OPEC deal – It’s all about trust

OPEC and ‘trust’ are not two words that I would put together too often. But that’s exactly what the Saudi’s and Russian’s are asking of their fellow members. Russia is not part of OPEC but the way they have been operating of late, you’d think they may as well be.

For the last 5 months, OPEC and NON OPEC members have delivered on 95% of the proposed cuts with the Saudi’s picking up the tab for those slow to reduce their production numbers. The compliance levels and trust within the group is higher than the market expected. History shows that members struggle to keep to cut quota’s. Many begin to producing more than they should. Others then follow. Hence, ‘trust’ amongst OPEC and NON OPEC is going to need to be high. All involved are going to have to believe that other players are towing the line. If a few blink and wobble, then others will likely follow.

The sell off in PoO post OPEC meeting was to be expected as the meeting delivered no ‘new’ news. The market needed deeper cuts to move to a mor ebullish $57pb range. Instead, traders departed expecting a slow drift as markets watch for supporting data over the coming weeks and months. DRAWS are now expected every week. You’d think that’s bullish, but in this market it’s already priced in. What is not priced in is huge DRAWS. The kind that makes the eyes widen. The market is in a delicate position at the moment and any ‘shock’ news on supply tightening could see PoO react very quickly. The Saudi’s in particular have shown some further intervention to prices by restricting production volumes to certain parts of the US. It’s a little trick that most are aware of but it can effect the headline numbers on EIA reports. The Saudi’s have also cut more than their share from time to time. With the Aramco IPO still very much planned for next year, they clearly have a keen interest to see PoO higher. Equally, the Russian’s are keen to see PoO support continue through to March 2018 or beyond. Putin has russian elections coming up in Mid march 2018 so it suits him perfectly. Crude will not be the only thing he’ll be reinforcing. I suspect the US will be keen to give him some of his own medicine come election time – best get your media firewalls sorted ahead of that one Mr Putin.

In summary, it’s Russia and the Saudi’s that can be trusted as they both have key interests coming up in early 2018. But as for the rest of the rabble… well, that’s anyones guess. So watch out for compliance level updates over the next few months, they are in theory just as important as the EIA reports. 5 months of 95% compliance is commendable, but 14 months of the same is hard to believe. And that’s going to keep plenty of traders guessing over the next few months and PoO is likely to bob around in the same pattern seen in the early part of the year.

Hummingbird Resources – Final Results

HUM issued final results this morning and whilst most was expected in these results, it is managements overview that is more telling and makes for a terrific read. Hummingbird Resources are refreshing in many ways. Their communication to investors is excellent. Their commitment to the Yanfolila Gold development is 110%.

Daniel Betts and team have made huge progress since gaining funding late last year. The company website has some great images and video’s showing the Gold development growing by the day. All is on budget and on time at present. There’s still some hurdles to leap but all the main long lead time materials have been ordered and are on site derisking the project further.

As Daniel states in this mornings results…

Based on this capital structure and looking forward to our first year of full scale production, this marks Hummingbird out as the standout gold developer trading in the public markets.  It is trading on 1.26 times projected free cash flow for the first full year of production against an industry average which can range anywhere from 15-25 times.   In the first full year of production, cash flow per share will be 20p.

This assessment of Hummingbird’s exceptional position in the market does not take our 4.2Moz Dugbe gold project in Liberia into account.  Broker Cantor Fitzgerald has suggested that this project could offer significant further upside and add a further 14p in value.

It is with this in mind that I firmly believe that Hummingbird is due a re-rating in the market as it evolves into a profitable mining company and delivers the significant free cash flow highlighted in our DFS.” END

I couldn’t agree more with him. Hummingbird should be in the mid 40’s by now especially with so many risky items in the development now completed and thus derisked.

