My article from seekingalpha.com - as usuals based on the principles of value investing and dividend paying stocks.
seekingalpha.com
Today’s financial papers read like a history of economic turmoil. In no particular order we have warnings the bank recapitalisation will not be enough if assets continue to fall (shouldn’t be a surprise), a surging yen hitting Japan (who largely avoided the bank credit issues), worries over the IMF being swamped with it’s relatively small fund of $250bn, Hungary, Iceland and the Ukraine looking into the abyss, global property prices falling at ever faster rates, mass redemptions of hedge funds, $3 trillion of corporate debt needing refinancing in the next 24 months, a BOE report that is frankly as depressing as you’re ever likely to read (I hope) and to cap it all worries about the confidence in government debt if any or all of the above continues. Now that has to challenge even the most optimistic of all contrarian investors.
It could be argued that it is somewhat surprising that the FTSE and Dow are only 40% off their highs. The flow and severity of bad news starts to be ever present in the thinking of many investors minds be they individuals, advisors or institutions.
This could explain the reason why so many defensive, solid companies have been hammered over the last two months. There is a global move to cash, driven by fear, fundamentals, redemptions and liquid assets are one of the first to go. The question is, does this present a buying opportunity or should you keep well away. You can always find a stock market adage for the moment, but some should be borne in mind, “in a bear market you can search for value but the wise seek cash’.
That said, there is perceivable value if you are looking to buy a good stock and hold it for the long term. This might be argued against, we’ve seen some huge, long standing institutions go bust, or as good as, over the last six months but this market needs to be approached with a rational mind and long term thinking.
Firstly we have the French group Areva.SA, one of the worlds largest nuclear services and technology companies, who’s share price has fallen 57% since June this year to 337 EUR. It does have its down sides with a large state influence for instance but this is a monopolistic type business with high barriers to entry and a growing market.
The second company is also French, Veolia Environment, one of the worlds largest water treatment and processing companies. It has similar attributes to Areva, with high barriers to entry, long contracts and a growing market but it’s also similar in that its share price has fallen from 65 EUR to 16 in just one year.
Both shares may have further to fall but at this price they would appear to offer value. If you wait they may be cheaper but they currently appear to meet long term value criteria.
Some would say a useful diversification away from the dollar if you suspect the dollars recent strength is down to technical reasons rather than fundamentals.
Wednesday, 29 October 2008
Article - Why Cheap Oil is Great for the Majors
My article from seekingalpha.com - as usuals based on the principles of value investing and dividend paying stocks
seekingalpha.com
For the last 3 years, the world’s oil majors have not had an easy time from the oil producing states. Increasing oil prices has led to a complacent attitude by oil reliant governments. This often masks inefficiency, sometimes corruption, and has led to high taxation coupled with unsound business practices. Russia's oil production for instance, has been reducing each year despite the governments desire to increase output. Easy credit and a speculative environment resulted in many new oil companies coming to the market, with high valuations and little, if any, proven reserves. As the oil price increased so did the tax receipts and so did the smaller companies share prices. This resulted in state influenced companies investing less and the global situation where finding new oil, or purchasing oil reserves, became ever more expensive due to the barrel price and the demand for people and equipment.
Times change, oil is now trading around $65 per barrel, a 16 month low, but still way above its 2002 price of $25. Prior to this it has not been higher than $30 since 1987. Was $25 artificially low? Have China, India and Russia really started using so much more oil in the last six years that oil should be substantially more than $25?
Who knows, but from a long term investment, the price can be ignored. The share price of the large oil companies does not fluctuate with the price of oil, and nor should it. Long term contracts and many different aspects to the business means the month-by-month barrel price makes little difference to revenues and earnings. A world recession will make a difference but the long-term case for building an investment over the next 12 months is compelling.
The current price of oil is very bad news for many of the OPEC countries, whose governments, or ruling factions, often manage to exist through maintaining social programs funded by oil receipts. Russia less so, but it’s hugely dependent on oil revenues and the health of the oil industry. These countries have followed the rest of the western world and spent while the going was good, but now it's a different story. Consider that to balance the books, Russia needs oil above $70, Iran and Venezuela need $80 and a similar figure for all the rest.
So what are the likely actions of oil producing countries, state influenced companies and the impact to the majors?
If we assume that the oil price continues to fall, or not recover, and that demand falls or production is cut, then none of this is good news for the oil states. In a slowing world economy it is likely that all three will occur. Apart from making life very difficult for the leaders of the countries dependent on oil, it is likely to result in less investment in the industry. When the economic cycle turns, as it will, they will turn to the majors to bring in expertise and assistance to increasing output and efficiency with a need to enter new or enhanced joint ventures. They will also be more open to providing access to possible reserves that they do not have the skill or experience to develop.
