25 May 2018 · 4 min read

Energy drives estimates higher – but oil now under pressure

Risks rising as Russia and OPEC debate turning the taps back on in H2

While it may seem that global investor sentiment has broadly improved over the last 3 months, following the rapid recovery in equity markets, returns have been dominated by the energy sector, Exhibit 1. With Russia and Saudi Arabia now discussing production increases to head off a loss in market share to US shale, this momentum in the oil price may now ease. Separately, despite volatility in emerging markets we note that profits forecasts have been largely stable in 2018, suggesting that any underperformance is due to the rising dollar rather than weakening profits trends. In developed markets, the median 2018 earnings estimate in the US continued to rise over the last month while in Europe and the UK estimates are stable, despite a marked slowdown in the economic data.

25 May 2018 · 2 min read

Italy: Political risk strikes (again) in eurozone

Political power and resolve of EU and ECB should not be underestimated (again)

The prospect of a populist Five Star/League coalition government in Italy has spooked Italian bond markets with yields soaring in recent weeks. Nevertheless, this price move may still be viewed in the context of a correction, given the clearly large difference in fundamental credit quality between Italy and Germany, both from a political level and as measured by the government debt burden as a percent of GDP. It is a situation which is likely to create investor anxiety but the precedent of Greece suggests that the ultimate political power of the EU and ECB is considerable. An “Italexit” scenario would create a high degree of market uncertainty but remains low probability in our view.

Elaine Reynolds
22 May 2018

Plenty of action for Hurricane on Lancaster EPS

Since our most recent note on Hurricane Energy, ‘Lancaster EPS on track and on budget’ activity has continued at pace for the company as it remains on track for first oil in H119. Last week the offshore installation phase of the Lancaster EPS commenced with the installation of the Enhanced Horizontal Xmas Trees on the two existing wells, 6 and 7z, completed by the Far Superior offshore construction vessel. In addition the Lancaster EPS buoy departed from Drydocks World in Dubai on the Jumbo Kinetic vessel and is scheduled to arrive in Lerwick in the Shetland Isles by the end of June, allowing installation of the turret mooring system for the Aoka Mizu FPSO to take place on schedule by the end of Q318. Meanwhile, we expect that re-entry and completion operations on the 6 and 7z wells will commence imminently, since the Paul B Loyd Jr rig is now on location. The activity will provide plenty of opportunities for those who like to track vessel movements.

9 May 2018 · 3 min read

2018 Earnings forecasts: Another Trump bump for energy

Rising oil price continues to support 2018 earnings forecasts

While our concerns on valuation remain in place, in the short-term market performance is more closely linked to the trend in forecasts profits. Those looking for a reason to sell equities on this basis are likely to be disappointed. As we approach the half-year point, median earnings growth forecasts for the US remain robust at 18% while eurozone and UK equities are at 8%. For now, our base case remains that the benign derating – equities moving sideways while interest rates and profits increase - will continue.

Elaine Reynolds
2 May 2018

Implications of Rabat Deep 1 results

Following on from this weeks’ announcement that Eni’s Rabat Deep 1 well offshore Morocco had encountered only limited hydrocarbon indications, partner Chariot Oil & Gas has provided an early set of conclusions regarding the outcome of the well.Under the terms of its farmout to Eni, Chariot was fully carried for the cost of the well.

20 April 2018 · 5 min read

High equity valuations face macro headwinds

Factors behind record run of corporate profitability may be fading

We have had a cautious view on global equities for longer than has been comfortable. In truth, over the last 12 months this view has been 50% right at best. European markets, including the UK, have delivered relatively little capital growth. However the US and emerging markets have moved significantly higher. When the headlines are focussed on geopolitical events, it is also easy to lose sight of the anchor of equity valuations. We have updated our equity valuation measures and find that the US market in particular remains notably expensive while European markets still appear overvalued. We recognise that this has in part been justified by the record run of corporate profitability but the factors driving this phenomenon may now be going into reverse.

Gavin Wood
17 April 2018 · 3 min read

Deutsche Beteiligungs – reduced earnings guidance for FY18

Lower market valuation multiples have materially affected H118 net income

Deutsche Beteiligungs (DBAG) has announced that it expects to report net income for the year to 30 September 2018 that is moderately (10% to 20%) lower than the €43.0m average of the last five financial years (the reference for previous guidance), equating to net income of between €34m and €39m for FY18. Previous guidance, first given at the time of the FY17 results and confirmed with Q118 results, was for a significant (more than 20%) increase in net income. The revised forecast is based on DBAG’s c €20m expected net income for H118, which reflects lower market valuation multiples being applied in the valuation of portfolio companies at 31 March 2018. DBAG’s guidance assumes constant market valuation multiples and so is subject to upward or downward revisions following significant market moves.

16 April 2018 · 3 min read

2018 Earnings forecasts: Still robust, for now

Corporate sector soldiers on despite increasing geopolitical tensions

Geopolitics will in our view continue to present headline risk for the rest of the year. The US/China trade détente has broken apart as the US administration addresses the prospect of China challenging for dominance in the world economy. This weekend’s military response to the use of chemical weapons in both Salisbury, UK and Syria may for now be described as “mission accomplished” but it remains to be seen what the response would be to any further provocation. At the same time, there has been a run of disappointing economic data in the eurozone. Nevertheless, earnings estimates remain relatively stable for now in aggregate as the recent strength of the oil price leads to upgrades in energy, offset by modest downgrades in other sectors.

Elaine Reynolds
28 March 2018

UK independents pick up blocks in Mexico’s Round 3.1

Premier Oil was awarded three blocks, while Cairn Energy has picked up one block in the latest shallow water round offshore Mexico. Premier beat off bids from five other consortia for Block 30,  which was the most hotly contested of the round. The company holds a 30% WI in the Sureste basin block, which will be operated by DEA and partnered by new entrant Sapura.

23 March 2018 · 3 min read

Market declines: US LIBOR or US trade war?

Headlines scream trade war while a surge in US LIBOR is tightening US financial conditions

It is very easy to point the finger at US trade sanctions against China as a reason for the recent declines in equity markets. The prospect of a near-term confrontation, in respect of access to markets and IP protection (a free competition zone perhaps rather than a free trade area), is clearly unhelpful for global equity sentiment. China’s transition from a catch-up nation to an economic competitor always had to be resolved at some stage. However the second dynamic at work during Q1 18 is a rapid rise in US LIBOR, over and above that of official US interest rates. This is tightening monetary conditions rather faster than policymakers may have intended.