Daniel also hints at a possible incease in reserves/mine life…

“Exploration has taken a back seat over the past year, for the reasons stated above.  However, as we approach the commencement of production, we are starting to now evaluate exploration targets (both brown and green fields) to extend the mine life at Yanfolila.  We are in an enviable position because we already have the resources to extend the mine life.  It is simply a question of prioritising the best ounces to convert to reserves and bringing these reserves into the mine plan first to improve the economics.  We are excited about our various expansion and exploration initiatives and I look forward to updating the market about these programmes in due course.” END.

There is certainly scope to improve on the resource at Yanfolila and I believe there is a not so subtle hint of what might be to come. As investors that follow the sharehub and HUM closely will know, the greater Yanfolila area (GYA) was recently signed over to Glenwick in a deal which will see Hummingbird shareholders retain approx 45.5% of the undeveloped area but through Glenwick shares. Glenwick have yet to relist and I suspect this will become clearer in the next few weeks. Thereafter, I suspect GYA will be explored via equity raising which will not come from HUM shareholders, but via Glenwick thus minimising risk and diluton. To date the market has not priced in very much for the Yanfolila development potential or GYA. This is something that I think the market will like when it finally arrives. If GYA delivers further resources then the cost to combine with the Yanfolila development is minor. The cost savings across the entire project should thus drop further. Quite remarkable considering costs are already extremely low at sub $700oz.

So what’s the plan going forwards? Dividends? Share buy backs? How is the cash flow going to be deployed once the gold begins pouring in late 2017?

Well, Hummingbird have two main licences. One in Mali (Yanfolila) and the other in Liberia (Dugbe). The latter is actually larger than Yanfolila and yes, the market has not priced anything in for this as it’s very much viewed as non core… at the moment. Cantor assigns 14p but I have no doubts that this will be worth 10 times that amount once fully operational, which of course will take time and capex.

So this is what I would do if I were Mr Betts and team…

  1. Relist Glenwick with funding deal to develop GYA in next few months – the sooner the better as it can be bolted into the developing mining site
  2. Deliver first Gold Pour at Yanfolila and generate cash flows
  3. In mid 2018, use cash flows to get Liberia/Dugbe moving
  4. Flog Yanfolila to Randgold or another larger player in 2019 for a handsome sum
  5. Deploy cash into Dugbe (subject to other acquisition opportunities)

Assuming the above works out, I would envisage a share price close to 500p+. Not bad for a stock currently priced at 25p a share. It might take a few years, but worth the wait assuming Gold remains firm. Should Gold rise above 1250 and towards 1600 levels, the numbers become astonishing! For now, best stick to a medium pricing expectation.

Hummingbird Resources is about as fresh as they come when it comes to growth stocks. As always with any stock risks shoud be noted. See risk warnings in column opposite.

HUM is part of thesharehub top ten for 2017.

Sharehub Hotlist 2017 Week 20

Week 20 turned out to be another ‘volatile’ one for wider markets. The DOW got Trump’d again. That’s not the first time and it wont be the last, so do not expect calm waters ahead. With major Indices at near all time highs, the froth is certainly there to be skimmed. Commodities bounced off support levels after a pretty torrid few weeks. It’s unclear whether this can be supported through the traditionally slower summer months, and in Oil’s case, thursday’s Vienna OPEC meeting will surely define the next ‘leg up or leg down’. Verbal banter has been kept to a minimum which was quite a gesture from the Saudi’s to the Iranian’s considering the latter had a very important election underway. With that now sorted, it will be interesting to see if Iran play ball on the cuts/extension plans. All involved agree broadly with the 6 month extension plans and even 9 month plans look pretty much priced in by the market. Ultimately it comes down to compliance levels. And reading between the lines and history books, most expect these compliance levels to drop fast. The last 5 months of near 95% compliance is well above what the market expected, but the frightening point to consider here is that even with these record breaking commitments, the rebalance still proves elusive. Yesterday’s announcement via President Trump on selling off half of US strategic oil reserves will worry many. It potentially sets up 2018 for another year of gluts and sub $60pb prices. I suspect this news has been ‘outted’ prior to OPEC’s meeting as a basis to secure a 9 month extension instead of just 6. Trump’s visit to Saudi Arabia looks to have been timed and planned with some precision. Another concern for 2018 is that many players who are ‘cutting’ are actually infact doing maintenance to wells and storing Oil. This means that when cuts are lifted next year, some will be faster out of the blocks than others and oil coming to market will be instant and higher than ever before. Clearly some kind of forward ‘ongoing’ management of PoO is going to be required for a good few years yet.

