SPREADBETTING The e-magazine created especially for active spreadbetters and CFD traders
5 Potential ten baggers & how to spot them
N IO IT ED LY JU
MAGAZINE
Issue 6 - July 2012
An Oil Exploration stock dream portfolio Dominic Picarda
Global markets technical analysis
Mid Term Scorecard How are our trades faring?
Robbie Burns’
Top 10 tips for surviving the markets
Elliot Wave Analysis Explained
www.financial-spread-betting.com
Editorial Contributors Simon Cawkwell aka Evil Knievil Simon Cawkwell aka Evil Knievil lives in West London and has successfully navigated the markets for nearly 45 years. Although he started working life as a chartered accountant, he came to prominence with the collapse of the infamous Robert Maxwell’s affairs where he cleared £250,000 profit some twenty years ago - no small sum back then. His specialisation is short-selling and he is a self confessed inveterate gambler. One thing’s for sure he doesn’t pull punches and tells it as it is!
Dominic Picarda Dominic Picarda is a Chartered Market Technician and has been responsible for the co-ordination of the Investor’s Chronicle’s charting coverage for 4 years. He is also an Associate Editor of the FT and frequently speaks at seminars and other trading events. Dominic holds an MSc in Economic History from the LSE & Political Science.
Robbie Burns aka The Naked Trader Robbie Burns - The Naked Trader has been a full-time trader since 2001 and has made in excess of a million pounds trading the markets. He’s also written three editions of his book “Naked Trader” and the “Naked Trader Guide to Spreadbetting” and runs day seminars using live markets to explain how he makes money. Robbie hates jargon and loves simplicity.
Reliance on content disclaimer Material contained within the Spreadbet Magazine and its website is for general information purposes only and is not intended to be relied upon by individual readers in making (or refraining from making) any specific investment decision. Spreadbet Magazine Ltd does not accept any liability for any loss suffered by any user as a result of any such decision. Please note that the prices of shares, spreadbet’s and CFD’s can rise and fall sharply and you may not get back the money you originally invested, particularly where these investments are leveraged. In comparing the investments described in this publication and website, you should bear in mind that the nature of such investments and of the returns, risks and charges, differ from one investment to another. Smaller companies with a short track record tend to be more risky than larger, well established companies. The investments and services mentioned in this publication will not be suitable for all readers. You should assess the suitability of the recommendations (implicit or otherwise), investments and services mentioned in this magazine, and the related website, to your own circumstances. If you have any doubts about the suitability of any investment or service, you should take appropriate professional advice.
Foreword Hello and welcome once more to this 6th edition (time isn’t half flying!) of Spreadbet Magazine. It is amazing to think we are already half way through the year... and so far it’s shaping up to be a pretty difficult year for spreadbettors and the industry in general. What with the Worldspreads scandal, the moribund AIM market in which a lot of our readers have investments and a generally difficult economic environment, we would have hoped to have had a more buoyant backdrop to launch! We are, however, made of sterner stuff here at Spreadbet Magazine and on we plough; hopefully adding value to our readers and providing them with some practical guidance and useful trading ideas. As ever, I invite readers to email me at editor@financial-spread-betting.com with their comments on the magazine criticisms, suggestions and general feedback all welcome! The lifeblood of the magazine is your continued patronage of course. This month, following various readers’ feedback, we have introduced a number of more ‘light-hearted’ features. There will be a regular travel section - but with a twist, this being Spreadbet Magazine! Not your usual bland golfing holiday suggestions, as you will see, with this month’s intro article. We will also include a number of ‘lifestyle’ articles including new technology trends etc. I hope you enjoy these new inclusions and that they provide a welcome diversion from the stresses of spreadbetting and CFD trading! Our line-up of features this month includes a cracking article on the Oil Exploration sector — a part of the market that is always a favourite of punters but that has been testing, to say the least, to be involved in during recent months with many shares down 50-70% from their early year highs. It is at times like these that it is worth recalling the famous saying,”you make most of your money in a bear market, you just don’t realise it at the time” As with most successful business transactions, the value is added in the buying - buy cheaply enough and fundamentals will ultimately re-assert.
The views and recommendations in this publication are based on information from a variety of sources. Although these are believed to be reliable, we cannot guarantee the accuracy or completeness of the information herein. As a matter of policy, Spreadbet Magazine openly discloses that our contributors may have interests in investments and/or providers of services referred to in this publication.
I hope you enjoy our mid-term update too - it is important that aside from the wider educational element of our offering that we are also actually generating decent trading ideas. If readers have any particular feature they would like to see in future months, again, feel free to email us. And so I sign off and wish you an enjoyable (and hopefully sunny and warm!) July and, that markets prove a little more forgiving in the near term. Good luck trading. Richard
July 2012 | www.financial-spread-betting.com | 3
Contents
5 potential ten baggers & how to spot them
6 28
Ophir Energy
33
Mid term update
48
Oil Explorers dream portfolio list
58
Dominic Picarda
66
Unique European escapes
A Trend watch Asset Management analysis of a potential oil major in the making.
A blunt appraisal of our Conviction trade recommendations to date.
A long portfolio of undervalued oil explorer stocks to tuck away for the medium term.
Our resident technical analyst provides a mid year global markets overview.
A new travel feature by Destinology.
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Anatomy of a trade By LS Trader
22
Evil Knievil’s mid term overview
40
Robbie Burns’
62
Top 10 spreadbetting survival tips
70
Ithaca Energy
77
FatProphets - UK Gold Stocks
84
Elliot Wave Analysis explained
88
Options Corner
93
Square Mile Data
96
Best new technology gadgets for 2012
A fresh look at Ithaca Energy following the collapse of bid talks.
Special Gold stock feature by respected research house FatProphets.
What is it? And how to apply it to the markets.
How to make money in a static market through the use of straddles and strangles.
This month we take a look at short interest in the General Retail sector.
A must read for the more successful traders this year!
July 2012 | www.financial-spread-betting.com | 5
Special Feature
5 Potential ten baggers & how to spot them. So called, potential “ten baggers� are, by their very nature, risky. In fact, very risky. The old investment principle of risk and reward being positively correlated still stands - certainly last time I ventured into the markets!
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Potential 10 baggers & how to spot them
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Special Feature
A ten bagger invariably results from the transition of extreme risk to that of an accepted investment proposition. This of course makes sense if you consider the magnitude of such returns. If you think about it, even in the high risk, high return arena of private/venture capital, very rare indeed is the result of an early stage investment (when the equity in a company is priced against the founders due to capital raising requirements) that a 10 fold return is produced. A 10 fold return is a phenomenal level of capital gain. Think of the analogy with a 10-1 bet against at the races. The reason the bookie prices the odds at this level is because there is a slim chance of it coming to fruition. The beauty with the public markets, however, is that the ‘animal instincts’ are much more visible than in the private arena AND you can trade on these instincts. The pendulum of greed and fear tends to be exaggerated in the price movements. This means that the ‘fair value’ of a stock can become materially dislocated from the true value of the company and so gives you an opportunity to trade and potentially profit. To refresh one’s memory of just how dislocated things can become look at the pricing in recent years of the Nasdaq bubble and then crash, Greek banks, the US housing sector, the Japanese equity market etc etc... Human nature never changes, and so opportunity is always there.
We believe that the current environment is perfect potential ten bagger hunting ground - sentiment is poor, valuations are depressed and the ‘marginal’ investor is presently absent the markets. This tells me that the ‘fear’ swing of the pendulum has swung nicely in our favour allowing us to pick up cheap stock. Now, the trick of course is to find the most likely candidates to deliver the fabled 10 fold return. Catch one of these and your portfolio value will rise disproportionately. To give you an idea of the impact of just one of these stocks on a portfolio, consider that from a pure mathematical perspective if you have 10 stocks in your portfolio and you place £10k each into them, then even if 9 go bust (you’d have to be a pretty bad stock picker for this to occur - although it is known!) and 1 is a ten bagger, then you still preserve your capital, even in such an Armageddon scenario. The typical profile from which a 10 bagger is born generally falls into 4 camps as we detail below:
1
Companies priced for bankruptcy that manage to pull themselves out of the mire.
Thinking once more about the risk:reward equation - the higher the risk, the higher the potential reward; then it makes sense that a share that is priced to go bust and that actually manages to pull itself out of the mire and transform its fortunes would see exponential returns. The absolute key in this instance is, without fail, management calibre. If a company is being swamped by a large debt burden (as many newly coined ‘zombie’ companies are these days), then you need a strong and respected management to be able to hold nerve with the banks and navigate a way to pay down the debt and rescue some equity value.
FEAR
GREED
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Potential 10 baggers & how to spot them
Many people still recall today (nearly 20 years later) the ‘phoenix from the ashes’ that was Next Group. The company’s shares went from being priced in the pennies to, at last look, just under £30 — a 600 fold return from the nadir in 1992 — see chart below. To be sure, this is an extremely rare return and for every resurrection there are many more that fall by the wayside. Indeed, such is the lure of the returns seen by Next shareholders that many a pound has been lost by retail investors in recent years trying to buy the next retail recovery play — HMV, JJB, Blacks Leisure, Game Group et al are just a few in recent times that have cost investors dear, and illustrating that for every 1 winner of that magnitude there are many, many more losers...
Next chart Another recent example is that of AEA Technology. Take a look at the chart below that shows the rise that the stock experienced during the latter part of 2011 — from 0.1p to 1p as the company warned on banking covenant breaches and the market then realised that the company’s assets were likely to be worth more than 0.1p even in a fire sale. Extreme risk is the common theme here — remember again the 10-1 odds against bet analogy.
AEA chart
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Special Feature
2
Small cap companies that develop ground breaking technology.
This is also fertile hunting ground for potentially very material capital gains and essentially involves hunting for ‘the next big thing’. A prime example here is that of video search company Blinkx. Take a look at the chart below that shows what happened to this stock just before it took off in June 2010. From hovering around 10p for months the stock went near vertical and hit 100p before the year was out as the company began to gain traction with a variety of partnership agreements. The classic ingredients here were - a ‘sexy’ tech story, tightly held stock, increasing institutional interest and a buoyant market background.
Blinkx chart Another key ingredient in this example was that management held a good percentage of the stock in the company - always a good sign as it means they are completely aligned with you. The last thing you want to be involved with in a supposed ‘game changing’ tech company, in particular, is one where management have next to no stake. The prime example of this is the story of Synchronica where the CEO continually raised money from investors who backed his vision, but he himself had a less than nominal stake.
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The other lesson with Blinks is that a cursory look through the holding announcements in 2010 into 2011 detailed increasing stakes being taken by respected institutions such as Black Rock - this is always a good sign as it shows that the mainstream investors believe in the ‘story’ and so add extra buying pressure along the way.
Potential 10 baggers & how to spot them
3
Pharmaceutical/bio-technology companies that produce breakthrough results.
Similar to point (2) above, if you are lucky enough (or connected enough) to be made aware of a cutting edge biotech company that has the potential to be brought to market then this is another area where outsized returns are up for grabs. There is no alternative here but to put the time in and research extensively such companies. The US is, however, the area where there is a much larger pool of potential biotechnology stocks - it really is a poor show that we simply do not have such smaller companies in the UK in any meaningful number that are pioneering new and ground breaking drugs generally it is the major pharmaceutical companies like Glaxo Smithkline and Astra Zeneca that have the capital to pursue these programmes. It is doubtful that any drugs in the pipeline within a major pharma stock has the potential to create 10 fold returns however.
These days there is also not really any quality research available on small cap stocks as the ‘cult of equity’ has waned dramatically in recent years, and brokers simply do not allocate capital to small cap specialist research. In fact, there are very few specialist analysts around; with most worthwhile research being done by in-house analysts at various hedge funds. One such company that does supply research on a wide variety of stocks and by respected CFA analysts is Fat Prophets - we recommend that readers take a look at their Virtual Trading Room which is offered for free for a full month in order to appreciate the calibre of their service.
July 2012 | www.financial-spread-betting.com | 11
Special Feature
4
Small cap oil exploration sector.
It seems that the small cap oil explorers’ sphere is every punter’s favourite hunting ground in the hope of making lottery type returns; certainly judging by the volume of readers we get to our blogs in relation to oil sector posts, and also which bulletin boards are the most popular.
Gulf Keystone and Rockhhopper are just 2 stocks in recent years that have delivered mind-boggling returns when striking the black stuff from their wildcat activities in frontier regions. GKP, of course, ran from 6p to over 400p — a near 70 fold return in just under 3 years! Investors continually dream of catching the next successful oil explorer and of course, in recent years, the Falkland Islands have seen fevered speculation in many of the stocks that operate there.
Rockhopper chart
The trick in this area is to diversify yourself amongst at least 5 stocks as the actual strike success rate for exploration wells is less than 20% - thus if you have 5 stocks and one hits the veritable ‘pay dirt’, then you at least have a chance of negating the inevitable losses on the others.
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The other tip is to invest only in well-funded explorers so that a capital raising doesn’t catch you out (hence avoid Desire Petroleum), and try to take advantage of depressed sentiment to buy as close to, or as much below, cash value as possible - this way you are not paying for any ‘speculative’ premium - you are in fact looking to ride that.
