Global Relative Value: Oil - integrated and E&P
Relative Value Global: Oil – integrated & E&P
LONG (on a relative basis) XLE US: $78.90; IXC US: $37.7; XOP US: 49.00; OIL FP: Eur33.00; PBR US: $9.00; LKOD LI: $46.48; Brent M05: $75.3 December 1, 2014 Following OPEC’s decision not to cut output after the recent fall in oil prices, in particular due to a glut of crude brought about by overproduction in the US (aka the fracking revolution), oil prices collapsed further last Friday, causing a crash in oil/energy related shares on Friday, and this morning in Europe. E&P companies are the most affected, being the high beta stocks in the sector as they are directly linked to changes in the price of crude. One immediate consequence of the oil bear market was the abandonment of the Petroceltic deal by Dragon Oil, with Petro Celtic dropping by almost 40%. Following our positive report on oil drilling and services, we are positive on oil/energy stocks in general, and particularly on E&P companies which are reaching ridiculous levels of valuations, exceeding (on the downside) the lows of 2008/09 when crude collapsed to $40.
1. OIL in the global valuation context As highlighted in our global strategy report (Oct 8), out of the top 50 best value stocks, 18 are energy stocks highlighting the undervaluation of the sector. In the US, of the top 25 best value stocks, 13 are energy, including 10 oil stocks (4 integrated; 6 E&P) and 3 oil services stocks. In Europe, out of 14 top undervalued stocks, 4 are energy. The story is the same in emerging markets where Russian oil stocks, Petrobras, and CNOOC (China) feature prominently amongst the best value opportunities. Even in Japan, Inpex is ranked #1 in terms of value vs. margins In fact on a global basis, of the top 10 best value vs. margins stocks, 9 are oil stocks (Inpex, 6 Russians, Statoil, Sasol). In terms of relative performance, the oil sector, be it on a global basis, or market by market is not only significantly oversold, but is selling on relative lows that are overshooting the preceding lows of 2008-09 when oil collapsed to $40. This would suggest that either the oil price is on for another significant leg down, or that on the contrary, if oil prices were to stabilize, the energy sector is due for a significant rally. E&P E&P are the high beta stocks in the energy sector. The following two charts are showing the relative performance of US E&P stocks to the US Energy sector and to the Oil Services sector. As can be seen, E&P are massively underperforming in the current oil rout. In fact as the chart below shows, the relative underperformance of the E&P sector vs. Energy is similar to the 2008 relative collapse. However, again the 2008 move took place in an environment where oil collapsed from over 140 to $40 CONCLUSIONS & TRADE RECOMMENDATIONS As demonstrated above, oil stocks are undervalued relative to world equity markets, and particularly so in the US and Europe. Relative performance of energy stocks to indices would tend to indicate that either oil stocks are extremely oversold (relative), or oil prices should plunge further. As such, we would overweight energy stocks in any long equity portfolio. This sector allocation bet was also highlighted in our last strategy report where we highlighted through a bottom-up stock selection based on relative values and profitability trends and cycles that the energy sector was the most attractive in all markets. CORE LONG OIL STOCKS ENI (ENI IM): Eur 16.7 STATOIL (STL NO): NOK 126 ENCANA (ECA CN): C$ 17.80 PETROBRAS ON (PBR US): $9.12 (we recommend Petrobras in US$) Russian Oil or Market Vector Russia (RSX): $19.60 (Gazprom, Novatek, Lukoil, Bashneft) KMG EP (KMG LI): $ 15.25 DRAGON OIL (DGO LN): GBP 5.02 OIL & NATURAL GAS (ONGC IN): INR 364.4 OIL INDIA (OINL IN): INR 571 INPEX (1605 JP): JPY 1219 BEACH ENERGY (BPT AU): A$ 0.98
SPECIAL SITUATIONS: BAKER HUGHES (BHI US): US$ 56.5 long the US sector with a 15% cushion/kicker PETROCELTIC (PCI LN): GBP 1.14 collapsed deal more than 100% higher; co. is for sale. PETROBRAS ARGENTINA (PZE US): $ 6.0 potential minority buyout; at a fraction to YPF TALISMAN ENERGY (TLM CN): C$ 5.14 ultra-cheap Canadian E&P co. Icahn main shareholder. PACIFIC RUBIALES (PRE CN): C$ 10.18 stake building by Alfa Group above C$20. High probability of a take-out BASHNEFT (BANE RM): RUB 1219 (US$ 23.6) majority stake expropriated by Russian gvt from Sistema. Significantly undervalued; stake could be resold later at a much higher price.