All eyes will be on May 25th’s meeting although for many the outcome looks odds on to extend. 9 months looks like the obvious choice to me.

Stocks to watch out for over the coming weeks… keep an eye on Providence Resources. The huge Druid prospect is due to be drilled in the next few weeks and it’s set to be this summers blockbuster event for smaller caps. Hummingbird resources continues to make good progress on their gold development and with volatility likely to rise in 2017, a gold focussed stock is not a bad idea if seeking some hedge to other commodities like PoO or just plain old market volatility. Finally, Faroe’s Brasse appraisal well is due to spud in a matter of days.

Week 20 results below:

Hummingbird Resources – Update

A bright and breezy update from Hummingbird Resources is most welcome and investors should be comforted by the news that the Yanfolila project remains firmly on time and on budget. The Ball Mill has now arrived on site and that’s a major hurdle derisked.

Dan Betts, CEO of Hummingbird, commented: 

“As the longest lead item, the delivery of the ball mill to site is a significant milestone for Hummingbird and further de-risks the delivery of the project’s critical path. Construction is progressing well, and I would like to thank our operations team and our construction partners for their continued hard work and dedication on site.” END.

With Gold prices looking firm to bullish for 2017, Hummingbird are on track to deliver first gold pour before the end of 2017.

With a market cap of just £81m, the company will be one of the cheapest producers out there and with one of the lowest margins to boot. That’s not a combo that you normal see.

The market may prefer to wait a few more months before rerating the stock but as each milestone is achieved and each month passes, HUM.L looks more attractive by the day.

HUM is part of thesharehub’s top ten for 2017.

Sharehub Hotlist 2017 – Week 19

We are fast moving through the year and after 19 weeks of performance, it’s commodities that are yet again lagging the wider market. The gains made from the last OPEC meeting in Nov 2016 have virtually been wiped out. Hedge funds long positions on crude are at the lowest levels seen in over 6 months. It’s as if a ‘reset’ button has been pressed. So has the market got it right? Does it look fair? Well, if you consider the Saudi’s ‘pump like mad’ strategy in Dec 14 thru to Dec 16, it’s pretty easy to see whereall this stock went… yep.. straight into floating oil tanker storage. The bulk of oil was sold at average levels of around $45pb. Post the OPEC cut deal which started officially for most involved as of Jan 1st 2017, the last 5 months of cuts have basically been offset by oil docked from floating storage tankers. At a nice 10% to 20% premium which just about covers the tanker costs. The Saudi’s and Russian’s flooded the market and over the last 5 months, it’s ‘all’ OPEC and non OPEC members that are taking the hit. Net result… the Saudi’s and Russian’s break even leaving the rest of OPEC nursing heavy losses and market share reductions.