Potential 10 baggers & how to spot them
Before we get into our stock suggestions below, I’d like to make the point that when it comes to spreadbetting or CFD trading in these type of stocks that due to the small market capitalisations of some of them it may not be possible to trade them via a spreadbet or CFD and if it is, the firms will almost certainly require that high initial margins be posted. This is actually in your interests, however, as it will avoid you being shaken out of the position in the event of more market volatility, and which tends to have a disproportionate impact upon the small cap sector - market makers go to ground and spreads get widened. I would even go so far as to say that you should, on the minnows, margin yourself at 70-80% to ensure you can carry a savage down-move and allow the trade to play out. Here are 5 stocks that IF certain catalysts occur at the current prices, each offer the potential to be a fabled 10 bagger:
1. Phytopharm. Current price 6p
The recent trial setback in early May for Myogane in an early stage animal testing model is, in our opinion, not a material issue as it seems that there were issues with regards to the data set and methodology. Still, an inconclusive result was unhelpful to investors. More promising results have been seen in the application of Cogane in the treatment of ALS in recent months. The catalyst that could propel Phytopharm up by a factor of 5-10 times from the current price of 6p is the results of Phase 2 trials of Cogane - due early next year. The chart below shows what happened on the last occasion the company delivered positive news in late 2009 — the shares were propelled from 5p to 35p in 2 days! If the trial is successful, the company would move quickly to final Phase 3 testing and would no doubt partner with a major pharmaceuticals player in exchange for a share of the royalties. Industry analysts estimate the size of the Parkinson’s disease treatment market to be over $4bn and Alzheimers, for which Cogane could similarly be used in its treatment, of over $7bn. As you can see, the numbers are not small for even a small market penetration...
Phytopharm fits the biotech profile. The company is currently in a key Phase 2 trial period for its primary drug, Cogane, which is hoped to be used in the treatment of the debilitating brain disorder Parkinson’s disease. Results are expected in early 2013. The company’s other major product - Myogane is also being tested for its efficacy in the treatment of both Glaucoma and ALS.
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Special Feature
The company is funded until the end of 2013 essentially sufficient time to allow them to assess definitively the potential for their compounds, and hopefully to move to a clear plan for monetisation. The outcomes are basically very binary here - a successful outcome and a no doubt multi-fold return, a disappointment next February and a rundown of the remaining cash.
Phytopharm chart
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An important factor to also consider at the current share price is that there is absolutely no speculative hope embedded in the shares and, such is the shareholder register profile, with the stock being tightly held, that a major move on the upside is very likely on good results.
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July 2012 | www.financial-spread-betting.com | 15
Special Feature
2. Ceres Power. Current price 5p Ceres Power is involved in the sexy area of fuel cell technology. Hydrogen fuel cell technology has been held out for a number of years now as the potential saviour of our energy industry. At its base level hydrogen is converted into electricity. The hydrogen fuel cell operates similarly to a conventional battery, having 2 electrodes - an anode and a cathode - which are separated by a membrane. Oxygen passes over one electrode and hydrogen over the other.
If ever there was a chart that illustrates the transition from excessive optimism to undue pessimism — the pendulum of greed and fear — then the one below is it. At the current market capitalisation of just over £5m, then even adjusting for a £40m capital raise (which is largely what we believe is required by the company), the shares could certainly rise 2 or 3 fold purely on completion of the fund raising if prior market valuations are anything to go by.
The hydrogen reacts to a catalyst on the electrode anode that converts the hydrogen gas into negatively charged electrons (e-) and positively charged ions (H+). The electrons flow out of the cell to be used as electrical energy. The hydrogen ions move through the electrolyte membrane to the cathode electrode where they combine with oxygen and the electrons to produce water. Unlike batteries, however, fuel cells never run out. Pretty neat eh?
I caught up with David Pummell, CEO and posed the following questions -
So, the potential is interesting, no question, and the end market opportunity very large. The principal issue is — which companies operating within this sector will ultimately prove successful? It looked for a number of years that Ceres Power was going to be one of the winners, not least due to its partnership with British Gas that was announced in 2008 and that involved BG trialling Ceres’ fuel cell CHP (Combined Heat & Power) wall mounted units - in essence next generation boilers (natural gas rather than hydrogen however is used in Ceres boilers). BG also (unfortunately for them) actually underwrote a capital raising for the company to allow Ceres to progress through to trial of the product through the purchase of just under 10% of the Ceres’ equity at 300p a share - yes that’s right, 300p per share. The capital raising by BG underwrote what was a then market capitalisation of £200m, and many within the analyst community believed that Ceres was worth potentially substantially more at this point. The company went on to raise capital just over a year later in 2009 at 165p a share - valuing the equity at that point at £165m (pre the placing discount).
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Q. What magnitude of capital do you believe the company will require to take you through to 2016 mass launch? A. We have not given a figure at this point. However, we reduced our headcount and cost base earlier in the year to reduce the funding required to reach our mass market launch in 2016. Q. Do you still have the support and intended dual marketing basis of the agreement with British Gas? A. British Gas is our second largest shareholder and we continue to work closely together to achieve the launch of the CHP product in 2016 and offer UK consumers the opportunity to generate their own electricity and significantly reduce their annual energy bills. Q. Do you plan to address the nominal holding that management currently has in the company and align with your shareholders & show confidence in the product? A. It is an interesting question, and as I am new at Ceres, it is something that I will be addressing myself in due course – however my current commitment and time is devoted to continuing the CHP product testing programme and achieving the mass market launch of CHP product in partnership with British Gas in 2016
Potential 10 baggers & how to spot them
Q. How big do you think the end market is that is up for grabs for Ceres - both in the UK & Europe?
Q. What do you say to shareholders who have been almost wiped out in recent years?
A. The market is substantial – 1.5 million boilers are replaced each year in the UK, 85% of which are wall mounted. Ceres is able to target this market because uniquely, its fuel cell CHP product is compact, lightweight and wall-mounted. Currently we have agreements with BG in the UK, Board Gais in Ireland and Itho-Daalderop Group B.V. for the Benelux countries (the third largest boiler market in the European Union with over 650,000 units sold annually). Of course we won’t get all of this, but a substantial market none the less to aim at. Globally, the potential market opportunity is in excess of 18 million boilers pa.
A. I can only really comment on my perceptions since joining the firm in September 2011. It is my firm belief that the Ceres technology is capable of delivering flexible, clean power generation in an integrated and wall mounted residential CHP product and I believe that the product can be engineered into a low cost reliable fuel cell CHP product for the residential mass market offering an attractive energy savings and payback. Since joining I have engaged everyone at Ceres to deliver against this target. We still have a lot to do but we have made substantial progress since September.
Ceres Power chart
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Special Feature
3. Falklands Oil & Gas. Current price 90p FOGL is covered more extensively in our Oil Explorers’ Dream portfolio article on Page 48. Suffice to say that should the FOGL hit the black stuff in the deep South Atlantic on their first Loligo prospect, then the stock will rise very rapidly and very substantially from the current 90p.
Falklands Oil & Gas chart
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Not for widows and orphans and certainly not for investing more than a small amount of your portfolio!
Potential 10 baggers & how to spot them
4. Namakwa Diamonds. Current price 4p The financial profile of South African Diamond miner Namakwa has changed extensively in recent days following a proposed (and underwritten) capital raising of some $55m in order to pay down debt. Essentially, the company’s largest shareholder (Jarvirne Ltd) has been supplying loans to the company in recent months to assist it with working capital requirements, and the proposed capital raising is a conversion of the majority of these loans into equity. In the event of other shareholders not stepping up, the end result will be Jarvirne owning over 80% of the company. Aside from the debt repayment of approx $45m, the proceeds of the Open Offer will be used to meet short-term capital and operational requirements. Management of the company have said that they expect to move into a cash-flow positive position in Q4’FY2012, and that as a consequence of the restructured balance sheet that the new capital should provide a platform for revenue growth, positive EBITDA and free cash-flow.
Again, as with the other recommendations, the historic chart does not provide pretty reading with the shares falling from over 60p to 4p. The company has also been involved in a legal dispute over ownership rights of its diamond mines with a Group called Batla Minerals and this has depressed sentiment further in recent months. The case looks to have little merit, however, and has already been dismissed once by the Lesotho courts. Turning to valuation possibilities, once the fund-raising completes, the market capitalisation will be just under £50m. Before the funding issues that have weighed on the stock this last 12 months, the company’s shares were valued at 60p and which equated to a market capitalisation of nearly £200m. Liberum Capital estimated the NPV of the first phase of the Kao mines alone at approx £100m (at current FX rates). Perhaps not a 10 bagger, but certainly potential here for a 3-4 fold rise should diamond prices remain firm.
Namakwa Diamonds chart
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Special Feature
5. Helphire. Current price 1.3p Shareholders of the rather aptly named HelpHire have certainly been in need of help over the last 18 months given the absolute drubbing the stock has endured. Many shareholders believe that the current Board should be ashamed to continue to hold a position in a public company given the mishaps and destruction of capital in recent years at their hands (an all too familiar story on AIM these days it seems...). That being said, the question is, does the company’s current market capitalisation of a measly £4m overly discount the risk with Helphire and thus offer opportunity? The chart below shows a collapse in the stock last spring from 20p down to 4p and with no ensuing bounce whatsoever over the subsequent months - a feat which is pretty rare as there is generally some type of takeover speculation that occurs in these bombed out companies. The answer as to why there has been no bounce is no doubt explained by the incessant selling of the stock by certain shareholders of which Schroders have been one of the most active in recent months.
Helphire chart
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The reason for the collapse last year was the discovery of ‘holes’ in the balance sheet - always an ominous sign... These holes related to historic claims that had been over-stated by the former FD (who ultimately resigned) and that summed to £40m. Given the heavy debt burden of Helphire this has created pressure on the balance sheet with a real risk of an equity re-financing or debt for equity swap. A modest boardroom clearout occurred in the summer of 2011 that included no less a luminary than the former Tory party leader Michael Howard being shown the door. The management change was instigated by major shareholder Neil Woodford of Invesco Perpetual whom are saddled with the thick end of just under 30% of the stock.
Potential 10 baggers & how to spot them
On the potential catalyst front to restore some equity value are the following issues: (a) The Group’s bankers re-approved its credit line up to the end of 2014. This is positive in that it avoids an immediate administration risk and actually allows the company time to continue to collect in the large amount of legacy claims and apply this to the repayment of debt. However, the debt outstanding of £132m against an equity value of just over £4m paints a clear picture of just how high the hurdle is to bring these 2 sides of the Enterprise Value component back towards equilibrium. The main risk with this stock suggestion is that there is a debt for equity swap that wipes out shareholders. If this doesn’t occur, and the debt is paid down extensively from the claims collections and/or the issue r.e. a Court case in (b) below, then the rise could be substantial. (b) Perhaps the most interesting immediate catalyst for a re-rating of Helphire is the situation surrounding Accident Exchange’s case against former employees of Autofocus in which accident claims were, allegedly, fraudulently represented in court and that resulted in peer Autofocus’ recovery rates being materially detrimented. If Autofocus is successful in their claims, it is expected that Helphire also could recover additional monies in relation to the spill over to their historic settled cases.
Should Helphire avoid a debt for equity swap and be successful in a court claim similar to that in (b) above, it is not inconceivable that a market capitalisation of £20-25m is possible. This would, in our opinion, require a reduction in the debt burden down to circa £60m over the next 2 years from the current £132m. A resultant Enterprise Value of £85m would put the Group on an EV:EBITDA multiple of 4 times. To wrap up, the magic ingredients that you are looking for in order to hook a prized ‘multi bagger’, if not a ten bagger, is as follows: you want to find a company with a debt pile that can be paid down by way of asset divestments or spin offs and where the residual business has decent rump value but has a negative current implied value. Alternately, a company with a decent cash pile in an area of the market that has the potential to be valued highly (biotech, tech, oil explorers) and, ideally, where sentiment is overly depressed is perfect potential fodder. Marry these elements with those companies where management have significant stakes and where the ‘story’ has not become popular on the bulletin boards (indicating that the speculative retail money is ‘in’), and you are some way there towards bagging one of these outsized returners. Thorough research, holding your nerve and as ever, the intangible and ever elusive requirement of ‘lady luck’, and you never know, you could join the rare ten bagger club. Remember, though, that they are like ‘holes in one’ — exceptionally rare. Good luck!
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Special Feature
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An Anatomy of a trade by LS Trader
An Anatomy of a trade In this month’s article we will focus on a popular request that we have received many times, that is - what makes a trade? There are numerous trades that we could have looked at this month, but we thought we would narrow it down to an analysis of one long and one short trade. One of these trades is one that we recently exited and the other is still running at the time of writing.
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Special Feature
To start off with, in true trend following style, we very much subscribe to the belief that prices are never too high to begin buying, nor too low to begin selling. This is counter to people’s natural tendencies and is the opposite of what most losing traders do which is ironic as in true time tested fashion; quite simply it works. This belief can be traced back to almost 100 years ago in the classic book, “Reminiscences of a stock operator” which is very definitely worth reading and is based on the trading philosophy of legend Jesse Livermore, who was a trend following pioneer. This shows that strategies that worked almost 100 years ago still work today. The reason? Ultimately the markets are made up of people and people by and large don’t change. They make decisions based on greed and fear in the same way today that they did 100 years ago, and will likely still be doing so 100 years into the future. For our long trade example we will look at a trade that we recently exited which was Soybean Meal. Based on our proprietary trading rules, Soybean Meal generated a long entry signal on LS Trader on the 27th February on the May contract at 33950.
Soy Bean Chart
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At this point both the long and short term trends were in alignment and the market had broken above a key prior resistance level; giving a momentum trade breakout to the upside with plenty of room to run since the next major resistance level was around 40150. The system entered long at 33950 on the May contract and rode the trend all the way up to contract expiration on the 27th April where we exited May at 42740 and rolled forward into the July contract. This banked some 8790 spread betting points profit. The July contract then continued to rise for a few more days until some resistance formed and the trend came to an end. Since there is no way of knowing in advance how long a trend will run for, it is necessary to give a trade some room to breathe and the exit stops need to be trailing up behind the market. In this way, it is always necessary to give back some profit on a trade before exiting as evidence that the trend is over is required before exiting. Again, this is contrary to most punters instincts — people quite simply have an ingrained desire to sell at the top (as well as buy at the bottom) whilst fighting their desire to snatch profits too soon and run losses too far.