LONG / SHORT MEAN REVERTING / RELATIVE VALUE TRADES: The following tables are showing the MRI for the various possible pair trades in the global energy sector. Highly mean reverting trades are highlighted in yellow. Of these we recommend the following trades based on relative values and price dislocation: Long E US (ENI ADR), Statoil (STL NO) / Short IXC US Long Oil futures (CLH5) /Sshort CNOOC (883 HK) Long Lukoil (LKOD LI), Novatek (NVTK LI) / Short XLE US Long XOP US, (OXY US, APC US) / Short RDSA LN Long Petrobras (PBR), OIH US, RSX US / Short CNOOC (883 HK) Long Lukoil (LKOD LI) / Short Sinopec (386 HK) Long Gazprom (OGZD LI) / Short RSX US Long RSX UX, Lukoil (LKOD LI), Gazprom (OGZD LI) / Short Schlumberger (SLB) We note that the Russian stock market (RTSI$ or ETF RSX) is most mean reverting with crude oil prices and a large number of oil stocks. Russian oil stocks have been among the best performing energy stocks in the last 3 months.
After Hours Gainers:
Companies trading higher in after hours in reaction to earnings: TLYS +20.5%, PSUN +11.8%, AVGO +6.3%,
In reaction to M&A: CACH +31% ($0.29 stock - co announced a review of strategic alternatives), HE +9.9% (NextEra Energy (NEE unched) and HE to combine in a $4.3 bln deal),
Companies trading higher in after hours in reaction to news: ARRY +22.8% (to regain worldwide rights to binimetinib), OXF +19% (disclosed that on December 2, 2014, it was notified the NYSE that it regained compliance with the share price continued listing standard of the NYSE), APPY +5.3% (light volume; will provide business update on Monday, Dec 8 at 4:30 following FDA request for additional info on APPY1 direct de novo submission), BMRN +2.1% (CEO appears on CNBC's Fast Money), PRA +1.8% (has authorized a special dividend of $2.65 per common share, increased its regular dividend by 3.3% to $0.31/share and adds to share repurchase authorization ), HDNG +1.1% (light volume; Privet Fund disclosed 7% stake; has engaged in discussions with management regarding the operations and strategic direction), DIS +0.1% (increases annual dividend 34% to $1.15 per share).
After Hours Losers:
Companies trading lower in after hours in reaction to earnings: SEAC -7.3%, VRNT -3.2%, ARO -2.5%, GES -0.1%,
Companies trading lower in after hours in reaction to news: KIN -26.4% (has re-assessed its atopic dermatitis program and the atopic dermatitis market and has decided to discontinue its AtoKin study in favor of directing resources toward other programs in its portfolio), ADC -2.7% (commenced underwritten public offering of 2.1 mln newly issued shares of common stock)
2014-12-04 00:00:01.3 GMT
(For a Real M&A column news alert: {SALT REALMNA <GO>}.)
By Tara Lachapelle
Dec. 4 (Bloomberg) -- Avanir Pharmaceuticals Inc. may be
leaving some money on the table.
The Aliso Viejo, California-based company, which makes a
drug to control symptoms of Alzheimer’s disease, agreed to sell
itself to Japan’s Otsuka Holdings Co. for $3.2 billion, or $17 a
share. That’s 4 percent lower than analysts’ average projection
for where the stock would have traded in a year. Jefferies Group
LLC’s Thomas Wei said he would have valued Avanir at $26 to $31
a share in a takeover. That implies Avanir may have been able to
negotiate for at least an additional $1.7 billion for its
shareholders.
Counterbidders are still possible. Just one month ago, JMP
Group Inc. said Eli Lilly & Co., H. Lundbeck A/S, Mallinckrodt
Plc and Shire Plc all could be logical acquirers of Avanir. And
they’re among more than a dozen suitable buyers that Wei
highlighted this week.
The catch is that Avanir agreed not to seek out other bids,
and should it walk away from this deal, it will have to pay
Otsuka $90 million. Avanir shareholders also don’t get to vote
on the transaction, so to get more money they’ll need another
drug company to make an unsolicited higher bid.
Otsuka’s offer is “underwhelming,” Ritu Baral, a New
York-based analyst for Cowen Group Inc., wrote in a Dec. 2 note.
“While we see no evidence of other potential bidders at this
point, we think there might have been interest from other
pharmas with portfolios in Alzheimer’s” and related neurologic
disorders.
