Tuesday, 7 January 2014

2014 Stock Picks: Group 1: The larger caps

Top Twit 2014 Hot Stock Picks: Group 1: The larger caps.

First of all let’s be clear, with the exception of Gulf Keystone, most of these companies’ market caps would usually be considered small but I've titled them as larger caps because the other 34 are so much smaller than these! Which just goes to show how keen we all are on tiny speculative stocks and the dream that we will one day own a part of the next ASOS or Dana or NEXT (£60 per share??? I remember them at 20p and in trouble!)  There were very little in the way of safe investments chosen by any of you but hey ho, in for a penny in for a pound eh? Or should I say in for a pound and usually out for a penny?  No? Well congratulations but please remember that these are generally high risk stocks and could end the year significantly down on where they started if recent performance is anything to go by. Right that’s the disclaimer covered, let’s have a look at this larger group category….

The category actually contains four of my personal favorites for 2014 (and I only got one vote, Trinity, so no influence here!). But that’s because I’m not keen on the tiny speculative companies that haven’t proven anything up yet. The following companies all have at least proven reserves or resources or assets from which they are aiming to unlock the value. Can they transform this potential into positive cash and profit flows? That’s the common challenge for these stock picks in 2014:

Larger Cap (over £100m)

Chosen By
Starting Market Cap
Starting Share Price
Gulf Keystone
Quadrise Fuel Cells
Xcite Energy
Sirius Minerals

First up, Gulf Keystone Petroleum (GKP).
I compiled an overview about Gulf Keystone in mid November here and that still just about covers what I would say about GKP. A rollercoaster of a ride for investors. Since November Excalibur have confirmed they are not appealing their court defeat and GKP have been paid the £17.5m being held, as well as an additional £3.2m being due as security for costs. It’s been a few months since an operational update, the litigation uncertainty taking the shine off the share price and so things could really start to motor if progress is now made on a move to a full market listing, production increases, and oil exports begin. In the near term there should be confirmation that the additional £3.2m from Excalibur has been received. In my opinion there are still two big potential SP catalysts possible in 2014. The first is that consistent and significant production growth and export is achieved. The second is that we see a takeover, which could potentially be more likely now that the court case is resolved. So there is a good reason why GKP is in this list, although no doubt it would have been in the same list had there been one for the past 3 years, and there is still significant risk due to the region of the world GKP operate in. As I said in my previous article…it’s been a rollercoaster of an investment to date and no probably some more to come!

Number 2: Quadrise Fuel Cells, (QFI).
This is a company I knew nothing about prior to this. It turns out they are a manufacturer and supplier of “emulsion fuels”. These are alternatives to heavy oil fuel (600m tonnes of which is used annually in shipping, refining, steam and power generation). Their Quadrise MSAR®Marine Fuel Heavy Oil alternative is being tested and is progressing towards full commercial approval and use. In August 2013 they announced that they had executed contracts to enable the production and supply of MarineMSAR®to Maersk for seaborne use in their two main engine types on very large ships. Subject to performance results this will support the issue of “Letters of No Objection” to the use of this MSAR®fuel alternative by leading marine propulsion manufacturers and should open the way to wider commercial use and revenue generation (around a third of the 600m tonnes of heavy fuel oil used annually is used in the marine industry so the prize is large).

Quadrise have also designated a Saudi Arabian refinery as a preferred first application of MSAR® technology as well as gaining positive results on trials of their products in the petrochemical / refining industry. They have established their own R&D facility in the UK and in September 2013 also commissioned their own MSAR® manufacturing unit at the Orlen Lietuva refinery. They are debt free and according to results are carrying forward nearly £35m of tax losses which would allow them to offset tax charges in the early years of successful revenue generation.

