Oil market buoyant as Tullow takes lead
Its shares closed 48.5p higher at 620p on news that its Buffalo well in Uganda had found a significant amount of oil. Last week it reported positive news from the Kingfisher field in the country, as well as a prospect in Ghana. Tullow’s partner in Uganda, Heritage Oil, added 14.75p to 235p.
Ahead of the US interest rate decision, the FTSE 100 followed Wall Street’s lead and added 31.52 points to 4309.08. Goldman Sachs helped sentiment by reporting a smaller than expected quarterly loss – even though it was the first time the bank had gone into the red since going public in 1999.
Energy group Drax shook off some early falls and a couple of downbeat analyst comments to end the day 23.5p up at 539.5p after a trading statement in line with expectations.
The slump at private equity group 3i continued. News that investment group Axa had sold more than 3.5m shares to reduce its stake to 9.35% did not help, given the fears about the group’s trading and debt levels. There have been reports 3i could sell stakes in some of its investments to rival private equity groups.
A note from Cazenove suggested the picture may not be as bad as it had been presented, with the shares having fallen 44% since November:
“We estimate that 3i’s cash balances are up a little since the end of September at £693m (compared to £668m), with proceeds from realisations being offset by some new investment, the unwinding of the forex hedges and net income. The gearing ratio has gone up from 44% at the end of September, however, as a result of the estimated fall in the net asset value. There is no doubt that leverage is high relative to the listed private equity sector, where most companies are holding net cash.
“3i’s next major debt repayment is £337m of bank finance due in the fourth quarter of 2010, followed by its £430m, due in May 2011. This just about matches 3i’s current cash, and therefore it is clear that 3i must maintain its cash resources to avoid a possible crunch. As a result we would not expect investment unless it is balanced by realisations. Currently portfolio income and fund fees cover running costs, so there is no cash drag from operations. If 3i cannot refinance the loans that become due, then crunch time for 3i will be around mid 2012. The good news is that there are no covenants on the existing loans at the 3i level.
“We believe that 3i should realise assets where it can do so at good prices. It is not a forced seller, but clearly lower net debt would improve the stock’s rating. There are listed assets that 3i can sell. We would also prefer not to see any new investment, no matter how tempting. Other than that, 3i has to work hard together with its underlying portfolio companies to ensure they make it through the next couple of years. It could be a demoralising period for 3i’s executives, but they are paid mainly on the cash returns on the realisations they make, so they are aligned with shareholders.
“3i has made a number of good calls over the last few years, but unfortunately it made one capital return too many. Had it not done this it would be in a far better position to take advantage of market opportunities and its net asset value would have much less downside risk. But what sort of portfolio decline does the current share price discount? Very roughly, a 50% decline in the overall portfolio from September would take the net asset value down to the current share price. We therefore think that the share price fall is overdone. Although we recognise that there is still uncertainty about how the portfolio will perform in the recession, with the market taking the view that it will be much worst than quoted markets, 3i has time on its side and in our view will be able to ride through the recession, rather than being forced to sell any investments today. There is clearly a risk that 3i – like any geared company – could go bust if current conditions persist for several years and refinancing is no longer possible, but we believe the most likely scenario is that the company survives and its net asset value recovers from the low point it has yet to reach. More generally, once its gearing is under control, 3i’s broad business model will enable it to adapt to the changing private equity landscape, unlike many of its peers who are primarily buyout specialists.
“While recognising our outperform recommendation has proven far too optimistic, we are not changing our recommendation as 3i remains a quality company with a very well diversified portfolio and we see upside from here for investors who are prepared to look through the cycle, though we caveat that it is one of our higher risk recommendations in the peer group.”
Elsewhere many of the miners were down, proving a drag on the market. Xstrata fell 26p to 691.5p after shutting a coking operation in Australia, reinforcing concerns about the effects of the current global downturn. Vedanta Resources lost 23.5p to 665.5p while Rio Tinto lost 40p to £15.01.
Confectionery group Cadbury slipped as it warned of slower growth in Europe and the US, while at the same time confirming it planned to sell its Australian beverages business and announcing the appointment of former Bristol-Myers Squibb director Andrew Bonfield as its new finance director.
Insurance business Admiral fell 117p to 883p after Merrill Lynch downgraded from buy to neutral, but telecoms group BT shook off news that JP Morgan had moved from neutral to underweight and recorded a 2.3p rise to 140p.
Lower down the market GoIndustry-DoveBid, the auctioneer, slumped 43% to 1.475p after saying it would not meet market expectations for the year. It is in talks with its bankers, who are said to be supportive.
Plant Health Care climbed 43.5p to 229p after announcing it had licensed its harpin seed treatment to US biotech group Monsanto. Evolution Securities said:
“Today’s confirmation that Monsanto will deploy Harpin in its seed-coating product for soybeans, corn, cotton and certain vegetables gives investors the long-term visibility they have been waiting for. We expect the shares will now resume their upwards path towards our 500p target price.”