Member Info for londoner7

Whitehat,

Please take my comments on the Tribunal outcome with a very large pinch of salt. I have a 10% holding in oil companies which I've split across 3 companies - CNE being one. So my holding here is modest. In my post I tried to focus on the areas which attract me to an investment in CNE, but it is hard to avoid the upcoming ruling on the Tribunal. I take a cynical view on the ability of those associated with the ruling to keep information confidential. A year ago when the news of a delay to the Tribunal process was released, as I recall on a Monday, the CNE share price had already fallen 4% the previous Friday. Coincidence? More recently, I felt there may be more to the decline in the share price post the August closure on the Tribunal than the fall in oil price. Oil was still climbing into Oct.

In any court case the client, and particularly the representation, must remain optimistic until judgement is passed, so I'm not particularly swayed by the CNS BOD's optimism in yesterday's statement. I notice Malcy sees it much more positively. I suspect that whichever way the verdict goes there will be an over reaction in the SP, which I can trade, hence I am relaxed about maintaining my modest holding through this uncertainty. But that said, I always trade around my holdings, which I've done with CNE over the past couple of years.

That all said, what prompted my reply is your assessment of a 50:50 ruling. I was giving it a less than 50:50 chance of the judgement going in CNE's favour and that any ruling would be black or white. Either CNE get the entire $1.4B or get nothing. One of us is wrong in their assessment. I'd be interested to know what others think and the basis for their view.

Best, Londoner7

In terms of production the update was as expected - the operators PMO and ENQ provided detailed updates recently. The only thing of note is that todays gross number for Kraken is about 1K bopd down from the number provided by ENQ early Dec, which suggests Kraken is likely to be towards the lower end of ENQ's 2019 forecast of 30K-35K bopd. On Catcher gross numbers of 60K -66K bopd are being achieved and this is expected to be maintained through 2019.

Obviously, CNE's guidance for 2019 is based on operator guidance and 19K - 22K bopd net looks a fair call. This time last year CNE guidance was 17K-20K bopd and they hit 17.5K bopd. Not bad considering Kraken was expected to plateau at 50K bopd but was well short, compensated to some degree by an out performance at Cacher.

On the cash front the year finished essencially flat, but there is an $85m draw on the RBL. Based on guidance being met and $65 oil I'd expect a similar draw on the RBL in a year, perhaps towards $200m, but well within the $575m limit which is available till 2025. Nova and Senegal should have cut in by then.

CNE doesn't have the geared play on the oil price that comes with PMO or ENQ but I can do without that excitment. The exploration prospects look interesting and success could move the price significantly, particularly GoM.

Then there's the elephant in the room - the Tribunal. I rate success for CNE as less than 50:50 and would look to trade on the result either way so I'm fairly relaxed about it. But with the final award being drafted I'd be surprised if the actual decision hasn't already been made and if it has, amazed if it hasn't been leaked. I've suspected that the recent fall in share price had more to do with a leak from the Tribunal than the fall in the oil price. The RNS should drop soon.

Billyboy4,

"Them Indians have lost 4 out of 5 tribunals so hope for best."

An interesting observation". What is your reference?

Auson, you ask a couple of questions.

"Do you think Phoenix have got this wrong ?"
I think their commentary on the CMA investigation and competition sounds valid, but I don't see where they get a valuation of three times the current price. If Dignity hit 84p EPS for 2018 that puts them on a PE of 8.4. at first sight that looks a fair valuation, but three times that at 25 looks expensive, particularly if you believe earnings will fall this year (2019) and the Q4 number suggest they will. Hence my caution.

"Can I ask what were your entry and exit prices ?"
My first buy was in Dec 2014 @ £13.4 and my final sell was in Feb 2018 @ £8.07, but my highest selling price was in May 2017 @ £26.74. I'm essentially a buy and hold investor following 5-10 stocks, but also do significant trading without fully exiting an investment I believe has long term value. During this period I made 51 buy/sell transactions in Dignity and made a compound annual return of 26.3% pa. In my book a good return but one that would have been much better if I'd accepted the turn sooner. As I said, a good lesson to learn.