QFI are not one I would normally look at but clearly have potential for substantial and ongoing revenue generation if they can deliver their proof of concept and gain the relevant approvals. Is this the time I should admit that for the sake of Xcite energy’s 250m barrels of heavy oil that I hope they don’t succeed? Hmmmmm! Joking aside, the only issue for me is that 2013 seems to have already been a watershed year for them. In August 2013 the share price was trading at 11.5p, and had been so for some time. Since then it has increased by 300%. Their Executive Chairman summed 2013 up as follows: “A truly exciting year in which the company moved forwards on many fronts”. Whether this means that 2014 can continue to see the same sort of rise in the SP remains to be seen, but QFI are certainly one to watch out for.

Number 3: Xcite Energy, (XEL).
Do I really need to expand for you? Is there anyone alive not aware of the story here? Xcite are sitting on 250m barrels of heavy oil in the North Sea. 198m barrels of it is in the 1P proven classification, with an NPV of over $1.5billion rising to $2.2billion for 2P. That’s before enhanced oil recovery or any of their other prospects or tax losses. The issue though is how Xcite will pay for it to be extracted and with whom? On the former they have a modest reserve based lending facility (RBL) already in place, which needs increasing, and which I suspect is probably already agreed in principle subject to the small matter of DECC approval for their Field Development Plan (FDP), which probably needs proof of financial fire power to be in place, which probably requires a farm out to be complete, and that probably requires the RBL to be completed or DECC approval, which as we said probably requires funding or the FDP to be agreed, and so it goes on and on and on. 

Most investors expect all these pieces to come together sometime during the first half. News last year was limited but my personal thoughts were that this was because the field is huge and the arrangements are complex but things are progressing confidentially rather than that nothing is happening. An average farm in deal, reasonable increase in RBL, and with perhaps even modest dilution (not out of the question) should still see an industry valuation put on the field which should (fingers crossed) be around twice the current market cap, before production. Funding in the North Sea has been challenging, and there has been little or no M&A activity to raise interest. But I can’t honestly believe that Xcite won’t succeed getting the deals they need at some point in 2014 and that this won’t give good upside to shareholders investing today at under £1 and who are prepared to wait for the story to unfold. That’s of course assuming they don’t get bought out in the meantime! To read more bout Xcite and sitting on one’s hands whilst we wait, see here….http://timpronkster.blogspot.co.uk/2013/09/xel-xcite-energy.html

Number 4: Sirius Minerals (SXX)
Sirius Minerals is a potash development company. They hold significant development properties in the UK and the USA. Their Potash project in North Yorkshire is their flagship development asset and is targeting the production of a multi-nutrient mineral Potash (polyhalite) which is important for plants and therefore food economics around the world. The initial plan is to target the extraction of this polyhalite resource, although there are numerous other minerals and sulphates that they would target later on. Their asset in North Yorkshire is the largest and highest grade polyhalite resource in the world! Which means Sirius could potentially become global leaders in large scale potash production. The only thing that stands in their way (apart from all the usual challenges like cash and time and making it happen of course) is the fact that the resource is sitting under the North Yorks Moors Peak National Park (something I studied in my Geography A level - how ironic) and there is therefore considerable opposition to the potential environmental impact. Approval has not yet been given by the council or the National Parks Authority. Meanwhile cash continues to burn and uncertainty remains an issue for investors.

Sirius have however already taken orders from around the world for over 4m tonnes per year of potash so presumably they must either be fairly confident of gaining approval, or they are playing a very serious game of “blink” with the local council and National Parks authority? 2014 should see the answer given on planning approval, and so it should either be the SP catalyst that investors hope for, or result in further delays and issues to resolve which will set plans back further and put the company finances under more pressure.

Number 5: Parkmead (PMG)
Led by Tom Cross, I admit that Parkmead has its detractors. They would say that the market has priced in value to Parkmead based on the history of Tom Cross’ last success with Dana, which should not be priced into a new venture as there is no guarantee that he can repeat that success. That said; look at his track record since he joined Parkmead. Multiple acquisitions, production up 300%, many of the deals paid for with PMG paper not cash thereby minimising dilution. They've just completed a 15:1 consolidation which has since seen good growth in the market cap, and have also just gobbled up another 20% of the Athena field production at a price which looks very canny indeed. In November they declared their Pharos gas exploration drill as a new gas discovery, and 2014 should see them start to develop their plans for the much larger Perth development which could form the basis for a large regional sour crude hub in the North Sea. Without any doubt Tom Cross is a real professional in the oil industry and the backers would say he is taking Parkmead along the same journey as before. Remember he sold Dana for £1.87bn. Parkmead has a 2014 starting market cap of £160m. So there’s plenty of potential here for patient investors in my opinion. One of my favorites, I wrote a previous summary about Parkmead here... http://timpronkster.blogspot.co.uk/2013/10/pmg-parkmead-looks-promising.html