“We will be paying close attention to the upcoming merger
filings” for details on the transaction such as the timing of
the talks and other potential bidders, she said.
Tight Spread
While Avanir’s stock closed yesterday 8 cents below
Otsuka’s offer at $16.92, which usually implies investors aren’t
anticipating a bidding war, it’s also a very tight spread for a
deal that was just announced. The average spread for pending
acquisitions of U.S. companies is currently 5.7 percent below
the offer price and the median is 2.4 percent, compared with
Avanir’s 0.5 percent, according to data compiled by Bloomberg.
Avanir’s stock price had risen 344 percent this year
through last week, before the deal was made public. The company
makes a drug called Nuedexta that treats uncontrollable crying
or laughing believed to be caused by neurologic conditions such
as Alzheimer’s. It won a patent case in April that will stave
off generic competition for Nuedexta for 12 years.
Positive phase 2 study data on Sept. 15 for another version
of the medicine contributed to much of the stock gains. The new
version is being tested to treat agitation in Alzheimer’s
patients, a much larger market.
Past Talks
Avanir had been in talks in September -- before the study
data was released -- about a merger or sale to a specialty drug
company, according to a person with knowledge of the matter. But
when the trial results spurred a one-day surge of 85 percent, it
put the deal out of range for Avanir’s potential partners, the
person said, asking not to be named because the matter was
private.
Less than three months later, Avanir has agreed to sell
itself to Otsuka. The merger filing with the U.S. Securities and
Exchange Commission this week didn’t provide details about
Avanir’s sale process or whether it received interest from other
buyers. Ian Clements, a spokesman for Avanir, said he couldn’t
comment further.
While it agreed to end any talks with other companies and
not solicit higher bids, the agreement says Avanir’s board can
change its mind if the company receives a better proposal and
determines that ignoring the offer would be inconsistent with
its fiduciary duties to shareholders.
Possible Counterbidders
As far as other potentially interested acquirers, Cowen’s
Baral cited Teva Pharmaceutical Industries Ltd.’s recent
investments in products for central nervous system disorders, as
well as Actavis Plc’s purchase of Forest Laboratories Inc.
earlier this year to gain the Alzheimer’s treatment Namenda.
Indianapolis-based Eli Lilly may also be interested in regaining
its lead in CNS drugs, she said.
Lundbeck, Mallinckrodt and Shire were also logical
acquirers, Jason Butler, a New York-based analyst at JMP Group
Inc., said in an interview in October. Copenhagen-based Lundbeck
and Dublin-based Mallinckrodt both have products to treat brain
diseases. Shire, also based in Dublin, focuses on rare diseases
and has a treatment for attention deficit hyperactivity
disorder. Shire has said it will continue seeking deal
opportunities after AbbVie Inc. unexpectedly dropped plans to
buy the company.
Representatives for Shire, Lundbeck, Mallinckrodt, Petach
Tikva, Israel-based Teva, Dublin-based Actavis and Eli Lilly
declined to comment on whether their companies are planning to
bid for Avanir.
Deal Windfall
For investors who bought Avanir shares before May, when
they were trading at or below $5 apiece, Otsuka’s offer may be
just fine.
“It’s unbelievable,” Peter Zeuli, chief investment
officer of Voorhees, New Jersey-based Philadelphia Investment
Partners LLC, said in a phone interview. “We started buying the
stock when it was around $4 or $5. The portfolio manager in me
says, ‘Don’t get greedy.’ But you never know.”
For Related News and Information:
Avanir Inroads in Alzheimer’s Market Justify Offers: Real M&A
NSN NE9XSN6JTSF4 <GO>
Japan’s Otsuka Agrees to Buy Avanir Pharma for $3.54 Billion
NSN NFYB2J6JIJV3<GO>
Merger-Arbitrage Spreads: MARB <GO>
Real M&A columns: NI REALMNA <GO>
Top deal stories: DTOP <GO>
To contact the reporter on this story:
Tara Lachapelle in New York at +1-212-617-8911 or
tlachapelle@bloomberg.net
To contact the editors responsible for this story:
Beth Williams at +1-212-617-2307 or
bewilliams@bloomberg.net
Elizabeth Wollman
The stock market ended the midweek session on an upbeat note with the Russell 2000 (+1.0%) pacing the advance for the second day in a row. Meanwhile, the S&P 500 posted a more modest gain of 0.4% with seven sectors ending in the green.