While invested in Dignity I followed the mortality numbers closely - there's useful and timely data available from the ONS - and questioned some ONS assumptions. I expressed some of those points on this board and was generally proven to be correct. The ONS took improved mortality assumptions of recent years too far into the future and did not see the recent flat line. Hence I had a more optimistic outlook on Dignity (for want of a better term) than the market. Being proven correct anchored my conviction in Dignity to a point where I was not quick enough to accept that high pricing was resulting in a loss of market share that even acquisitions couldn't halt.

I still maintain my spreadsheets for Dignity in the hope that I see another investment opportunity, but that starts with a stabilisation of earnings following the change in strategy and any CMA outcome. The Q4 number doesn't show stabilisation, perhaps the Q1 and Q2 numbers will. I'm a patient investor.

Best, Londoner7

I was invested in Dignity for many years. It was good to me and this clouded my judgement late 2017 and early 2018 when the warning signs were there, but I was slow to recognise them. I had invested a lot of time over years and knew the business very well, which contributed to a reluctance to fully exit at the time. It was a good investment and I learnt some good lessons from it's downfall.

But that's history.

I've been watching Dignity's progress over the year looking for another entry point but I still don't see it. The 2018 death rate is 1.3% up on 2017 but has dropped off significantly over the last quarter Q4 (around -4.5%), so it was a tough comparative quarter. The trading update refers to the £79m number as a better than expected performance and indeed it is - I make it 84p EPS, above consensus and close to the highest forecast at 85p. But Dignity has been well ahead of the revised forecasts all year. In April 2017 the consensus EPS forecast was only 68p. Knocking the Q3 number off £79m leaves £10.6m for Q4. Q4 is normally their 2nd best quarter for operating profits but in 2018 it was their worst. In 2016 & 2017 the Q4 number was over £25m - against those numbers £10.6m look poor inspite of the 4.5% drop in Q4 mortality.

There may be trading opportunities around the competition enquiry outcome, but from an operating level I'd like to see the full year accounts to understand this apparent poor Q4 performance and then the Q1 update in May.

In a call with government ministers last night the BB CEO made some insightful comment on the impact of delays to the construction industry.

Balfour Beatty chief executive Leo Quinn said: "I would like to know when we might get back to a normal functioning government. Decisions are being delayed on HS2, new nuclear, Heathrow expansion.The enemy of business is delay and procrastination, and the construction industry will face large-scale restructuring where it cannot carry the resources it will need over the next 25 years, and capability will have to be let go.Once resources are lost to industry it is very difficult to get them to come back; the next six months are critical."

My simple take of this is that older workers will tend to remain within the industry while able to move from one contract to the next, but when that next contract is delayed they will be more inclined to call it a day and hang up their boots. We saw it after the 2008 crisis. House building slowed to a crawl and then when the stimulus came through to build again, Help to Buy etc, there were not enough builders to fill the positions. 10 years on there is a another generation of construction workers ready to hang up their boots.

Hi Joe,

Just to capture the point we’re looking at, you said "HUR will not be able to do their 2021 exploration/development wells on GLA and fund the ongoing GWA activities and FDP imo."

Your assumptions:
EPA first oil 30 Mar 2019 and $60 oil price
3x GLA drills $180m
No cash flow for first GWA well tie back start 2021 - (50% share x 12K bopd x 85% up time) = 5,100 bopd - I assume you overlooked this, I nearly did too.

I'll accept the 30 March date for first oil but not the oil price.
Several firms (GS, MS) have recently revised down their oil price forecasts. I'll use an average of them - 2019 $65, 2020 $70 - and stick at $70 for subsequent years.
The first 3x GWA drills are costed at $180m but this includes 'from scratch' surveys and planning, and modifications to the FPSO. I think the cost of the subsequent 3x GWA drills at $105m is a better estimate of the cost of 3x GLA drills.