© Metastock
An Anatomy of a trade by LS Trader
A proper trend following system that is completely automated, like ours, turns all this on its head and takes the emotion out of trading. This is a key concept to keep in mind as if you enter a market on a uptrend, it is logical to remain in that trade until the trend is over. A mistake that novices (and even traders that should know better) regularly make is exiting too soon. There is always a temptation to take a profit, but doing so is the wrong thing to do until there is evidence that the trend is over. There is a major myth on Wall Street that you can never go broke taking a profit. This, in our opinion, is incorrect. The reason is that the markets only trend around 40% of the time: meaning that you can only expect to win on around 40% of trades. In order to be profitable then it is necessary to have your winners be larger than your losses. This can only be accomplished in 2 ways: one is cutting losses quickly and the other is letting profits run in order that small profitable trades have a chance to develop into larger profitable trades. If you think about it logically, it is impossible to ever take large profits if you always take small profits because small profits can never develop into large profits if they are taken too soon. This is a lesson that nearly all traders need to learn.
Crude Oil Chart
For our short trade example we are going to look at Crude Oil which is a trade that the LS Trader system gave a short entry for back on the 7th May on the July contract, entering at 9690. This was the level at which our proprietary rules had indicated that the trend had switched to down from up, following the break of key support at 9705. A glance at the chart will show that this break means that not only is the long-term trend down, but so is the short term trend. Add to this the break of key support and you have a very attractive trade proposition. When the short term and long term trends are aligned and a market breaks out from a consolidation, this gives the maximum chance of a trade developing into a decent trend. There are, of course, never any guarantees that this will happen and the trade could have reversed following the breakout to give a whipsaw loss, but this did not happen and the trend continued south, and is still heading south almost 6 weeks later.
Š Metastock
July 2012 | www.financial-spread-betting.com | 25
Special Feature
From the entry price of 9607, the market fell to 8107 in just 5 weeks which represents a gain of 1500 spread betting points. This is a very healthy return in just a few weeks, and at the time of writing the trend is not over yet although there are signs that a short-term base may be forming around the 8100 level. However, until we get evidence that the trend is over, and that aggressive buying has returned, we will remain short. Our system includes proprietary rules that indicate what the long-term trend is as well as where the trend is likely over; at which point we exit the trade. If the 8100 support level does get taken out, July Crude may fall to the next support level around 7700. So, above you have two very recent actual examples of trend following trades we are playing - one long and one short; as well as an outline of the thinking and strategies that were used to initiate, manage and, in the case of the Soybean Meal trade, finally exit the trade. It should be evident that a few trades like these two, both of which have generated large profits, will more than make up for the instances where the markets give false breakouts forcing the trader to exit for a loss.
This brings us back to the key concepts of successful trading, which are: • • • •
Trade with the trend Ride winners Cut losses Manage risk
There is a lot of extraneous fluff bandied about by many so-called experts, most of which is either incorrect or unnecessary. All that is really required to consistently extract profits from the markets is an understanding of the above four concepts and rules which incorporate them; coupled with the discipline to consistently apply them - the latter is what really curtails many people from making money in the markets. All of the above concepts are an integral part of the LS Trader system and subscribers to LS Trader get an analysis of the trends as well as the levels that the system will enter and exit trades in real time, as well as much more.
Readers of SpreadBet Magazine can take advantage of a 30-day free trial so that they can test the system out for themselves. This free trial is a true £147 value. In order to start your trial simply visit www.lstrader.co.uk/spreadbetmag
26 | www.financial-spread-betting.com | July 2012
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Special Feature
Ophir Energy A new oil giant in the making? “Quinquireme of Nineveh from distant Ophir…” (“Cargoes”, John Masefield) “Moreover also, the fleet of Hiram, which brought gold from Ophir, brought in, from Ophir sandal-wood in great abundance, and precious stones.” (King James Bible, 1 Kings 12:11)
28 | www.financial-spread-betting.com | July 2012
Ophir Energy - A new oil giant in the making
July 2012 | www.financial-spread-betting.com | 29
Special Feature
At Trendwatch Asset Management (TAM) we’ve been fans of the oil producers’ sector for as long as I can remember. It’s hardly rocket science. A finite supply; exponentially growing demand from newly emergent economies such as China and India; the escalating cost of getting the black stuff out of the ground (or these days, out of the sea bed); the ever-present threat of supply disruption in the Middle East (notably Iran)… Frankly, when the oil price takes a breather, as it is currently, we just rub our hands and treat it as a buying opportunity. The problem is not the lack of decent oil shares to buy; it’s the state of the equity market. TAM’s whole investment strategy is founded upon buying into shares in the early stages of an uptrend. On fundamentals, an oil company may be the most brilliant in the world. But why would you want to buy its shares if they’re falling? Surely the time to buy is when they stabilise and start to trend upwards again? TAM is uniquely placed to know about trends. Our proprietary trend analysis software scans every share on the market, identifying exactly where each is in its own particular trend cycle. Our software currently tells us that there are currently… wait for it… just two oil shares that meet our stringent definition of an uptrend. Fortunately, one of them is what looks to me to be a cracker: Ophir Energy (OPHR), Established in 2004, it floated on the Official List in London just three weeks before last August’s stockmarket crash. Its founders comprise a strong technical team with over 160 years of combined regional experience.
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One of its largest shareholders, Mvelaphanda, a South African industrial and resources conglomerate, was founded by Ophir’s non-executive chairman, non-other than controversial Gauteng politician Mr Tokyo Sexwale. This successful relationship has helped the company build strong connections with key governments and oil and gas participants throughout Africa. Ophir’s achievements to date can be summarised thus: • The largest net acreage holder in the offshore East Africa • Fifth largest deepwater acreage holder in Africa. • At least five potential world scale oil and gas plays. • 4 billion barrels of oil equivalent of net unrisked resources. • Interest in 17 projects in 9 different African jurisdictions. • Commercial discoveries in 5 out of 8 operated wells to date.. • Clear monetisation plans for gas discoveries. • Active drilling campaign over next 18 months • Targeting 1.8 barrels of oil equivalent of net unrisked resources. There’s a global shortage of deepwater drilling rigs at present, but Ophir had the clout to secure three of them, West Polaris, West Aquarius and Deep Venture, via rig-sharing agreements with ExxonMobil Inc. These agreements give Ophir more than 500 days of deepwater rig time, divided into three slots over a three-year period. So Ophir is able to make firm plans to evaluate and test its exploration portfolio.
Ophir Energy - A new oil giant in the making
Just under a year ago, the good fairy, who presided over Ophir’s birth, came back for the christening when billionaire Indian steel magnate Lakshmi Mittal lashed out $220 million for a 21% stake. That’s serious money even by his standards. And four months ago it added another £150 million to the coffers by way of a placing. Somewhere along the line the company also scooped up Dominion Petroleum. The CEO had this to say about five weeks ago: “Ophir continues to develop at pace. Over the past six months we have… acquired five seismic programmes in Tanzania and Gabon, and completed Jodari-1 as the largest discovery in the Company’s history. The recent equity raise strengthens Ophir’s balance sheet to support this momentum, and a further five well results are expected by the end of the summer.” Despite several mentions in the Bible, historians can’t agree on the location of the ancient port of Ophir, or even in what country. But we can be fairly sure that Ophir was somewhere in Africa, which is where Ophir Energy operates – specifically in Congo, Senegal, Guinea Bissau, Equatorial Guinea, Gabon, Somaliland, Tanzania and Saharawi. I suspect that, like me, most of you would struggle to pinpoint these countries on an outline map of Africa!
Masefield’s poem (top of this piece) contrasts the transport via Ophir of the unimaginable riches of ancient times on a quinquireme (a type of Greek oared warship) with the “Dirty British coaster with a salt-caked smoke stack…with a cargo of Tyne coal… pig lead… firewood… and cheap tin trays.” Wealth changes its form as the centuries unwind, but we’ll settle for an oil-streaked tanker when Ophir starts gushing in earnest. These are early days for the company so investing is an act of faith. But judging by the involvement of seriously wealthy investors such as Mr Mittal, we reckon Ophir is destined to become a major player in the industry within a few years. We were a bit late to the party – after holding steady at just above 250p until January, the shares have more than doubled since. We were initially put off by the fact that it’s unlikely to make a profit until at least 2015. Only when we came to look more closely did we see its qualities come shining through.
July 2012 | www.financial-spread-betting.com | 31
Special Feature
Ophir Energy chart
Just because we were late to the party doesn’t mean that the party is over. Mr Mittal bought in at 250p and the most recent shares were issued at 495p. So the rich get richer. But there might be a bit left for the rest of us too. Credit Suisse for one has a target price of 900p. Since 2009, Trendwatch Asset Management has run a unique equity-based managed spread betting service, which has many benefits, not least:
• Gains are not subject to UK income or capital taxes • Low minimum investment: £5,000. • Your funds are held by FSA-registered spread betting brokers • Complete transparency – you can log in to your account 24/7 and observe your investment changing in real time. • 5x gearing, which resulted in a 67% gain in 20 months between May 2009 and January 2011.
We have just launched a new version of this unique investment; with greatly improved risk management to reduce downside volatility in adverse market conditions. To register your interest and benefit from a reduced inital fee especially for Spreadbet Magazine readers, email editor@financial-spread-betting-com quoting TAM.
32 | www.financial-spread-betting.com | July 2012
Mid term update
Mid term update How are our trades faring? Unlike many financial publications where editorial contributors simply pump out story after story and there is no real way of measuring the effectiveness of their pieces (unless you are both very diligent and have a lot of spare time as a reader!), here at Spreadbet Magazine we plan on measuring our ‘Conviction’ recommendations (Buy and Sells) - those that we go out on a limb with in terms of our belief.
To date, we have now put out 5 Conviction stock Buy recommendations and a clear directional play on the Nikkei at the start of the year; each detailed below with the price point at the time. We don’t believe in measuring ourselves against an index - the FTSE for example. Rather we ask the fundamental question as a spreadbettor; that being - did we make a recommendation that made or lost money?
July 2012 | www.financial-spread-betting.com | 33
Mid term update
Here are our primary recommendations -
1
Japan
Japan was our top pick of the markets for 2012 in our January edition in which we set out the case as to just why we believed it would be an outperformer against other global indices. This played out perfectly for the first 3 months with the index rising from 8500 at the start of the year to 10255 at the peak - a return of over 20% against 10% for the S&P 500 and 8% for the FTSE at their respective peaks as the chart below illustrates. In recent weeks the Nikkei has however returned to flat line on the year, and is now modestly underperforming the World index which is up just 0.5% (time of writing).
Nikkei 225 chart
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We stick with our belief that, notwithstanding the slowdown in China - to which Japan is probably the most heavily exposed to given its regional dependence - that valuations here are basically at a bear market trough. A long bet at this level (8450) will likely prove a better home for punters’ money than in the US in particular over the medium term (12 - 18 months). A ‘core’ long bet on the global indices to us.
How are our trades faring?
2 We wrote a lengthy piece in our May edition and have revisited this recommendation in the “Oil Explorers Dream portfolio� piece this month found on page 48.
elow is a chart of Heritage over the last 12 months with our Buy entry level. Our Conviction Buy is re-iterated here and we will revisit this trade at the end of the year.
Our trade entry price was 142p and at the time of writing the stock is trading at 125p. B
Heritage Oil chart
July 2012 | www.financial-spread-betting.com | 35
Mid term update
3
We initially covered CWC in our April edition within which we pointed out the extensive and sustained buying of the shares that had been carried out by CEO Tony Rice during the last 2 years all the way down from 60p to the early 30p’s. At last count he held over 30m shares with a rough average of around 40p. This magnitude of director’s vested interest should not be underestimated — your pain is his pain and vice versa. The final results on the 6 June in which the Company cut the dividend in half to 4c was actually received well by the market as it rebased the Group’s cash flow rofile to a more sustainable one going forward.
Cable & Wireless chart
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At the current price the shares yield almost 9% with the dividend now being covered over 1.5 times. We moved to a Conviction Buy on this date and below is the 1 year chart showing our entry level (30p). Please note that the registration date (the shares have gone XD) has now been passed for the final dividend and which equated to 3.5p (5.33c). This means that if you had purchased the stock, this would also have been credited to your CFD or spreadbet account.
How are our trades faring?
4
It was a punchy call in our May edition to slap a Conviction Buy on the whipping boy that is RIMM. Many an eminent global fund manager has caught a cold buying the shares down from $30 a share over the last 18 months, and that includes such luminaries as David Einhorn and George Soros, no less. Quite simply, our Buy recommendation was based upon a “sum of the parts� calculation that stuck a floor on the stock of $11-13 in a fire sale; the target of $20 being based upon a 50% premium to the then share price ($13) in the event of a takeover.
At the time of writing, the shares trade at $11 and so from the recommended purchase price there is a capital loss of $2 (15%). Given the modest premium to tangible book value that the shares currently trade on we remain long Rimm in the expectation of corporate activity.
RIM chart
July 2012 | www.financial-spread-betting.com | 37
Mid term update
5 We first covered Bowleven in our Feb/March edition where we postulated upon 4 potential outcomes given the takeover approach the company was subject to at the time by Dragon Oil. It is fair to say we that did not see the falling apart of the bid approach so swiftly, indeed only ascribing a 20% probability to this. We also stated that we would: (a)sell shares to reduce risk on a rise to 150p (which duly occurred) and that (b) we would re-implement purchases at the 110p level (which unfortunately we did too!).
Bowleven chart
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We moved to a Conviction Buy on Bowleven on the 6th June at 59p and cover it in depth in our Oil Explorers Dream portfolio piece this month on page 48. The chart below looks to us as if the stock is carving out a 4th bottom.
