/shr. It appears cheap.
Mediterranean Oil and Gas - share price
Source: Bloomberg
Disclaimer: The information, discussions or topics referred to on this blog should in no way be considered “advice” to buy or sell anything. The information which may be referred to is freely available in the public domain and where required the source of information is referenced to for verification. While every effort has been made to ensure the veracity of any information contained within this blog, the author accepts no responsibility for the accuracy of any information contained within this blog or for the sources of information which may be referred to. Readers are responsible for their own actions and interpretation of the information contained within this blog.

Friday 1 February 2013

Aggreko (AGK) ... first class


I bought some Aggreko (AGK LN, mkt cap £4.3bn) at 1618p/shr. It’s fallen out of favour (34% down from Sept 12 peak) due to a profit warning in December last and then again this week. This week's plunge is seemingly on the back of some spurious speculation in the Daily Mail that more bad news may be on its way on March 7. Given that Aggreko’s management are first class, I doubt they have any intention of disappointing again and reckon they’ve “kitchen sinked” enough already.

As the knife is falling, my short-term timing may not be perfect with this purchase. However, I reckon Aggreko is an excellent business, with fore-mentioned first class management, high barriers to entry, exposure to growth markets in an increasingly energy dependent region, and minimal financial risk. AGK achieves high returns on capital (ROE percentages in mid 30s to low 40s / ROIC in mid 20s), and is lowly geared with net debt of £620m and net debt to EBITDA of c. 1x. Further, I reckon the group is capable of generating enough free cash over the next seven years to buy back up to 40% of its equity at current levels.

And another thing, a company such as General Electric (GE US, mkt cap $234bn), could if it so wished consume AGK at say 2000p/shr with six months of its free cash flow. Hmmmm ......

AGK - share price
Source: Bloomberg
Disclaimer: The information, discussions or topics referred to on this blog should in no way be considered “advice” to buy or sell anything. The information which may be referred to is freely available in the public domain and where required the source of information is referenced to for verification. While every effort has been made to ensure the veracity of any information contained within this blog, the author accepts no responsibility for the accuracy of any information contained within this blog or for the sources of information which may be referred to. Readers are responsible for their own actions and interpretation of the information contained within this blog.