One positive to come out of the recent cuts is the compliance levels. These have been at 90% or better. That’s quite impressive considering OPEC have a habit of seeing cuts through as an arbitrary event. Going forwards, the verbal banter pre OPEC meeting on May 25th is for a cut extension of 9 months. This will certainly make make a difference and support crude but the big questions that remain is can OPEC really make 9 months of cuts stick amongst all members – many of which are tired and beaten to a pulp by the last 2 years events? Furthermore, the verbals are via Saudi’s and Russian’s. But what of Iran and Iraq? The latter two have sought exemptions to cuts and have been pumping like billy-o. The sticking point to any future oil cut deal will likely hinge on whether these two unpredictable and untrustworthy OPEC players, will agree to cap or even cut production. It could be a situation of ‘no cut deal’ if these two do not participate. In conclusion, the Oil cuts have achieved one thing and that’s to burn through the floating storage which was racked up by the Saudi’s in the first place. US production is near record highs and virtually unmoved. It looks like rising further assuming PoO rises into the mid $50’s again. This leaves all involved in ‘no mans land’. The next few years could be just a continuation of the same oil price levels. But here’s the biggy. Global oil reserves are dropping fast. And there are not enough investment and new developments arriving to replace the oil volumes required to satisfy demand. It might not be until 2021 before this is felt but jitters in the market could arrive well before then.

Short term – it’s likely to be pretty boring stuff for many Oil focused stocks. The only light at the end of the tunnel is if US production begins to drop. For the same reason as above, investment has dropped in US shale and wells that have been pumping like mad for the last 5 months will soon dry up and there are not the same volume of wells coming online to replace them. This can be seen by the rig count which is still half of what it was some 2 years ago.

All in all, it’s going to longer than expected to see the Oil Market recover and $60pb might not be seen until mid 2018 at best.

Results thus far – week 19

The last 3 weeks have been good for the wider market as french election risks past. The Daily mail and Telegraph picks continue to fight it out both showing very decent gains for first half of the year with a month to go. The sharehub picks need something more than the 9 month cuts from OPEC. US production has to fall and draws need to be sizable before $57pb is broken. M&A offers a glimmer of hope, and it’s possible we could see one or two more stocks get picked off before year end. Ithaca Energy will be delisted shortly and sharehub will review whether to redistribute the proceeds from sale to the other 9 stocks or to plough them into one of the remaining 9 picks.A decision will be made shortly. Historically, stocks cannot be traded in or out of the top ten picks and have to run for a full 12 months. But with buy outs, cash can be reinvested to add some interest to the second part of the year.

Hurricane Energy – Agree warrant based funding facility

This morning, Hurricane Energy announced FY results and a warrant deal for 25m new shares. The shares will be issued/called upon when needed and are expected to carry the company through the next 3 to 6 weeks and allow for financial flexibility during farm out / funding talks for the Lancaster EPS project due for first oil in H1 2019.

Cash held as of y/e was £82.2m. This sum has likely dropped to around £20m or possibly lower after the recent drill campaign which has seen the company flat out since July last year.

Project finance for the EPS still eludes them. The company said…

The total forecast capital cost of the EPS is approximately $467 million (including costs already incurred to date). Therefore, the Company has a significant funding requirement that may include a combination of equity, debt and / or a farm-out (the “Primary Funding”). This Primary Funding is, subject to market conditions, anticipated to occur in mid-2017.“END.

Most investors are well aware that HUR require funding but it’s the type of funding that has many still guessing. My hunch is that any prospective farm in partner will prefer to wait until OPEC/NoN-OPEC agree terms / action for the second half of 2017. The meeting is due to convene on May 24th and end on May 25th. An extension is expected but there’s a possibility that the Saudi’s may play hard ball in an attempt to pull Iraq, Iran and other OPEC members inline. This is a big event for PoO and no one is counting their chickens. Hence today’s news of HUR’s ‘bridge loan’ as I call it suggests they are buying time through to end of May or at the very least, to the conclusion of OPEC’s pivotal meeting.

The most favourable option and fair solution to part or all of the funding requirement would be to do an Rights Issue. This would enable all shareholders to partake on an even basis with no particular holder gaining more advantage over another. However, RI’s take at least 3 to 6 weeks to conclude. And HUR clearly want to get on with the EPS and have cash calls from service providers beckoning.

I suspect all will become clearer after the OPEC meeting results on May 25th.

Hurricane Energy is part of thesharehub top ten for 2017.

Updated results on 2017 performance will be posted on Monday.