HUR costs
- GWA funding to mid 2021 (including costs of first well tie back to FPSO) = $149.4m
- 3x GLA drills 2021 (may be fast tracked, first likely to be Halifax to prove connectivity) = $105m
- Total costs to GWA FFD FID mid 2021 =$255m

HUR cash flows
- 2019 @ $65 oil = $106m
- 2020 @ $70 oil = $272m
- 2021 H1 @ $70 oil + 5,100 bopd GWA tie back ($44m) = $180m
- Total cash flows to mid 2021 = $558m.

Cash flows minus costs = $303m

HUR would enter 2021H2 to fund FFD on GLA (as operator and well stock drilled) and FFD on GWA (as 50% partner and up to $250m from Spirit), $360m annual cash flows (EPA and GWA tie back), and cash in the bank. There is $230m debt to be repaid or converted by 2022 - dilution would represent 20% at current capitalisation.

I don't know the cost of these FFDs so the question on funding isn't answered but it seems to me HUR could enter this period in a strong position.

Of course it will not go according to plan and different JV decisions may be taken but this is how it appears to me at this moment. There are risks and likely additional costs but also upside possibilities in relation to EPA throughput subject to a gas export solution and regulation.

Attention should soon turn from first oil at GLA to the first drill at GWA.

Best, Londoner7

Hi Joe,

Thanks for your numbers.

I thought the Energy Voice article was a good summary and the point you made on funding one of the most interesting areas to examine.

I'll take a look at your numbers tomorrow - I'm basking in tonight's Spurs win.:-)

Best, Londoner7

Joe, you say

"HUR will not be able to do their 2021 exploration/development wells on GLA and fund the ongoing GWA activities and FDP imo."

You might be right but have you worked any numbers to support your opinion?

If you have I'd be interested to see them.

Best, Londoner7

Several directors have been buying through Sep, Oct and now Dec. One might catch the bottom, but I'm not sure that's the game. I prefer to think that these directors have sufficient insight into the business to believe that their investment will be rewarded over the medium to long term rather than tomorrow or next month.

In the absence of another trading update before the FY results in March I'll take these puchases as a vote of confidence in current and future expectations for Breedon.

After stating a couple of weeks ago that I was resisting adding to my current holding today's news that David Warr has added 250K shares to his already substantial holding of 5.5m shares has tempted me into joining in with a similar 5% increase in my holding.

The news that bitumen, one of the cost pressures identified in the recent update, is 28% down from it's Oct high and now sitting at a more modest 12% up on a year ago has also given me confidence.

Some dodgy math there!

9% more cost (22% to 24%) for 12% more oil (16.5% to 18.5%)

Today's relief in the share price is probably due to another section opened last night

https://www.eveningexpress.co.uk/fp/news/local/first-vehicles-drive-on-new-section-of-awpr/

The next biggie is the Don bridge, due before xmas (who knows)

But it goes on. The bridge would complete the road section but there is still drainage and associated works to be completed, which will run for several months. However, I'd guess that after the bridge completion the work force and associated costs will drop off considerably. Will there be further costs in addition to the recently briefed £20m? Perhaps, but not likely to be of that scale. The upside is that when construction is complete the "substantial" compensation claims for the utility over runs can be heard. It would be nice to get some idea from GFRD what substantial means.

farhantahir, I've quite a few out of favour stocks in my portfolio so I guess in part it's fair to point towards the market. The prospect of a head Brexit in particular will impact.

But specifically to Breedon and breaking out the two key metrics: revenue and margins.

Revenue. Traditionally Breedon do not chase revenue at the cost on margin, so I was pleased to see the recent update pointing to revenue for the full year ahead of expectations. I stick by my forecast of £894m. A large part of the growth in revenue is due to YOY improvement at Lagan - market forecasts around £834m are based on same again 2017 performance. But I'd be very surprised if there isn't also growth within the original Breedon business, probably around the 2-3% level.