How are our trades faring?
6 Gulfsands was first brought to our readers’ attention in the Directors Dealings section of our June edition following recent buying activity by the board. It is fair to say these shares are not without risk given their exposure to Syria where civil unrest appears to be escalating.
Our piece on the Oil Explorers Dream portfolio this month expands further on the investment case for Gulfsands and, as the chart below illustrates, the stock is dramatically oversold at this level. This has become our 5th stock Conviction Buy this month at 90p.
Gulfsands Petroleum chart
July 2012 | www.financial-spread-betting.com | 39
Special Feature
Evil Knievil’s mid term overview
This month, as part of our mid-term update, we take a look at Simon Cawkwell’s trade recommendation record for Spreadbet Magazine readers this year. Starting with our inaugural Januay edition in which Evil offered up 6 short opportunities for 2012. Below are each of the stocks with the recommended short price, current share price and their respective charts: 1
Hargreaves Lansdowne recommended short price - 440p. Current price - 474p
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Evil Knievil’s mid term overview
2
US Treasury Bonds recommended short price - 440p. Current price - 474p
3
Experian recommended short price - 900p. Current price - 936p
July 2012 | www.financial-spread-betting.com | 41
Special Feature
4
Carillion recommended short price - 310p. Current price - 270p
5
Pursuit Dynamics recommended short price - 80p. current price 14p.
This has been Evil’s most spectacular success this year and a particularly apposite illustration as to why he is not known as the UK’s most feared bear raider for nothing. Spot on Simon.
42 | www.financial-spread-betting.com | July 2012
Evil Knievil’s mid term overview
6
Thomas Cook Group recommended short price - 14p. Current price 16p.
It’s fair to say this would have been a ‘hairy’ short with the stock doubling in price from the recommended short level on re-financing and takeover speculation before returning back to the 15p level. Another advocation for diversification and position size!
From the Feb/March edition Evil switched his trademark short hat to offer up 6 potential Buy opportunities for 2012. Below are each of the stock’s recommended purchase price, current price and the respective chart:
1
Beximco Pharma GDR
recommended purchase price - 24p. Current price - 22p
July 2012 | www.financial-spread-betting.com | 43
Special Feature
2
Trading Emissions recommended purchase price - 27p. Current price - 19p
3
Sea Energy recommended purchase price - 28p. Current price - 28p
44 | www.financial-spread-betting.com | July 2012
Evil Knievil’s mid term overview
4
Tanfield recommended purchase price - 60p. Current price - 54p
5
Ruspetro recommended purchase price - 155p. Current price - 155p.
Evil’s most successful purchase with the shares rising almost 70% from the suggested purchase price. He later re-iterated his Buy advice on this stock in our June edition with a new price target of 750p. We also believe this is a very interesting play at the current price.
July 2012 | www.financial-spread-betting.com | 45
Special Feature
6
Bank of Ireland recommended purchase price - 15c. Current price - 10c
From the June edition Evil suggested a short position be opened in the South African minerals giant Randgold at a price of £48. At the current price of £56 Evil’s under water on this one — but this is his signature style; namely he is very happy to sit and wait for his view to play out over time. We will watch with interest how this pans out as the year progresses...
46 | www.financial-spread-betting.com | July 2012
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July 2012 | www.financial-spread-betting.com | 47
Special Feature
A Spreadbet Magazine
Oil explorers Dream Portfolio list We released a blog on our website on the 24th May in which we opined on a potential dream oil exploration stocks portfolio list with an 18 months time span to allow it to bear fruit. This proved to be by far our most popular blog to date - evidence indeed at the magnitude of private investors’ interest in this sector.
48 | www.financial-spread-betting.com | July 2012
Oil explorers - Dream Portfolio list
This article is an expansion of our case as to which stocks we think you should tuck away for 12 months in the expectation of (a) potentially positive drilling results/news flow, (b) possible corporate activity given the lowly valuations of each of them and (c) a possible general re-rating given the drubbing in recent weeks. With the oil price (Brent crude contract) still hovering around the key $100 a barrel price level and showing little likelihood of relinquishing decisively this new benchmark price point, the stocks we detail below trade at such discounts to both their respective NAV’s and recent industry corporate deal comparables, that it seems inconceivable to us that they cannot fail to re-rate over the ensuing months, certainly on a portfolio basis. The key to the recommendations below is to (a) ensure, as ever, that you have the margin to carry a decent move against you (apologies to regular readers who will now be very familiar with this caveat that I ALWAYS insert, but I hate to see a trade come good and you not be able to enjoy the returns because one over leveraged oneself) and, (b) to enter it on a portfolio basis, i.e. to spread the risk and buy each stock not just one. The danger of choosing one singular stock is that you pick the wrong one and ‘sod’ and ‘law’ make their usual appearance... Taking each stock in turn:
Gulfsands Petroleum 90p current price From a high of over 400p in early 2011, the shares have continued to touch new lows in recent weeks, in fact falling to just 77.5p on the 6 June. At the current price of 90p the market capitalisation is now just a shade over £100m and yet the company sits with around £68m of net cash. Gulfsands is being hammered due to continuing political and civil unrest in Syria that, in recent weeks (at time of writing), seems to be intensifying; even in the face of almost universal political condemnation.
The effect of the unrest on the company has been a de facto halting of their activities within Syria (its principal exploration asset and which actually was producing positive cash flows) in the early part of the year. General Petroleum Company (GPC) - Gulfsands’ joint partner in the Syrian operations (known as Block 26) has, however, continued to pump oil during this period and, at the beginning of February, Gulfsands was owed approximately $25m from GPC and so reducing even further the very slim premium to the company’s cash value that the shares currently trade at. It is worth pointing out too that although Gulfsands is currently restricted under sanctions from involvement in operations in Syria, its partner GPC does continue to operate, and Gulfsands continues to accrue its entitlement to the production revenues generated from this arrangement. Within Syria, there were 4 oil discoveries during 2011 and its 2P reserves within this area alone rose to just under 74.5m boe. Let’s think about that for a moment. The company has cash of £68m and a market cap of £100m and, prior to the unrest, enjoyed a positive cash flow profile. This means that the proven and tangible Syrian Oil is valued at under 50p per boe. Should the political and civil unrest in Syria abate and the sanctions against Gulfsands be lifted, then the re-rating would be dramatic as a 50p boe valuation (less if we factor in the cash accrual due to Gulfsands from GPC) is unheard of. The company actually made a profit after tax last year of £35m - the shares therefore trade on 1 times ex cash historic earnings. Aside from the oil within its Syrian fields, management also reported 65bn cubic feet of gas in place reserves and with a monetisation path from 2015. At the current price the market has ascribed pretty much a zero probability to a resumption of its Syrian activities but equally importantly (and so our opportunity) attributed almost no value to its other Global operations which span Iraq, Tunisia, Italy & the US (the latter of which management have been steadily divesting assets).
July 2012 | www.financial-spread-betting.com | 49
Special Feature
As detailed in the June issue of our magazine, on the 11th May Mr Mahdi Sajjad (a director) purchased 30,000 shares at 111.75 on behalf of a Discretionary trust his children are beneficiaries of, taking his total beneficial holding up to 8.65m shares. Back in February, Chairman Andrew West also purchased 17,500 shares at 179p. There is a further intriguing spin on the Gulfsands story and that is the stake-building by both Michael Kroupeev (the Russian oil financier who has amassed a stake of 18% of the shares in the past few months) and also Soyuzneftegaz (a group headed by Yuri Shafranik, Russia’s former energy minister) that has picked up 3.4%. Clearly these boys see value and they each have prior ‘form’. Rumours of predatory takeover interest by CNOOC (China National Offshore Oil Corporation) are likely to commence in earnest again at these depressed levels.
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Recall also that back in April 2010 Gulfsands received an unsolicited joint bid proposal from Oil India Ltd & Indian Oil Corp Ltd at a price of 315p (over 3 times the current price and illustrative of the type of re-rating that will likely occur should the Syrian situation reach a positive conclusion) and that was unanimously rejected as undervaluing the company at that time. It is worth pointing out too that management are totally aligned with shareholders and highly incentivised to restore value given their combined interest of 17%of the equity. Should political signs of stabilisation and/or Government change in Syria become apparent, then I fail to see how the shares cannot dramatically re-rate or, alternately, be swooped upon by a predator. This becomes our 5th Conviction Buy recommendation some people will say too risky - we believe it has been overly discounted, and then some.
Heritage Oil 130p current price Heritage’s shares currently trade at the second lowest valuation relative to risked NAV within the mid cap Oil & Gas exploration sphere today (Gulfsands now being number one). The company has been sold down to such a degree over the last 15 months that in fact, at the time of writing, the company’s Enterprise Value (market capitalisation — cash) is just £110m. The depletion of shareholder value has been so great that even though the path to monetisation of their monster gas find in Kurdistan is becoming clearer by the day, almost no value is now ascribed to this by the market. It is worth remembering that the Miran field alone has been valued at between 150p to 300p per share by independent analysts. At the current share price the company’s entire portfolio is valued at just 43p per share adjusted for the cash. Remember too that should Heritage emerge successful in their dispute with the Ugandan Tax authorities and Tullow Oil, that approximately £1 a share would be returned in cash to the company. If this happens the net effect is that there is a negative value of over 50p currently ascribed to the Group’s entire portfolio at the current share price.
We have noted that the major shareholders, including Tony Buckingham himself (CEO) and savvy institutional player Lansdowne Partners, have not reduced their holding in the company during this savage and unrelenting downdraft. In fact, the company itself has bought back in excess of 30m of their own shares during the last 12 months - with an average purchase price approaching 200p. They saw value nearly 100% higher and “Mr Market” has now thrown us the opportunity to pick up shares at 130p. I would suggest those readers not familiar with our previous recommendation on this stock take a look at our link here: http://issuu.com/spreadbetting/docs/ financial-spreadbetting (Page - 26) and that sets out a detailed valuation case for Heritage Oil. We made Heritage a Conviction Buy last month at a price of 142p and given the continued drubbing in recent weeks due to the continuing Eurozone woes that has sliced another 15% off the stock price, we take the opportunity to re-iterate our belief here.
July 2012 | www.financial-spread-betting.com | 51
Special Feature
Bowleven 60p current price Bowleven’s activities focus primarily on West Africa in Cameroon. The Etinde Permit was the main focus of drilling in 2011 and comprises approximately 2,316 km² of exploration acreage located across the Rio del Rey and Douala Basins in offshore Cameroon. In late 2010 and early 2011 the shares rode up to £4 from a low of 20p in 2009 (a 20 bagger no less!) on hopes that its acreage could be the next Tullow Oil. However, a series of drilling disappointments on its Sapele well drills hit the shares hard. In February 2012, the company announced a potential takeover bid by Dragon Oil which, to everyone’s surprise including ours, very quickly came to nothing. Many respected analysts believed the shares to be worth between 150 - 250p to Dragon Oil and the stock was quickly ran up to the 150p level before Dragon walked away. It was confirmed that Dragon did not actually progress to look through the company’s books and it is our opinion that the ‘steal’ opportunity they were expecting to capitalise on, given the then value of Bowleven, was taken away with the sharp re-rating. As a betting man, I would say that Dragon expected to pick up Bowleven for 120-150p and when it became apparent that shareholders would not accept this they walked early stage before wasting funds and time on an approach that would have been shown short shrift. Further drilling activities on the Etinde discoveries are planned for this year and next with two firm wells and two contingent wells, beginning with IM-5 appraisal well on block MLHP. The start of the exploration drilling programme in onshore Bomono is also planned for the second half of 2012. In April the company also signed a Memorandum of Understanding between SNH, German company Ferrostaal GmbH and EurOil Ltd with a view to supplying natural gas to a chemical fertilizer plant in Cameroon, and which potentially makes its existing gas find a commercial proposition in the near term.
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With OIP (Oil in place) of around 650 mm barrels plus and substantial gas finds from the exploration undertaken by the company to date, Bowleven already have an attractive base case valuation. Drilling success in Q2/Q3 this year would very likely cause a serious re-rating of the stock. The current market capitalisation of £182 million attributes a shade over £100m of value to the successful discoveries made to date and almost discounts as worthless the permits the company holds (something Dragon Oil disagreed with...). The company currently sits with cash of approx 35p per share too following the capital raising undertaken by Kevin Hart last year that raised £80m at 103p per share. It has to be said, however, that part of the reason for the sharp de-rating is increasing twitchiness on some investors part as to whether they can raise the circa $250 - 300m of extra cash that is required to begin production on their fields. We doubt, at the current share price, that Mr Hart will embark upon another dilutive equity fund raising, but more likely look for ‘farm in’ partners, and that will be less damaging to shareholders’ interests.
Oil explorers - Dream Portfolio list
But for the dilution/capital raising risk, the current share price is a nonsense in our opinion. Success during the balance of the year in their drilling programme will likely propel the stock back over 100p and provide a solid platform for farm-in negotiations by management from a position of strength. Alternately, at the current price, we feel the shares are excessively oversold and that the downside is almost non-existent now.
The chart below shows just how far we have fallen with the stock now down nearly 90% from the highs of last year. We made Bowleven a Conviction Buy at 59p on the 6th of June.
July 2012 | www.financial-spread-betting.com | 53
Special Feature
Xcite Energy 80p current price We have covered Xcite Energy extensively in both previous editions and also via our blog with a warning that a break of 100-110p would be a serious technical setback. Well, we tempted fate and the shares fell through the key 100p level to re-trace all their gains in the early part of the year. We have been perplexed at the sustained weakness given the news flow, however, and which included the reaffirmation of 2P (proven & probable) reserves of 116 mm barrels of oil. In early April confirmation that the company received a $50 million unsecured loan from Canadian based West Face capital was also a positive step towards extracting value from their asset base. Xcite is currently drilling the 9/3b-7 well by the Rowan Norway rig to allow an extended well test to take place to validate the Bentley reservoir model. First oil is expected imminently and this may be a sentiment changer.
