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Tempus: pouring oil on troubled waters

Buy, sell or hold: today’s best share tips
 
 

About the last thing the market wanted to hear was another delay to Premier Oil’s Solan project to the west of the Shetlands. This was due to pump its first oil in the second quarter of this year; bad weather and other delays pushed this to the end of the year. The unprecedented number of storms this winter has meant some lost days and has pushed the first oil out to early next month.

This does not greatly matter. There is no change to the arrival of peak production in the summer, once a second pair of wells is drilled, and this will run at 20,000 to 25,000 barrels of oil a day for two and a half to three years before gradually being run down over the next decade or more.

Some have wondered, given the precipitate plunge in the oil price, whether the $1.85 billion project will pay its way. At $37 a barrel, probably not; the cost of production is well below this, at about $12 a barrel, but payback on the investment requires a significant improvement in the price.

This, though, fails to take into account any other oil that can be extracted from the area, either through existing discoveries in the region, such as Strathmore, or owned by third parties. Premier has headroom on its borrowing facilities and $3.5 billion of UK tax losses from earlier acquisitions, so it is well placed to buy assets. The news from Solan came with the completion of the $120 million sale of Premier’s Norwegian assets. Exploration at the Sea Lion project in the Falklands should complete by the end of February and there will be an update from the Isobel Deep well there early next month, which should provide some good news. It makes no sense at all, with the oil price where it is, to push ahead with Sea Lion, and so the next phase, the awards of engineering and design contracts, could be some way off.

Investing in oil presents something of a quandary, unless it is in shares like Royal Dutch Shell offering a significant yield. The sector, including Premier, is being heavily shorted. When the direction of the oil price changes, shares could recover rapidly. I don’t see that happening immediately, but I doubt that Premier shares, up 2¾p at 48¾p, have further to fall. I’ve said that before, though.

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$120m price for Norway assets
44m Barrels of reserves at Solan

MY ADVICE Avoid for now
WHY At some stage the price of oil will turn and share prices will recover sharply, but there is no sign of this happening soon

Capita appears to have taken the view that there is no point in hanging around for a possible higher bidder for Xchanging, the software company it had tried to buy in the autumn. The outsourcing specialist has decided to accept the 190p a share on offer from Computer Sciences Corporation, of the United States, announced this month, for its 9.9 per cent stake.

Capita’s own offer was pitched at 160p and, plainly, a higher offer did not make much financial sense, even if a deal would have given it access to Xchanging’s automated paperwork platform for use elsewhere in the insurance industry. Some had worried that the deal, for £412 million, was a step too far and offered too high a level of risk. As it is, the £7 million-odd Capita will make on its stake will defray some of its costs.

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For the outsourcer, it is all down to the next deal and the consequent uncertainties. My recommendation of the shares earlier in the year was on the expectation that a deal could be struck. The company will have to rely on the sort of low-to-middle- single-digit growth analysts that believe it is capable of. The shares, up 22p at £12.12, sell on 17 times this year’s earnings, which looks a full valuation, then.

190p price per Xchanging share

MY ADVICE Avoid for now
WHY Without Xchanging, the rating looks a high one

I am not going to try to predict the exact direction of the markets next year, but I suspect it will be another difficult one. The economic runes are not exactly favourable and there is no obvious reason why oil or commodity prices should recover soon.

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This means, I suspect, that stocks offering a good, reliable income will continue to be favoured. Among these will be vehicles such as John Laing Infrastructure Fund, whose shares, off ¾p at 117p after the announcement of the first deal in Spain, offer a yield of 5.8 per cent. JLIF and other infrastructure funds are finding it difficult to find appropriate assets in Britain at the right price that offer a proper income, and the fund has said that it will be looking further afield. There are already assets in the Netherlands, Finland and Canada and now it is taking a 40 per cent stake in a Barcelona metro project.

This fulfils the usual investment criteria in terms of the discount rate applied to the forecast income. Spain, despite recent traumas and the uncertain political situation, is seen as an appropriate place to invest and, while the project is not quite complete, JLIF is taking on no construction risk and the concession has more than 27 years to run.

The fund put in place a new lending facility that will allow £280 million in all to be raised, which means that the £85 million purchase price of the metro stake will put no strain on its finances. At some stage, it will cut debt by issuing new equity, because this is how it funds itself, but there is never any shortage of buyers for the shares.

Price of Spanish metro stake £85m

MY ADVICE Buy for income
WHY The yield looks attractive, given market uncertainty

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And finally . . .

Mike Danson is the entrepreneur who built Datamonitor and sold it to Informa for more than £500 million at the top of the market in 2007. He is trying to repeat the trick with AIM-quoted Progressive Digital Media Group. It has announced a deal whereby it would buy one of Mr Danson’s businesses, GlobalData, for £66.5 million in shares and sell a small non-core business to him. A bit incestuous, except that Mr Danson already owns 66 per cent of Progressive and the independent directors are happy enough.

Follow me on Twitter for updates @MartinWaller10

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