However, I missed the impact of cost pressures from oil (bitumen) and UK energy pricing. Also, I'd guess labour costs are in the +3-4% range. Mitigating these to a degree will be any increase in revenue and efficiency gains from recent capital investments.

I was encouraged by the director buys in Sept and Oct.

That's history, what's the outlook.

IMO a hard Brexit will hit the share price further and the May deal (or something similar) would boost the share price. The oil price has come back alot so should relieve some cost pressure. Talk is that the big boys are looking to raise pricing in the spring. At the half way stage Lafarge (AI in the UK) reported cost pressure in the UK. At the Q3 stage comment had turned to problems in their French markets.

Ireland - there's no doubt that Breedon's acquisition of lagan was timely. I recently heard that the UK is the biggest net beneficiary of inward investment largely down to it's timezone, language and financial markets. What I foumd surprising considering it's size, is that Ireland is the 2nd largest beneficiary. With Brexit looming I guess Ireland will see even more and the Irish construction markey should benefit.

The expectation is that pricing will adjust to the cost pressures, but there's a lag and the recent share price is reflecting that. But until I see a mis-step by Breedon management I'm holding. I already have a full stake and deacades of investing have taught me to be humble in my expectations so I'm not adding. As I said I have a few stocks that are out of favour and I haven't lost faith in them either.

strictly, You say, "More controversially, perhaps, as we're on this tack, as an investor I disregard all fixed assets on a balance sheet."

IMO, not controversial if you are a strictly 'house builders' investor, as I understand you to be. I also understand that you know your way around a balance sheet, but with Telford reporting today I'm wary that less informed investors visiting this board might misunderstand your comments.

It should be clear to investors that house builders have little need for fixed assets, or as I prefer to call it 'non current assets', specifically, 'property, plant and equipment". A warm office for the CEO, CFO and their staff and some IT kit is pretty much it.. The profits are generated by the on site activities, which will include site offices which are transitory and given the short duration of the building cycle largly falls within 'current assets', or 'current liabilities' if leased.

If the often commented move to off site manufacturing becomes a significant part of the house building industry then these facilities would come under the category of fixed assets and it could be a mistake to ignore them.

After checking the numbers I posted earlier I found that I'd underestimated on my forecast for Breedon over the last four months. The consequence of this is that my expectation of £706m for this mornings update should have been £724m.

My conclusions remain valid. The £739m update implies improving revenue growth over the recent period, and my full year forecast (assuming normal weather) stays at £894m. Incidentally, I had a note from a fellow investor querying my full year number. He suggested a simple divide by 10 and multiply by 12. It's more complicated that that. This method ignores the fact that Lagan didn't contribute for the first 16 weeks. Also, multiplying the last 4 months revenue by 1.5 underestimates the impact of the xmas holiday. A suitable multiplier is closer to 1.43.

In a free moment I had a crack at analysing the material growth numbers. The agg number reflects a continuation of the first six months performance (21% ahead of the 20% I calculated for same again). I was encouraged by this because the first half included 10 weeks for the Lagan business which was enjoying the recovery from the Beast from the East. Similar for Asphalt (45% ahead of my 41.7% calculated) but more caution here because of the larger rounding error on the asphalt numbers, e.g. 0.9 could be anything between 0.85 and 0.94.

Even more caution required for the Concrete numbers (-5% worse than my calculated -2.7%) because my calculation doesn't exclude the Tarmac disposal (23 plant) or the (12) plant closed, sold or mothballed in the first six months. That said my feeling is that the concrete volumes look good against this backdrop. Perhaps also reflecting the slight market improvement in concrete volumes in Q3.

spindok, I'm not sure if your reference to headless chickens in in relation to the market in Breedon or more generally.

Specific to Breedon, I don't think there is much interest in the stock at the moment, born out by the fact that only 62K shares were traded in the first hour. I'd guess many of the sells are traders bought ahead of the update hoping for a pop and now exiting slightly disappointed, but not down significantly. In spite of what I think is a good update I don't think there is much reason to get in ahead of the current Brexit uncertainty. If the weather remains 'normal' for the rest of the year we should see brokers updating their revenue numbers. But if we get another 'Beast from the East' then unlike last spring there wouldn't be time to recover lost work before year end.