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The shares should respond to further news on the well test as well as any progress on reserves based lending (RBL) to allow the next stage of the field development. At the current price of 89p, although technically worrying from a chart perspective, XEL looks like an inexpensive and relatively low risk play on the resumption of North Sea oil production. At the current Enterprise Value:2P, although not as ludicrously cheap as Heritage and Gulfsands (which of course have very different risk profiles in terms of their regions of operation relative to the North Sea), we wouldn’t be surprised to see a resumption of takeover speculation. Part of the reason for the run up in the share price in February this year was speculation that Statoil may make a move on them. Stranger things have happened...
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July 2012 | www.financial-spread-betting.com | 55
Special Feature
Falklands Oil & Gas 97p current price Falkland Oil and Gas, the South Falklands basin focused oil and gas explorer, has been the main share price beneficiary of Borders & Southern’s gas condensate find in early April this year with the stock rising from a year’s low of 41.75p to approaching 100p (time of writing). Interestingly, even though Borders fell back sharply following the gas find (the market being disappointed it was not oil) and the subsequent capital raising for the second drill, Fogl has retained its price appreciation, and against its sector peers continued weakness.
The move that Borders experienced in the run up to the drilling results, with rampant speculation of the data to be revealed, could be a precursor as to what may happen over the next several weeks with Fogl as the drill reaches terminal depth. The chart below is interesting in that there is a clear gap at the 200p mark and the shares have been tracing out a classic ‘saucer’ bottom over the last 12 months and a beautiful golden cross has now formed. With the fallen RAB Capital legacy stock overhang out of the way now too, this also plays into the bull hands.
Although Borders find of gas was not what the market had really hoped for, we believe that the presence of hydrocarbons and the locating of them on the drill by Borders has de-risked the impending drilling by Fogl. The Leiv Eriksson drilling rig is due to start drilling on FOGL’s acreage following the completion of Border’s Stebbing prospect next month. At a cost of around $180 million it is a high stakes drill where fortunes could be made. Two exploration wells will be drilled; Loligo and either Scotia or Nimrod. The prospective resources of Loligo are 4.7 billion barrels and Scotia/ Nimrod are around 1 billion barrels — a strike on this drill will make Borders move from 40p to 120p look like a small blip on a cardiograph.
In March 2012 the company also announced that it had granted an option to an, as yet, anonymous company to farm-out a maximum of 25% of the FOGL licences which gives FOGL significant financial leverage to maximise its drilling activities during the remainder of 2012.
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Make no mistake, that is a higher risk prospect with a relatively binary outcome - a successful drill and returns in the 100%’s are likely or, in the alternate, a duster with both drills, and a Desire Petroleum type outcome. Don’t bet the house on this one!
Oil explorers - Dream Portfolio list
Northern Petroleum 70p current price At the current market cap of £60m, Northern Petroleum trades at a premium of just £35m to its last reported cash reserves. Northern’s geographical activities concentrate principally in the Netherlands where they are actually producing oil & receiving revenues. The company’s licences include the potential for exploring the Shale basins in the North & West of the Netherlands and where an independent study has estimated gross reserves of between 20-30bn barrels of oil. The company does however have activities in Guyane (at time of writing, there is a legal spat with the Government of Guyane over the exploration license validity, although the importance of this to NOP is very minimal given their tiny interest in the Guyance license at stake), Italy (the 2 areas with good exploration prospects and hence NAV upside) & the UK which includes both gas and oil opportunities. Consensus broker price targets exceed 100p per share, and at the current share price there is very little value ascribed to the company assets with the stock trading on an ex cash PE of under 5 times.
The chart below is quite interesting to us too in that there is the tantalising prospect of a ‘double bottom’ formation now the stock has returned to the 60p level. From an RSI perspective the shares are oversold (being around the 30 level) and the weekly stochastics seem to be giving a lead indicator of an upturn. Married with the cheap valuation for an established and politically low risk operator, we believe the shares offer good value here. Please note that this is quite an illiquid stock and depending upon your spreadbet firm, the margin requirement may be high. Stops should be used cautiously given the illiquidity - best to take a modest position size than run too rigid a stop.
July 2012 | www.financial-spread-betting.com | 57
Editorial Contributor
Dominic Picarda’s Technical Take Global Markets Overview Dominic Picarda is a Chartered Market Technician and has been responsible for the co-ordination of the Investor’s Chronicle’s charting coverage for 4 years. He is also an Associate Editor of the FT and frequently speaks at seminars and other trading events. Dominic holds an MSc in Economic History from the LSE & Political Science.
The global economy and the uptrend in developed-world stock markets since early 2009 are in danger. The possibility of a collapse in the Eurozone is creating enormous uncertainty and contributing to slowing growth well beyond its borders, including in both the UK and the US. A co-ordinated effort from the Eurozone’s stronger members, principally Germany, is needed to prevent disaster befalling its weaker ones, including Portgual and Italy and Spain. At the same time, central banks need to pump more liquidity into the financial system, in the US, Japan, in the UK and in Europe. I do not believe there will be a disastrous outcome in the Eurozone and that, in the final analysis, the instinct for collective self-preservation will prevail. Once the next serious round of money printing gets underway across the world, I am expecting another big rally in global equities. Until this is confirmed, my trading stance on stocks is fairly cautious.
S&P 500 At the start of June, the Dow Theory gave a sell-signal. This venerable branch of technical analysis – which compares the behaviour of the Dow Industrial and Dow Transport Averages has helped predict many market declines and recessions over the last 110 years. The average loss in the S&P 500 following a Dow-theory sell-signal is 14.8% over six months. While US stocks have bounced back since this signal, big risks remain. Given the S&P’s dear valuation, I believe that a sustained resumption of its bull market since 2009 will require more printed money from the Federal Reserve and progress towards a resolution of the European crisis. Still, with the index currently above its 55-day exponential moving average, I am not seeking short positions for now, despite my view that the S&P could retest 1268 this summer.
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Dominic Picarda’s Technical Take
FTSE 100 The FTSE offers much better value right now than the likes of the US equity indices. According to one of the most successful valuation models of all – ShareMaestro – the UK large-cap index is currently worth around 8700, compared to its actual present value of 5600. The necessary catalyst for the FTSE in order to get some way towards that level is, I believe, a major bout of monetary easing from the big central banks.
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Editorial Contributor
The Bank of England is already poised to inject further liquidity into the flagging UK economy, but it is America’s Federal Reserve and the European Central Bank that matter more here. With the index currently just above its 200-day simple moving average, I have a slight bullish bias. So long as the market meets this criterion, I would buy bounces off the 13-day exponential moving average currently positioned around 5430.
IBEX 35 I do not see Spain leaving the Eurozone, nor any other country for that matter, apart from Greece. Ultimately, it is going to be less costly for Germany and for other nations if the world’s twelfth largest economy remains within the single-currency area. Spanish stocks – which include international household name brands like Zara-owner Inditex, Telefonica and Repsol IPF – already offer potential opportunities to longer-term value investors. The dividend yield on the IBEX 35 recently touched 8.4%, its second highest level in 25 years.
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Dominic Picarda’s Technical Take
One issue with investing directly in Spanish stocks is currency-risk. I firmly believe that in order to survive, the Euro will likely have to cheapen versus many currencies, including sterling. However, spread bets are quoted in sterling and so do not suffer from this disadvantage. While the IBEX has bounce from its early June lows at 5988, it has yet to surmount its 21-week EMA. Were that to happen, I would be much more willing to believe that we were in the embryonic stages of a new bull market. In the meantime, I’d be looking to short drops through the 21-day EMA. A revisit of the lows is not out of the question.
Nikkei 225 Japan’s stock market is a world leader when it comes to producing disappointments. Equities in the land of the rising sun have had countless false dawns during their long bear market since 1990. It would take a brave man to declare the Nikkei’s slump as having ended at the early-June lows of 8239. Still, it is possible that the Nikkei could surge back towards the 10000 level once the next round of global money-printing starts up.
I would be much more inclined to take long positions in the Nikkei as and when it got back above its 21-week exponential moving average, currently at 9001. Until that time, I would use the daily chart and go short each time it dropped below its 21-day EMA.
July 2012 | www.financial-spread-betting.com | 61
Editorial Contributor
Robbie Burns’ Top 10 tips For surviving the markets The editor of this magazine emails me to give me a deadline for this month’s issue but adds whether I could write something a bit different this time. Obviously I began to write back: “Different?!! Whatdaya mean... last month’s not good enough eh? Go and stuff ...” Then I remembered he bought me a very expensive lunch recently... so, okay then. To be fair to me, I only ordered the second most expensive main and the fourth most expensive wine... Anyway, I mailed him back politely asking him for a suggestion. He came back with a good one: “How’s about Robbie’s top 10 tips for surviving the current market environment?”
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Excellent. It is a question of survival. I’ve survived. Cue in “Eye of the Tiger” music in your mind now. And I like thinking up Top Ten’s; though sometimes it is a struggle to find number 10 which is usually the craziest. So, in the hopeful spirit of nabbing an even more expensive lunch next time, here they are:
Robbie Burns’ Top 10 tips
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Editorial Contributor
1
DON’T MAKE LOADS OF TRADES EVERY DAY YOU IDIOT!
I can tell you this for a fact: if the trades you are making on your spreadbet account start to mount up every day, you are chasing the market. It will eat you up and toss you down the rubbish chute. The more trades made, the more losses pile up. Only trade when you think the odds are really in your favour. Stop pressing so many buttons.
2
HAVE A BREAK!
And not just a Kit Kat sized one. Things not going your way in the market? Stop huffing and puffing and saying bad words at your screen. Especially that one. Sell up. Come back next week or the week after. You don’t have to trade in a difficult environment. Keep hold of your capital and you can fight another day.
3
WAIT FOR THINGS TO SETTLE
Don’t just jump in because you heard Greece is saved on the news. Remember, everyone else knows it too. If there is big news about, don’t go straight in — especially right now because Greece can be saved and then lost in ten minutes in this environment. And if Greece is fixed, they come up with another country to worry about. Wait till the whipsawing ceases and you can figure out a longer-term trend is really developing.
4
WE’RE NOT ALL IN THIS TOGETHER
The professionals know just how to extract your hard-earned trading cash from you. In current conditions, the moment you are in profit the market will turn on you. And just when you take your losses it will shoot back up. Don’t let them have it.
5
BUY WHEN YOU ARE REALLY SCARED AND ABOUT TO SELL THE LOT
The professionals are buying just as the private investors are piling out. Remember if shares are tanking down on fear that prices are actually cheap! It’s amazing how private investors buy at the top and sell at the bottom.
6
SELL WHEN THE NEWS IS GOOD.
If you bought on the bad, you want to sell on the good. The Euro saved? All in the garden is rosy? Commentators saying the FTSE is going to boom up to 6,500 by the end of the year? Time to bank profits.
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Robbie Burns’ Top 10 tips
7
STOP BEING JUST A BUYER
Spreadbet firms will tell you even in bad market conditions that more people are still buyers than shorters. Seems that psychologically it’s hard to be a shorter. But if a share is in a continual downtrend, you must consider making some money on it as it goes down. Don’t just think long; think short too. If you get a decent short in and a downtrend continues, it can pay off handsomely as fellow contributor Evil Knievil will relay with gusto.
8
WATCH OUT IT’S A CASINO RIGHT NOW
Especially if you are playing indices. It’s tough to play those. The FTSE opens up 60; suddenly it’s down 30; hang on it’s up 30 again; now it’s down again... During all this mucking about unless you are one of the super special 5% of the day traders that win, the casino is, in effect, just raking in all your chips. Don’t let this happen. Only put your chips down if you are playing the FTSE when a proper trend one way obviously develops. Steer clear of the really choppy days because all your stops will get taken out.
9
DON’T STAKE IT ALL
In volatile conditions keep your leverage low. Play with a smaller amount. If you lost a lot, don’t try and get it all back in a couple of days. Don’t seek revenge on the market; you could lose more. Take your time to get it back then hit a profit.
10 DO THE OPPOSITE OF WHAT YOU WERE GOING TO DO! A bit of a crazy idea... or is it? If you’ve been losing a lot recently, don’t you realise how much money you would have made if you’d done the opposite? Imagine if you’d pressed sell instead of buy and buy instead of sell! So each time you trade, just as you are about to press buy or sell... press the other button instead! If you think that’s crazy, better go and read Evil Knievil. Now that guy really knows what he’s talking about.
If you’d like to meet Robbie in person, he is offering readers of our magazine a 20% discount off his July 16th seminar. At the seminar you can join Robbie for a whole day of live trading, suitable for both beginners and those seeking improvement in their trading. For details email him at robbiethetrader@aol.com with “SB mag discount offer” in the subject line.
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Travel Feature
Unique European Escapes
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Robbie Burns’ Top 10 tips
Everyone trader deserves a holiday and in these uncertain and stressful times you need to ensure that you really make the most of it. Here we have shortlisted our favourite European escapes for when you don’t want to travel too far afield, and only want the very best when you do. Mykonos A favourite European destination of the cognoscenti is the Greek island of Mykonos which, at just four hours from the UK, is a fantastic choice. Its location in the idyllic Aegean Sea means that the summertime climate is warm and sunny with temperatures reaching 27°C, and despite the recent economic issues what is still on offering is jaw-droppingly beautiful scenery and some of the most luxurious boltholes in the world. The Myconian Ambassador Hotel & Thalasso Center is a traditional, classy and intimate property that makes any holiday experience luxurious. The water-sports and PADI dive centre is extremely popular, with an array of activities available. Whether you fancy high powered Jet Skis and wake-boarding or windsurfing and kayaking, the facilities at Myconian Ambassador are second to none. If your top priority when on holiday is luxury and VIP treatment, the Gold Seal service at Mykonos Blu will not disappoint. The Gold Seal service can provide luxury airport transfers, helicopter hire, 24 hour butler service, an in-room cellar, yacht hire and a private chef as part of a personalised, private service throughout your stay in Mykonos.