Similar to yesterday, equities were essentially left to their own devices amid a lack of market-moving news. Cyclical sectors were responsible for the bulk of the advance as all six growth-sensitive groups ended in the green while health care (+0.2%) was the lone gainer on the countercyclical side.
The materials sector (+1.4%) settled in the lead after showing relative strength throughout the session. The group benefitted from strength among steelmakers and miners with Market Vectors Steel ETF (SLX 39.15, +0.90) and Market Vectors Gold Miners ETF (GDX 19.60, +0.40) climbing 2.4% and 2.1%, respectively.
Meanwhile, another commodity-related sector—energy (+1.2%)—settled just behind materials, which represented the third consecutive day of relative strength for the recently-battered sector. Today's advance occurred amid a 0.5% gain in crude oil ($67.30/bbl) and helped the sector extend its week-to-date gain to 3.2%.
Elsewhere, the industrial sector (+1.3%) was the only other group to add more than 1.0%. The top-weighted sector component—General Electric (GE 26.38, +0.33)—spiked 1.3% while transport stocks also displayed relative strength. The Dow Jones Transportation Average settled higher by 0.8% with Alaska Air (ALK 56.76, +1.51) setting the pace.
Also of note, the technology sector (+0.5%) underperformed in the morning, but powered to new highs during the final hour. The sector was underpinned by chipmakers and its strength helped the S&P 500 to a new high just ahead of the close. As for chipmakers, the group rallied broadly after Microchip Technology (MCHP 46.59, +1.94) said it is confident the small correction experienced in the third quarter is now in the past. The stock spiked 4.3% while the PHLX Semiconductor Index jumped 2.0%.
Over on the countercyclical side, consumer staples (-0.8%), telecom services (-0.8%), and utilities (-0.3%) ended in the red while health care (+0.2%) turned positive in the early afternoon. Biotechnology contributed to the rebound with the iShares Nasdaq Biotechnology ETF (IBB 308.25, +1.38) climbing 0.5%.
Treasuries spent the bulk of the session near their flat lines before ending close to highs. The 10-yr yield slipped one basis point to 2.28%.
Participation was a bit below average with just over 755 million shares changing hands at the NYSE floor.
Economic data included ADP Employment Change, Q3 Labor Productivity Data, ISM Services, and the MBA Mortgage Index:Tomorrow's data will be limited to the Challenger Job Cuts report for November, which will be released at 7:30 ET while weekly Initial Claims will cross at 8:30 ET (consensus 295K).
- The ADP report revealed that employment in the nonfarm private business sector rose 208K in November, which was below the increase of 225K expected by the consensus.
- Q3 nonfarm business productivity was revised up to 2.3% from an originally reported 2.0% gain while the consensus expected a revision to 2.4%
- Unit labor costs were revised down and now show a 1.0% decline in the third quarter after initially showing a small 0.3% increase. The consensus expected a flat reading.
- This was the second consecutive quarterly decline
- The ISM Services Index for November rose to 59.3 from 57.1 while the consensus expected an uptick to 57.5
- The weekly MBA Mortgage Index fell 7.3% to follow last week's 4.3% decline
- Nasdaq Composite +14.3% YTD
- S&P 500 +12.2% YTD
- Dow Jones Industrial Average +8.1% YTD
- Russell 2000 +1.4% YTD
BN 12/03 20:43 *TURNER SALE SETS AUCTION RECORD FOR ARTIST AT SOTHEBY'S
BN 12/03 20:43 *RARE TURNER PAINTING IN PRIVATE COLLECTION FETCHES $47.5M
2014-12-03 20:45:56.164 GMT
By Mary Romano
Dec. 3 (Bloomberg) -- One of the few works by British
artist J.M.W. Turner held in a private collection sold for 30.3
pounds ($47.5 million), the first time the painting had come to
auction in 130 years.
“Rome, From Mount Aventine,” a 200-year-old landscape of
the Italian city viewed from Aventine Hill looking north across
the city, sold today at Sotheby’s in London, setting an auction
record for the artist. The work was estimated at 15 million
pounds to 20 million pounds.
Link to Company News:{BID US <Equity> CN <GO>}
For Related News and Information:
Top Stories:{TOP<GO>}
To contact the reporter on this story:
Mary Romano in New York at +1-212-617-5552 or
mromano6@bloomberg.net
To contact the editor responsible for this story:
Mary Romano at +1-212-617-5552 or
mromano6@bloomberg.net
2014-12-03 20:31:53.326 GMT
--JIM SILVER
-0- Dec/03/2014 20:31 GMT