For the market more generally, I think there is reason to be cautious. I think May will get her Brexit deal through parliament but the talk of an armageddon scenario following an possible failed first attemt and a market plunge forcing a revised vote second time round isn't an attractive option for holders of UK stock. I know from experience that I'd struggle to trade round such an outcome so I'm just holding my stock for now but not adding ahead of the outcome.

barchid, I don't know is any gloss is being applied but to your specific point on pensions.

My understanding of the pension issue is that the pension deficit is coming down in part due to the annual cash contributions. These cash contributions will continue until the pension is in surplus. That could be ahead of the next review in 2020 due to a change in gilt yields, and agreement with the trustees.

If that occurs then pension contributions are no longer paid, hence, other factors staying the same, cash costs will come down.

In Sept Breedon reported 46% growth in revenue post Lagan acquisition (4% organic). I broke that down to a running 21% growth rate in Langan for the period. Extrapolating these revenue growth rates (4% Breedon and 21% Lagan) through to end of Oct gave me £706m. Unless I have my numbers wrong this update of £739m suggests one or both of those growth have increased in the latest period.

Extrapolating the £739m number to the full year, using last year's end of year appropriation which takes account of the xmas holiday period points to £894m for the full year. This is 7% ahead of current concensus at £837m.

That is a good beat and some of those first half cost pressures will have backed off with the recent fall in the oil price. Makes the margin number a bit of a guess for the full year, but I'm feeling good about recent progess.

How the market intrepretes it is another thing.

I've revised my original assessment of Cineworld US market numbers.

UK broker comment expressed concern at the lackluster UK numbers and the lack of any upgrade in full year expectations. I wasn't particularly concerned by these items as for me the key is the US market accounting for 75% of revenues and as I said my number cruching pointed to a underperformance of the US market in the most recent period (which mainly covers Q3).

This concerned me so today I spent a few hours digging out the Regal data and market data for last year. For the full year (2017) Regal performed almost exactly in line with the market, down 2.6% against the market down 2.7%. However, when I look at the Q3 data the market was down 27%. This is the largest YOY quarter drop in the 8 years of data I was looking at. Clearly an exceptional quarter. But Regal only reported a drop 13.3%. This represents an outperformance of 13.7% !!!!

It turned out that Regal's numbers show an underperformance in each of the other 3 quarters, Q1, Q2 & Q4. The Cinemark numbers show the same pattern, albeit Cinemark just beat Regal over the full year by 1%.

Clearly, in Q3 2017 there was an exceptional mismatch between the reported admissions revenue by the Cinema groups and the market data, which has unwound this year with the significant outperformance by Cineworld in H1 negated to a degree by an underperformance in the recent period including Q3, but still resulting a market outperformance by Cineworld of +1.6% to 11th Nov against an inline performance by Cinemark of +0.1% to end Q3 and an underperformance by the market leader AMC of -1.1% to end Q3. To a degree this is noise because typically 0.5% of additional screens are added each year.

Turning to the UK data. Mojo numbers show, after a fair amount of processing, that the UK admissions revenue is down -2.9% to end Oct, with Q3 YOY performance similar to H1. Yesterday, Cinemark reported UK up 1.4% to 11th Nov so IMO a decent outperformance against the market of roughly 4% (slightly different periods).

Perhaps the UK movie market is lackluster but that's down to Hollywood rather than Cineworld. The film slate matters and clearly inspite of a simiilar film slate the UK audience is very different from the US audience, and the ROW film slate completely different again, As Cineworld predicted at the interims the ROW has made a strong recovery in the 2nd half (so far). If the UK broker focus is on the UK performance then they shouldn't ignore the ROW which in 2017 represented 70% of UK revenues and a similar EBITDA at £98m.