Santorini The island of Santorini is, although another Greek Island, dramatically different to Mykonos. While Mykonos is flat and lined with soft, white beaches, Santorini’s steep coastlines and volcanic heritage make it a unique islet what with its famous caldera. Formed from one of the largest volcanic eruptions in the world, the island has a dramatic, cliff landscape with amazing views over the caldera, making it perfect for exploring the rugged cliffs and hilltops. As a result of the volcanic eruptions, the beaches on Santorini are lined with black and red pebbles and surrounded by the steep, picturesque landscape. The infamous Red Beach is one of the best beaches on the island. Hotels such as Grace Santorini and Vedema Resort have breathtakingly spectacular views across the coastline, jagged scenery and still ocean waters. Stays at Grace Santorini are traditionally known for romance & serenity with private rooms and bespoke concierge service.
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Another European destination that is perhaps less known, but equally as attractive, is the Croatian city of Rovinj. With pastel coloured buildings, winding streets and a Venetian bell tower in the centre of town you could be forgiven for thinking you are in Italy. The cultural sights do have reminders of Venice, from the Balbi Arch and the local harbour, but people here are proud to be Croatian. From April to October, tourists can take a catamaran from the harbour in Rovinj to Venice in just over four hours, perfect for a trip combining these two magnificent cities. Accommodation in Rovinj varies from large hotels and chic boutiques to town centre apartments and beach-side camping sites. The modern Hotel Monte Mulini boasts beautiful views over Lone Bay and features a large, contemporary spa offering signature treatments and cutting edge fitness facilities.
Fisherman & Farmer Elsewhere in Europe, the Amalfi Coast in Italy is another of our hand-picked favourite destinations. As a UNESCO World Heritage Site, the natural beauty and undisputed serenity of the area is captivating. The historic blend of ‘Fisherman and Farmer’ is still very much present with the mountainous land and protected waters being used for sustainability as well as tourism. In August the small resort of Ravello becomes an extravagant and enchanting abode with the Ravello Festival & Concert at Dawn taking pride of place. The Orient Express owned Hotel Caruso has stunning views over the Amalfi Coast and Ravello. Its palatial exterior and unique interior features make it a faultless member of the Leading Hotels of the World family.
Monte Carlo Finally, we can’t write about Unique European Escapes without mentioning the rich playground that is Monte Carlo. This tax-free haven attracts royalty, celebrities and tourists from all over the globe who want to experience the opulent, extravagant French Riviera lifestyle. Of course the Monaco Grand Prix will need no introduction to many readers of this magazine. Although one of the slowest tracks in the Grand Prix program; many drivers deem it the hardest of the World Formula 1 Championship. Drivers race the 3.34km track through Casino Square, past the Monte Carlo Grand Hotel, through the tunnel and along the coastline, circling the very best sights in MonteCarlo. The Monte Carlo harbour is perhaps where the most glitz and glamour can be found. With private expensive yachts, trendy cafes and shimmering sunshine throughout most of the year, this is the perfect place for a long weekend break on the credit card! That just about rounds up our selection of unique European destinations and, needless to say, whatever type of luxury holiday you’re after, Europe really does have something for everyone. With such diversity, charm and appeal it’s very easy to see why Brits holiday in Europe so often and why it’s fast regaining is place as one of Destinology’s most popular travel destinations.
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Special Feature
Recent takeover collapse now offers opportunity for the bulls. Ithaca Energy has been in the news for all the wrong reasons recently for those long the stock following the aborted takeover by various unnamed suitors and that has resulted in a few singed fingers... Ithaca’s focus is on the North Sea region and its strategy aims are as follows: • Fast track appraisal and development of oil and gas fields in the North Sea. • Acquire producing fields or undeveloped discoveries that: (a) Are not material for larger companies (b) Need technical or financial investment (c) No longer fit with an existing company’s strategy and business model.
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• Use tried and tested development and production technologies. • Employ in-house technical excellence to generate development and acquisition opportunities. • Participate in licensing rounds to gain acreage positions around its core assets.
Ithaca’s Core assets & Company background Ithaca’s primary assets are in four main areas of the North Sea: Inner Moray Firth Outer Moray firth Central North Sea Southern North Sea
Ithica Energy
Inner Moray Firth
Outer Moray Firth
Beatrice
Athena
In 2008 Ithaca entered into an agreement to lease the Beatrice field, the pipeline to shore and the Nigg storage facility from Talisman for a minimum period of 3 years. The Beatrice Field, in which Ithaca holds a 50% interest, is operated by Ithaca and is the largest oilfield (approximately 485 MMbbls of stock tank barrels of oil initially in place) in the Inner Moray Firth area. Beatrice has produced in excess of 163 MMbbls to date. Over the second half of 2009 Ithaca undertook a program of well interventions on wells producing at the Bravo platform. The result of the Bravo workover campaign increased production from the Bravo facility by 1,500 bopd (750 bopd net to Ithaca). The Company has undertaken an extensive workover campaign on Alpha platform wells, which has involved the replacement of down hole equipment and the recompletion of 4 production wells.
The Athena field is situated in block 14/18b in the Outer Moray Firth area of the North Sea; lying approximately 18 kilometres west of the Claymore and Scapa fields and the associated production facilities. Ithaca currently holds a 22.5% interest in the Athena Field. The reservoir has been evaluated by Sproule Associates to contain 2P reserves (gross) of 26.1 million barrels of oil. Joint Venture partners in the Athena field are: Ithaca, operator (22.5%), Dyas UK Limited (47.5%), EWE Energie AG (20%) and Zeus Petroleum Limited (10%).
Central North Sea Cook
Jacky
The Cook field is located in Block 21/20a of the Central North Sea approximately 175km east of Aberdeen and 20km north of the Gannet Cluster development.
Ithaca was awarded block 12/21c in the 23rd Licensing Round which contained the previously drilled 12/21-2 well. Ithaca and partners drilled the 12/21c-6 well in 2007 which encountered oil-bearing Beatrice sands, 175 feet above the oil in 12/21-2, as predicted.
The field was discovered in 1983 and the first well encountered oil in the Fulmar Formation and tested 7,330 bopd of 40.6 API oil and 6.7 Mmscfpd of gas.
Jacky came on-stream on April 6, 2009. Initial production was stabilised at rates in excess of 10,000 bopd. The field has been developed with one production well and one water injector well.
The field was brought on-stream in April 2000 following development drilling in 1999. The annual production rate for oil peaked in 2001 at a rate of 16,800 barrels of oil per day. The single well behind the Cook development is regarded as one of the strongest and most efficient wells drilled in the UK sector of the North Sea.
Polly Greater Stella The Polly discovery lies 2.5 km to the east of the Beatrice field and is an elongate structure which straddles blocks 11/30a and 12/26c. Ithaca acquired the Polly prospect through the 23rd UK Licensing Round. Development of Polly has been considered via either a subsea completion tied back to the Jacky platform or a deviated well drilled directly from the Beatrice Bravo.
The Greater Stella Area became a core focus for Ithaca with the purchase of a 66.66% working interest in the Stella and Harrier undeveloped discoveries from Shell and Esso in August 2008. Ithaca expanded its portfolio in this area with the award of one part block in the area in the 25th UKCS Licensing Round and one part block in the 26th Round. These blocks contain the Hurricane and Helios undeveloped discoveries respectively.
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Special Feature
This area lies in the heart of the prolific Central Graben of the North Sea and is surrounded by numerous producing fields and undeveloped discoveries. Major E&P companies including Total, Shell, ExxonMobil, BG, BP, Maersk and ConocoPhillips operate platforms and pipelines in the area which provide several options for the export of hydrocarbons from the development. Having taken over operatorship of the Stella/Harrier block from Maersk in November 2009, Ithaca drilled an appraisal well on the Stella discovery in early 2010. In Q3 2010 Challenger Minerals (CMI) completed on an Earn In deal for a 18% equity in the Stella/Harrier license by funding 27% of the appraisal well cost. The development scheme is likely to involve up to 5 production wells drilled from a sub-sea drilling centre on Stella and 2 further production wells drilled on Harrier. The Harrier centre will be tied back to the Stella where the hydrocarbons from both fields (oil and gas) will be combined. Stella
Outer Moray Firth Athena The Athena field is situated in block 14/18b in the Outer Moray Firth area of the North Sea; lying approximately 18 kilometres west of the Claymore and Scapa fields and the associated production facilities. Ithaca currently holds a 22.5% interest in the Athena Field. The reservoir has been evaluated by Sproule Associates to contain 2P reserves (gross) of 26.1 million barrels of oil. Joint Venture partners in the Athena field are: Ithaca, operator (22.5%), Dyas UK Limited (47.5%), EWE Energie AG (20%) and Zeus Petroleum Limited (10%).
Central North Sea Cook The Cook field is located in Block 21/20a of the Central North Sea approximately 175km east of Aberdeen and 20km north of the Gannet Cluster development.
The Stella development lies in the Central North Sea, 15 km northwest of the Joanne Field and was discovered in 1979 by well 30/6-2 when gas/condensate was encountered throughout a 25 ft section of Paleocene Andrew sand. Oil was also observed in the underlying Ekofisk Chalk reservoir. Subsequent appraisal wells achieved flow rates of 2,900 boepd of condensate and 23 mmscf per day of gas from the Andrew sands.
The field was discovered in 1983 and the first well encountered oil in the Fulmar Formation and tested 7,330 bopd of 40.6 API oil and 6.7 Mmscfpd of gas.
Ithaca drilled an appraisal well and a sidetrack (30/6a-8 and 30/6a-8Z respectively) on the Stella discovery in 2010.
The single well behind the Cook development is regarded as one of the strongest and most efficient wells drilled in the UK sector of the North Sea.
Harrier
Greater Stella
The Harrier discovery lies 10 km south of the Stella discovery, also in Block 30/6a. The accumulation was discovered in 2004 by well 30/6-4 when gas/condensate was encountered in both the Ekofisk and Tor chalk reservoirs in a salt induced anticlinal closure. Appraisal sidetracks 30/6-4Z, 4Y and 4X were drilled immediately following the discovery to appraise, core and test the reservoirs.
The Greater Stella Area became a core focus for Ithaca with the purchase of a 66.66% working interest in the Stella and Harrier undeveloped discoveries from Shell and Esso in August 2008. Ithaca expanded its portfolio in this area with the award of one part block in the area in the 25th UKCS Licensing Round and one part block in the 26th Round. These blocks contain the Hurricane and Helios undeveloped discoveries respectively.
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The field was brought on-stream in April 2000 following development drilling in 1999. The annual production rate for oil peaked in 2001 at a rate of 16,800 barrels of oil per day.
Ithica Energy
Helios
Carna
Block 29/10d was awarded to Ithaca in the 26th UKCS Licensing Round in 2010.
Blocks 42/52b, 43/16 and 43/21b were awarded to Ithaca in the 22nd Licensing Round in 2004. Block 43/22c contains the eastern extension of Carna discovery and was awarded to Ithaca in the 23rd Round.
The block lies within the Company’s core Greater Stella area in which the Stella and Harrier discoveries are under development, and the Hurricane discovery is to be appraised in early 2012. In 1969 well 29/10-1, lying within Block 29/10d, was drilled and both gas and condensate was found in the Andrew Sandstone; the equivalent and principle reservoir of the Stella discovery now under development. Hydrocarbons were recovered from an FIT test. The Company is currently evaluating the potential appraisal drilling of Helios along the southern flank of the structure.
The Carna discovery straddles blocks 43/21b and 43/22c in the Southern North Sea and lies between two producing fields, Garrow and Kilmar, which together constitute the Tors Development. The Carna exploration well, 43/21b-5, was drilled in 2008. The well encountered dry gas bearing Carboniferous reservoir formations. The section was cored and a well test was carried out which flowed at a stabilised rate of 9 million standard cubic feet per day.
Project pipeline
Southern North Sea Anglia The Anglia field lies approximately 60 km from the UK coastline and approximately 11 km southwest of the Clipper field. The field was discovered in 1972 by well 48/18b-1 when dry gas was encountered in the Rotliegendes Formation. Cumulative production from the Anglia field at the end of 2009 was 194 bcf of dry gas with an estimated recovery factor of 60% to date. Topaz The Topaz Field lies approximately 145 km from the UK coastline and 15 km southeast of the Schooner Field. The field was discovered in 1987 by the 49/1a-3 well which encountered a 130 ft section of gas bearing Carboniferous Westphalian C/D and Ketch sands. The current single producing well (49/2a-6Z) was drilled in 2009 as a twin to the discovery well and tested at 30 mmscfpd. First production was achieved in December 2009.
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Special Feature
Financial Overview For the year ending December 2011 Ithaca produced net cash flows of US$103.5 million (2010 US$88.9 million), and profit before tax of US$37.1 million (2010 US$38.0 million). Cash reserves were US$112.1 million (2010: US$201.9 million) and the company had a UK tax allowance pool of US$325 million (2010 $289 million). On 21 March 2012 the UK Government increased the Small Field Allowance (SFA) tax shelter availability from the 32% Supplemental tax charge for future small developments. The size of fields that qualify for full SFA was increased to include all fields with reserves of under 45 mmboe. The tax allowance available to each field has been doubled from approximately US$120 million to US$240 million. This change brings the Stella field under the SFA tax shelter and doubles the relief expected for all other developments including Harrier, Hurricane, Carna, Scolty Area (Scolty, Crathes and Torphins) and South West Heather. In respect of the Greater Stella Area, this amounts to in excess of US$80 million of additional tax-savings net to Ithaca over the expected life of the fields.