Number 6: Trinity Exploration (TRIN)
Trinity could be a potential little gem of a Trinidadian oil company. They are backed by a board with several highly experienced players in the oil industry. They absorbed Bayfield energy at the end of 2012 for a good price and are focussing on developing reserves from both onshore and offshore producing fields. They also have a number of exploration prospects which could add significant upside to their reserve numbers. One of these has just been drilled (TGAL-1) and was confirmed as an oil discovery with between 50 and 115 million barrels of oil OIP.  Trinity currently produce around 4000 barrels of oil per day (awaiting end of 2013 figures), have good debt facilities in place if required, are cash flow positive and profitable at every level. They have other prospects which they plan to explore in the future and are currently drilling their El Dorado prospect (13mmbbl unrisked prospective resources) with results expected imminently. Also important to me is that directors hold considerable personal stakes in Trinity and have stated publicly that avoiding unnecessary dilution is important to them. 2014 should see production climb further. It will also be interesting to see how the recent budget changes in Trinidad (designed to be an incentive to E&P companies) will flow through to Trinity’s bottom line in their full year results. See more of the detail behind this company here http://timpronkster.blogspot.co.uk/2013/11/trin-trinity-looks-well-set-for-2014.html

Number 7: Bowleven (BLVN)
And finally for group 1, another oil and gas company I have written about here…. In a nutshell they are sitting on substantial oil and gas resources, have had some fantastic drill results almost without downside, have an off take deal already agreed with the Cameroon government to supply gas to a proposed fertilizer plant nearby, own several other highly attractive prospects across Kenya, Zambia and Cameroon, and have agreed a financing deal with Petrofac for £500m of the funding required to bring their Etinde assets to production. What’s there not to love? Well, on the flip side, they don’t yet have environmental approval from the Cameroon government, they have run short of cash, and a farm in deal for their onshore block in Cameroon fell through at a late stage. They were trading in a range of 50-60p when they announced these setbacks and simultaneously announced dilution and a fund raising at 45p. Interestingly a significant amount (19m shares) of the funds were from Ian Suttie, one of Scotland’s richest men, and also involved in Bowleven’s partner in Kenya, First Oil Expo Ltd, which own 30% of Bowleven’s Kenyan subsidiary. Unsurprisingly the market didn’t like the delay or fund raising and have punished Bowleven severely. Since then the share price has traded between 33p and 37p, around 20% lower than the price Ian Suttie paid for his £8.7m stake in November. So it’s not just small PI’s that get their fingers burnt on the alternative investment market!

If - and it does still need to be an if at this stage considering the risks of extended delays and financing challenges - the government grants Bowleven environmental approval, Petrofac pay some of their back costs up front, and perhaps a new farm in partner enters the stage, then the market will surely have valued Bowleven very foolishly in my opinion and I would hope for increases of at least 100% from these levels on the back of this sort of news. For further background on Bowleven, the board, their progress to date, and their future prospects please see http://timpronkster.blogspot.co.uk/2013/10/blvn-bowleven-catches-my-attention.html...

So that wraps up the larger caps. I hope you like the selection. If not please blame the twitter fans at the top, not me! They are all potentially on the cusp of transforming assets into value for investors, yet all of them face the dual challenge of fund raising and cash flow whilst development takes place. Any thoughts or feedback welcome on the below comment space

I would hope that this group sees good growth in 2014 and justifies the patience and hard work that has taken place to get them to this place so far. I’ll track their performance monthly from now..... next up will be a summary of group two, the mid-tier choices. Watch this space and thanks for your visit....

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