Reserves Net Proven and Probable reserves (“2P”) increased approx. 9%, from 46.05 mmboe as at December 31, 2010 to 50.25 mmboe as at December 31, 2011. Net 1P Reserves 26.13 million barrels of oil equivalent (“mmboe”) (2010: 22.30 mmboe). The increase in reserves came mainly from the acquisitions of interests in the Cook field and Challenger Minerals (North Sea) Ltd. Ithaca’s management has hedged well in recent years; entering into swap contracts to sell 768,800 barrels of the Company’s March 2012 - June 2013 forecast production at an average price of $116.07 per Barrel.
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The Company also entered into put options, at a market price, for 390,000 barrels of oil at a weighted average oil price floor of $120.24 / bbl for the period May 2012 February 2013 during Q1 2012. Company has locked in a portion of 2012/13 oil production (over 1.1 million barrels) at a weighted average price of approx. US$118 per barrel, thereby securing approximately US$136 million of revenue.
Significant developments in 2012 Takeover In late January 2012 Ithaca issued an RNS stating that they had been approached by an unnamed suitor with a view to a potential takeover. The shares rose quickly to 180p from an undisturbed level around 130p as the market priced in a takeover north of £2 per share. At the end of May 2012, management released a Corporate Update that included the blow to speculators of the stock that discussions had ceased with the initial suitor who was intending to acquire the entire entity and also all the additional potential bidders. The shares promptly fell to around £1.10, despite significant positive corporate developments outside of the takeover. The wording of the RNS by management was interesting: “The Board has concluded that continuing the current process at this time was unlikely to produce a transaction with financial terms that properly reflect the value of the Company, particularly in light of the current volatility in global markets and the short term softening in Brent crude prices. In reaching this decision the Board of Directors has fully considered the Company’s current value, its growth potential, the future value that can be delivered to shareholders and the responses of the third parties with whom discussions have been held.” Our guess is that the market volatility and the softening in oil prices caused one or two of the parties interest to wane and the ‘competitive tension’ that is all important in a bid process was much diminished. Management likely were holding out for a full price relative to recent deals in the region of 220p - 250p, and the remaining party(ies) were playing hardball on price. With this in mind the bidders bluff was called and Ithaca decided to plough their own furrow going forward.
Ithica Energy
Athena
What makes Ithaca interesting to us?
In June 2012, Ithaca announced initial peak gross oil production rates from the Athena field of 22,000 barrels of oil per day (4,950 bopd net to Ithaca) as metered into the BW Athena’s storage tanks following the production of first oil in late May 2012. At current oil prices, the project is anticipated to achieve payback within twelve months. Final pressure testing on the subsea infrastructure is in the course of being ompleted and first oil is expected in Q2 2012.
1. Stable North sea production and exploration assets. 2. Over 50 million barrels P2 reserves over broad portfolio of assets. 3. Strong financial position. It is Fully funded and has no debt, sitting with @ £70m in cash at present. 4. Cash flow from operations is set to increase from approximately US$150 million in 2012 to approximately US$575 million in 2014 (assuming $100 a barrel). 5. $400 million debt facility to buy new assets and pay for development of existing fields. 6. Current market capitalization only £300 million. 7. Forward price/earnings of less than 3. 8. Good news flow — ramp up in Athena production, Hurricane appraisal well, potential acquisitions.
With this added production, total Ithaca production is around 9000 barrels per day. 4,299 barrels per day were produced in Q1 2012. When the Greater Stella area comes on-stream in 2014 production is expected to increase to an average of 20,000 barrels per day. Hurricane appraisal well The Hurricane appraisal well is expected to spud by the end of June. Stella/Harrier field DECC approval n April 12th 2012, Ithaca announced that the company had received Field Development Plan approval for the Stella and Harrier Fields (located in the Central North Sea) from the UK DECC (Department of Energy and Climate Change). A contract for use of the Ensco 100 heavy duty jack-up rig on the development drilling campaign to commence in H2 2012 was executed in November 2011. Debt facility The Company announced a threefold increase in its debt facility in May 2012 to $400 million plus US$30 million cost overrun tranche. The facility is available to fund the Company’s ongoing development activities and future acquisitions, and takes away a lot of the financing uncertainty for development of their fields that presently hampers valuations of other companies like Bowleven and Xcite Energy.
At the current price (at time of writing - 115p), the company’s EV:2P (Enterprise Value:Proven & Probable reserves) equates to £4.40 per barrel against a Brent Crude price of over $100 (@ £70 per barrel at current FX rates). Corporate takeover/absorption deals in Ithaca’s area of exploration have been struck in the £7-10 per barrel price range in recent years and so illustrates the present undervaluation in the share price. We also believe that the weakness in the share price has been exacerbated by the general market malaise; particularly in the Oil Explorers area of the market which is perceived as risky. The bid talks collapsing has also most likely squeezed out a lot of leveraged money. Downside looks minimal here although it has to be said that the valuation is not as cheap as the other North Sea play we are keen on — Xcite Energy. Technical view The 5 year chart overleaf illustrates how Ithaca’s share price is now sat at a key support level. One could argue that if 100p is broken decisively, that a very large M top that had taken 2 years to play out was complete and the next support is at 50p. What tempers this scenario is that the RSI is now somewhat oversold and the deviation from the 19 week moving average is now excessive and at a point that typically presages a bounce of some degree.
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Special Feature
The alternate scenario, of course, is that the current price point will trace out a triple bottom around the 100p level and a rally back towards to 150p would represent a 50% retracement of the decline.
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UK Gold stocks
UK Gold Stocks
UK Gold stocks bounce; more to come. UK gold stock investors saw a long awaited bounce after returning from the extended bank holiday on Wednesday. This followed weak US jobs growth in May, announced on 1st June, which boosted gold as it increases the chance of further quantitative easing. Gold stock valuations aren’t expensive and look to have further upside.
The weak jobs growth in the US in May, however, has seen gold rebound as the prospects for near-term quantitative easing in the US have increased. Meanwhile, China looks set to become the biggest consumer of gold this year – the country cut interest rates this week for the first time since early 2009 – and emerging market central banks remain keen to diversify away from dollars.
Gold stocks haven’t proven to be golden for investors recently as they have weakened on the stock market sell-off. This is as even if the gold price holds up gold stocks will tend to fall back with equities in general at least in the short-term.
July 2012 | www.financial-spread-betting.com | 77
Fat Prophets
Gold Price over 17 months
For gold shares the gold price is the key driver which explains the bounce in gold stocks following the gold price bounce. We remain optimistic on the gold price and so view the current weakness as an opportune time to top-up on the sector. The above graphic shows that gold bounced but fell back slightly today on comments from the Fed Chairman.
The supply side for gold is seeing strength in some areas such as China and Russian output. However, many regions are mature such as South Africa and new large mine discoveries are sparse. On balance supply looks to be relatively constrained.
In a nut shell the gold price is underpinned by China and India’s economic growth as the countries are the top two consumers. This supports jewellery demand while global investment demand is driven by dollar weakness and economic instability which looks set to continue.
The UK Fat Prophets portfolio has six gold stocks which are by order of market value Randgold Resources, African Barrick Gold, Petropavlovsk, Centamin Egypt, Highland gold Mining and Avocet Mining. Many of these stocks look to have recently hit bargain basement levels which explains the strong bounce on Wednesday.
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UK portfolio gold stocks
UK Gold stocks
Randgold rose 7.6%, African Barrick jumped 14.5%, Petropavlovsk rose 10%, Centamin was up 11%, Highland gold up 5.2% and Avocet up 10.3%. This follows gold closing at US$1,568 on Thursday and then closing at US$1,637 on Tuesday – an increase of 4.4%. The price has since weakened marginally to around US$1,600 on cautious comments from Ben Bernanke on more QE. Of the six gold miners in the portfolio all were rated buy at our last review with the exception of Randgold which has been such a strong long-term performer that are rating has moved to hold. The gold stocks have seen greatly varying fortunes but are all likely to perform well if gold shows strength. We do note though that critics of gold stocks often point to the general failure to meet output targets, cost inflation and the more aggressive tax stance from host countries.
Nevertheless gold stocks look inexpensive enough to offset these factors with P/E ratios at long-term lows. Reviewing portfolio stocks and Randgold trades on a P/E of 17X for the current year, African Barrick sits at 11X, Petropavlovsk trades at 4.8X, Centamin at 5.6X, Highland Gold at 4.48X and Avocet at 12.3X. The dividend yields are generally low but Avocet has a yield of 3.3% and Petropavlosk and African Barrick offer 2.5%. On the balance sheet front at the end of March African Barrick Gold stands out with net cash of US$581m, Centamin had liquid assets of US$175m and no debt and Randgold had cash of US$457m. Meanwhile Avocet saw debt reduced to US$23m which is set against cash of US$100m.
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Fat Prophets
At Highland Gold Mining the group had US$126.7m cash at the end of 2011 and a debt free balance sheet. Petropavlovsk is the only group which stands out with net debt up 360% to US$787m at the end of last year. The company is set to see debt fall, however, as lower capital expenditure kicks in and gold output increases.
For relatively low risk investors Avocet Mining looks to be a strong investment with the group having a clearly defined growth strategy and a strong dividend yield. The group is expecting to produced 160,000 ounces this year and then hopes to see this increase by 50% by 2014 on expansion at its existing mine.
Broadly the gold miners have strong balance sheets and many have cheap P/E ratios and all are targeting gold output growth. Clearly there are lots of stock specific factors with Centamin Egypt being affected by weak sentiment towards Egypt – second round Presidential elections are due in a week.
Avocet is also hoping for phase 2 expansion at the key Inata mine to start-up in 2014 and also is looking for the start-up of its second key project in Guinea in 2014. All told Avocet is looking for output to exceed 500,000 by 2015 which is growth of over 200% in three years.
Meanwhile Petropavlovsk and Highland gold focus on Russia and have not performed to expectations on the output front. However, Petropavlovsk looks to be back on track on the output front and Highland Gold’s weakness looks in part to be due to the sale of a stake by Barrick Gold.
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UK Gold stocks
A Randgold meanwhile is looking to increase output from 696,023 ounces in 2011 to double to over 1.4m ounces by 2016. The group stands out for its expectation that it can lower cash costs/oz over the period.
Centamin Egypt is another group with clear growth plans with output set to come in around 25% up on 2011 during the current year at around 250,000 ounces. The group is targeting a rage of 500,000 ounces in the medium term. A strong cash position and growth plans makes the stock stand out.
The other gold miners are more coy on the production front with African Barrick previously having a target of 1m oz per year but output in 2011 down 2% to 688,278 ounces.
Highland gold saw output fall in 2011 but is looking to return to growth this year while Petropavlovsk saw output up 24% in 2011.
July 2012 | www.financial-spread-betting.com | 81
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UK Gold stocks
Summary and valuation Some of the gold miners now look to be priced for failure with Centamin Egypt, for example, pricing in a high probability of mine nationalisation. Broadly, though, the operational side looks to be getting back on track while any negative economic data will support the case for more QE and therefore boost the gold price.
At the higher risk end of the spectrum Centamin is partly a play on the politics of Egypt but its strong growth plans and financial position also make it attractive with high quality fundamentals. Meanwhile Petropavlosk and Highland Gold look cheap on P/E ratios of under 5X earnings.
Investors are best advised to take a portfolio approach and we have all the stocks rated as buy except Randgold Resources. However, Avocet Mining does stand out for its strong growth plans, good cash position and supportive dividend yield. African Barrick Gold meanwhile is a medium risk play as it gets back on track in Tanzania. Accordingly, our gold stocks will remain firmly held in the Fat Prophets portfolio. We re-iterate our buy recommendations on African Barrick Gold, Petropavlovsk, Centamin Egypt, Highland gold Mining and Avocet Mining.
July 2012 | www.financial-spread-betting.com | 83
School Corner
School Corner Special feature
Elliott wave analysis explained By Thierry Laduguie Elliott wave theory was discovered by Ralph Nelson Elliott, an accountant who turned stock market analyst in the 1930’s. He noticed that the stock market follows a recurring and predictable pattern; he called it the wave theory.
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Elliot Wave analysis explained
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School Corner
This explains why wave 3 is often the most powerful wave in a five-wave sequence. During wave 3 the economic/corporate news will improve. Wave 4 is a pause in the uptrend. Remember, investors are more optimistic after wave 3 therefore wave 4 is supported by the bulls and for this reason wave 4 will not retrace a large portion of wave 3. Price action in the fourth wave is often sideways.
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The Elliott Wave Principle, named after R.N. Elliott, is a detailed description of how groups of people behave. It reveals that mass psychology swings from pessimism to optimism and back in a natural sequence; creating specific and measurable patterns. These patterns reflect investor psychology. For example, if we take a rally in five waves in the stock market, we have three motive waves (waves 1,3,5 in the direction of the main trend) and two corrective waves (waves 2,4 against the main trend).
Finally, as prices break into new highs wave 5 unfolds. At this stage an even greater number of bulls push the market higher, there is increased optimism, but the advance is not as strong as in wave 3 (technical divergence) and stocks are overvalued. The end of wave 5 is characterised by an extreme in bullish sentiment. This extreme in bullish sentiment will lead to the next major decline which is a decline in three waves [A,B,C]. This move corrects the advance from the bottom of wave 1 to the top of wave 5. This completes the cycle in eight waves. Once a cycle is done, a new cycle in eight waves will start. The bottom line is that rallies start when there is increased pessimism and end when there is increased optimism. By analysing and counting the waves the analyst can predict the next turn with great accuracy. Elliott wave analysis helps investors determine the future direction of the market with high confidence.
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Wave 1 is a rebound from oversold condition. At this stage very few investors will buy as most think the trend is down. There is increased pessimism and stocks are undervalued. As the trend turns up and prices rally above the top of wave 1, investors become more bullish, there is increased participation (more bulls than bears) and the rally extends.
Elliott wave analysts use other sources of information like sentiment indicators in conjunction with the Elliott wave count to be more precise in calling the next move. Sentiment indicators such as the CBOE Equity Put/Call ratio, the VIX and the percentage bullish advisors are used to confirm the wave count. For example, if the market has traced out five waves up and the percentage of bullish advisors is 85%, chances are the rally will likely run out of steam and the trend will reverse. At e-Yield I have developed my own timing indicators: I use the BTI for direction and the Top 20 Differential for identifying top/bottoms. For example, an overbought Top 20 Differential at the end of five waves up would be a strong signal to go short. Our clients use our proprietary indicators to trade stocks and stock indexes. To learn more about e-Yield Click here.
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FINANCIAL-SPREAD-BETTING.COM S p r e a d B e t t i n g A c a d e m y
The Traders' Academy
www.financial-spread-betting.com Please note: Our website guide is purely educational in nature, we do not advise or tip and any illustrated example trades on the website are for educational illustration purposes only. Please make sure that you understand the risks involved. You must understand the risks involved and consider the appropriateness of trading, having regard to your own particular objectives, financial situations or needs.
July 2012 | www.financial-spread-betting.com | 87
Options Corner
How to make money in a static market Through the use of straddles & strangles
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How to make money in a static market
In a relatively trendless market, like what we have experienced during the last 2 months, the use of options can be very lucrative. In a moribund market environment where prices are not going anywhere it can be difficult, if not impossible, to make money spreadbetting in the conventional sense; particularly if your area of interest is the indices. The lifeblood of most spreadbetters and, indeed, the majority of market participants is volatility — without moving prices then how do you make money? This month we will look at how selling option premium by way of so called ‘straddles and strangles’ is one way you can still generate potential profits in a market environment like that which we are experiencing at present.
Now, you may take the view that this range is likely to remain in place for the balance of the year. If this is your view, then one possible way to take a position is to sell what is called a strangle. A strangle is the sale of both a Call and a Put option that are each ‘out-of-the-money’.
Below is a chart of FTSE over the last 6 months. We can see clearly that the index has essentially ranged between 5200 and 6000. It seems sellers assert themselves at the 6000 level and buyers come back to the table towards 5000.
For example you could construct a strangle as below Sell the November 6000 Call for say 40 and Sell the November 5000 Put for say 55
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Options Corner
WWhat you have done is taken in total premium of 95 pts (multiplied by whatever size you are comfortable with; for example, if £10 per point then you would take in £950 of premium). If the FTSE does not break through either 5000 or 6000 at the point of expiry, then you will keep the 95 pts. Of course, as we move closer to expiry then the premium would diminish (assuming the index does not break out of the range that is) and you would be free to purchase back the premium and take the profit at any time -you do not have to run it to expiry. My own personal rule of thumb when selling options is when 85-90% of the premium has been stripped out then I buy back — why hang around for the remaining 10-15% and take the risk of giving back your profits? In the example above, if the index did move out of the 2 strangle parameters, i.e. rise above 6000 or fall below 5000, then you would only begin to lose money at the respective strangle parameters plus the premium received on the call side and minus the premium received on the Put side, i.e. 6095 & 4905. Here is a P&L diagram of a Strangle strategy -
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There is one major factor you must be aware of when selling strangles or indeed straddles and that is the impact of volatility - a component that we have touched upon before in previous articles which is, at its heart, a measure of the expected volatility investors anticipate over the remaining period of an option’s life. Basically, as a seller of premium you want to be selling options when volatility is high as this increases the premium value of the option. If you sell an option when volatility is low, then, even though time decay will be working in your favour (i.e. reducing the premium value), if there is a sharp uptick in volatility then the price of the option will rise. It is important to be aware of this when implementing a strangle strategy. You are looking to ideally incept such a strategy when (a) the instrument is at the midpoint of your expected continuation range and (b) when volatility is quite elevated - certainly not when volatility is low.
How to make money in a static market
Time decay profile - showing how premium diminishes in an accelerated manner as an option nears its expiry.
A straddle is very similar to a strangle but with one major difference - when selling the 2 legs (premiums) you sell both a Call and a Put that are ‘at-the-money’. In the example we used above and continuing to assume that you expect the FTSE to remain within the 5200 - 6000 range, you would sell in the straddle case the November 5500 Call & Put - i.e. effectively the level where the FTSE currently is stationed at. Of course, as you are selling at-the-money options then the premiums are that much higher.
The profile and premium receipt would be as follows Sell the November 5500 Call for say 170 Sell the November 5500 Put for say 190
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Options Corner
In this straddle strategy you have taken in a much larger premium - 360 pts versus 95 but the breakeven levels are closer (5140 & 5860 - being the strike price plus the premium receipt). Again, the immutable investment law of risk & return rears its head - your premium receipt is higher, but the risk of the strategy expiring outside of the range (and hence losing you money) is higher. You would sell a straddle as opposed to a strangle if you believed that the market/underlying instrument was more likely to remain relatively static. Also, with the straddle you have to pay heed even more of the level of volatility — you certainly would not ordinarily sell a straddle if volatility was low.
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The beauty of straddles and strangles is that they are very versatile. For example if you are long an instrument and you (a) do not expect it to go much higher and (b) would also be prepared to add to your position at lower levels, then selling one of these strategies achieves this for you; i.e. if the market goes up then you lock a profit on the call sale and subsequent exercise side, yet if the market goes down, then the combined premium less the Put upon level reduces your entry cost. Next month we will look at how buying straddles and strangles can potentially work for you.
Special Feature
Square Mile data takes a look at the current short interest in the popular General Retail sector this month. Last month we looked at the Oil Sector which continues to be a ‘hot’ area within the stock on loan % search rankings alongside oil equipment services and oil distribution for similar reasons. We are, however, now seeing increased interest in the General Retailers sector which is the subject of this article. Three of the top 20 highest stock loan % companies listed on the LSE are in fact General Retailers - and that excludes the currently much out of vogue Supergroup which is in fact in the top 20 but is somewhat strangely classified as Personal Goods by the LSE!
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Special Feature
Take Home Retail Group in the graph below, as an example. On the face of it, there looks to be a good ‘visual correlation’ between stock loan % increase and price decrease. It may well be that the stock is on loan for shorting purposes. If you visit our website and look at the graph over a 3 month period, you will notice that price is levelling out, but in the last 6 weeks the stock loan % has increased by an additional 5% to the current level. This is an interesting situation. If the stock has been loaned but not yet shorted into the market, then there is plenty of gunpowder hanging around waiting to be fired. If it has been shorted into the market then the market is holding up fairly well - especially given the current market conditions. This is the type of share I personally would add to my watch list and would wait for the market to give further signals as to whether to go long - for example a reduction in the short position with a rising price would be a lead indicator that sentiment may be changing and a trend change imminent. Carpetright has a similar 3 month profile - i.e. increasing stock loan % but a flattish price - check it out on our website.
Figure 1 - Home Retail Group - Price, Stock Loan %, Volume
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Square Mile Data - General retail
A review of Mothercare suggests that shorters have been covering their positions recently too. The stock loan % trend for Asos is also up and it recently reached a 3 month stock loan peak of 11.43% on 30th May - one day after reaching a 3 month price peak. Since then, Asos’s share price has both fallen sharply off and then rebounded hard - this is one share that I must admit to finding too difficult to trade as it seems to go up and down sharply on a whim - so I will leave the price discovery experts to have their fun!
One interesting movement we picked up on our radar was French Connection. The price was drifting down whilst the stock loan % was flat-lining and then, a week or so before the price broke sharply downwards, we saw a relatively large increase in stock loan %. Here’s an important point: it’s not the absolute stock loan % that is always important — it’s the relative change in stock on loan that can give signals to watch. We will soon release a feature on the site that will pick up these movements.
Not shown in the top 10 is perennial punters’ favourites - penny stocks YELL and JJB. Yell is a popular search on our site as is JJB. In my opinion they are binary type shares - they either pull through and re-bound or they fail. Both have seen reductions in stock loan %; interestingly to their lowest levels in over 3 months - again take a look on our website. It seems that perhaps confidence in the future of each of these stocks in increasing.
By the time you read this the statistics will have changed so check out the latest figures on our website which will soon have a sector search facility to make your searching and trading lives easier!
Figure 2 - French Connection - Price, Stock Loan %, Volume
For more FREE information in company short interest data that is generally the privileged preserve of city institutions, click HERE
July 2012 | www.financial-spread-betting.com | 95
Special Feature
Best new technology gadgets for 2012 96 | www.financial-spread-betting.com | July 2012
Best new technology gadgets for 2012
We all know that the best presents are those for ourselves! To save you some valuable trading time we have sourced some of the best, luxury gadgets that are available on today’s market. Some are a reasonably priced treat, others for if you have had a spectacular trading year! It is important, after all, to gain enjoyment from financial success. Here is our selection of some of the most covetable items for 2012:
1
Panasonic TH-152UX1W Plasma Television
For the ultimate television, and if you have the space and the funds for it, this high-spec Panasonic TV will offer an unbeatable home viewing experience offering, as it does, the most sophisticated technology of any televisual equipment available for domestic use on the market today. You would certainly expect that, however, as it comes with a hefty £600,000 price tag. It just might be worth it, though, to invite guests over and wow them with this beautiful beast; the screen is 152” and the set weighs almost 600kg. You’ll definitely need to have a vast wall space to fit it in! To the technical bits then — using 4K2K plasma technology this TV gives you four times as many pixels as a standard HD set, and has a 4096 x 2160 resolution. It’s 3D capable with a separate 3D image for each eye, and so will rival any cinematic experience.
Mostly used for commercial purposes, it is quite simply over and above anything else you can buy for your home.
July 2012 | www.financial-spread-betting.com | 97
Special Feature
2
Blackberry Porsche P’9981
Smartphone heavyweight Blackberry has teamed up with design and engineering maestro Porsche to come up with this very sexy piece of equipment. Although the company has taken something of a mauling this last year, being usurped by Android phones and the seemingly unassailable Apple Iphone, RIM are definitely fighting back with this combination of modern design with top-notch technology. At the price, we think this is a very attractive alternative to the more expansive Nokia Vertu. The phone is a stainless steel model and incorporates Blackberry’s newest technology, the 7.1. It has a touchscreen and QWERTA keyboard making emailing and texting easier. The 1.2 Ghz speed and 8 GB memory, combined with its dual wi-fi functionality, ensure excellent speeds and a pleasing browsing experience. This is notably faster than other models, and it compares favourably here to the iPhone. Expect to pay about £1500.00 retail.
3
Alfred Dunhill Turbo Carbon Lighter
True, smoking is not the height of sophistication as it was once was, rather the opposite in fact, and we are certainly not encouraging you to start or to halt giving up, but if you are a smoker then why not smoke with style with this beautifully designed lighter? The monochrome look replete with Dunhill’s trademark design offers an instant cool factor when offering a light to a suitably beautiful lady in the most trendiest of bars. It’s not heavy (like my brother!) and, we feel, has the gravitas of smoking accessories from yesteryear. This delightful product will cost you £365.00
98 | www.financial-spread-betting.com | July 2012
Best new technology gadgets for 2012
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12-core Mac Pro OSX
Simply the best and fastest computer Apple have out at the moment boasting a processor speed that is one and a half times faster than anything else they currently have in their suite of products, and up to five times faster and better graphics. Features such as the turbo boost result in the power of the applications that you are currently using being powered with surplus energy from the ones you aren’t; end result — it’s at its optimum performance at all times. Its single-die technology ensures that power isn’t wasted through its Intel processors having to make longer journeys to connect with one another. Basically, Apple have done everything in their power to streamline the process within the machine and make it as efficient, and therefore as powerful, as possible. It also has a huge amount of storage, and removing and adding hard drives is supremely easy. With this model expect to get professional level development features too.
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If all this is giving you a bit of a geeky headache, forgive us our excitement and focus on the most pleasurable aspect of this machine; the classic Mac design is all here, with a surprisingly small machine, given what it can do. From £4000 upwards.
HD3 Slyde Watch
This is a watch to impress friends – you can personalise it, connect to the internet and download virtual apps. A bit like a smartphone but on your wrist - the perfect combination, therefore, of modern essentials and traditional accessories for the sophisticated gentleman. Watches aren’t desperately needed anymore, yet the stylish man about time will always want a sophisticated clock strap around their well-dressed wrist. This innovative product cleverly combines both, and therefore offers something genuinely new to the market. The face is a masculine square and comes in discreet black colour tones. You will be dying to upturn your arms at your next meeting in order to showcase your wrist finery. On the market for about £3200.00
July 2012 | www.financial-spread-betting.com | 99
MAGAZINE
SPREADBETTING The e-magazine created especially for active spreadbetters and CFD traders
Issue 7 - August 2012
In next months’ edition...
Why do most spreadbetters lose?
100 | www.financial-spread-betting.com | July 2012
Options Corner When to buy straddles and strangles
Dominic Picarda Special Gold stock feature
NEW petrolhead supercar feature
MAGAZINE
SPREADBETTING www.financial-spread-betting.com
Thank you for reading, we hope your trading is profitable during the forthcoming month. See you next month!
July 2012 | www.financial-spread-betting.com | 101