The majors will negotiate hard in any venture or partnership remembering the treatment received during the last few years, the obvious example being the tactics and problems encountered with the TNK-BP venture. For their own future planning, the majors use a long-term investment assumption of $ 30 - $40 per barrel, so any investments in their own business should not be too badly impacted by the lower barrel price. In addition the planned investments will not be competing for the physical and human resources that have been so scarce for the last few years.
This situation cannot be said, however, for the many small oil producers and explorers whose share prices are almost totally dependent on the prevailing oil price. Large oil companies are well funded and have access to credit, which many of these smaller companies do not, and this makes them highly vulnerable to being taken over at depressed prices by the majors, thus acquiring long term reserves at sensible prices. There is certainly no shortage of small companies, which have been funded by other people’s money, that now look attractive targets.
In the medium to long term, we are looking at a relatively healthy and well prepared commercial industry, with the state influenced sector under invested and in a weaker position. This might not be good for the economy as again it indicates supply and demand imbalances, but the oil major’s plan for volatile oil prices, they always have done and always will do.
So the fall in demand will impact the large oil companies, but this is a short term impact and many of these firms have been around for a long time and are used to planning for economic cycles. The cycle is key to the reason why these companies now make a compelling case for investment. If we assume that within 3 -5 years the world economy starts to grow again, and continues its upward path of growth, which it always has done, the long term benefits of cheaper reserves and under investment by others will be good for the future of the independent oil companies.
With good yields, strong balance sheets and a long term growing market, it gives a strong argument for investing into the likes of Exxon (XOM), Chevron (CVX), BP (BP) and Shell (RDS.A) over the next twelve months as a traditional buy and hold stock.
seekingalpha.com
For the last 3 years, the world’s oil majors have not had an easy time from the oil producing states. Increasing oil prices has led to a complacent attitude by oil reliant governments. This often masks inefficiency, sometimes corruption, and has led to high taxation coupled with unsound business practices. Russia's oil production for instance, has been reducing each year despite the governments desire to increase output. Easy credit and a speculative environment resulted in many new oil companies coming to the market, with high valuations and little, if any, proven reserves. As the oil price increased so did the tax receipts and so did the smaller companies share prices. This resulted in state influenced companies investing less and the global situation where finding new oil, or purchasing oil reserves, became ever more expensive due to the barrel price and the demand for people and equipment.
Times change, oil is now trading around $65 per barrel, a 16 month low, but still way above its 2002 price of $25. Prior to this it has not been higher than $30 since 1987. Was $25 artificially low? Have China, India and Russia really started using so much more oil in the last six years that oil should be substantially more than $25?
Who knows, but from a long term investment, the price can be ignored. The share price of the large oil companies does not fluctuate with the price of oil, and nor should it. Long term contracts and many different aspects to the business means the month-by-month barrel price makes little difference to revenues and earnings. A world recession will make a difference but the long-term case for building an investment over the next 12 months is compelling.
The current price of oil is very bad news for many of the OPEC countries, whose governments, or ruling factions, often manage to exist through maintaining social programs funded by oil receipts. Russia less so, but it’s hugely dependent on oil revenues and the health of the oil industry. These countries have followed the rest of the western world and spent while the going was good, but now it's a different story. Consider that to balance the books, Russia needs oil above $70, Iran and Venezuela need $80 and a similar figure for all the rest.
So what are the likely actions of oil producing countries, state influenced companies and the impact to the majors?
If we assume that the oil price continues to fall, or not recover, and that demand falls or production is cut, then none of this is good news for the oil states. In a slowing world economy it is likely that all three will occur. Apart from making life very difficult for the leaders of the countries dependent on oil, it is likely to result in less investment in the industry. When the economic cycle turns, as it will, they will turn to the majors to bring in expertise and assistance to increasing output and efficiency with a need to enter new or enhanced joint ventures. They will also be more open to providing access to possible reserves that they do not have the skill or experience to develop.
The majors will negotiate hard in any venture or partnership remembering the treatment received during the last few years, the obvious example being the tactics and problems encountered with the TNK-BP venture. For their own future planning, the majors use a long-term investment assumption of $ 30 - $40 per barrel, so any investments in their own business should not be too badly impacted by the lower barrel price. In addition the planned investments will not be competing for the physical and human resources that have been so scarce for the last few years.
This situation cannot be said, however, for the many small oil producers and explorers whose share prices are almost totally dependent on the prevailing oil price. Large oil companies are well funded and have access to credit, which many of these smaller companies do not, and this makes them highly vulnerable to being taken over at depressed prices by the majors, thus acquiring long term reserves at sensible prices. There is certainly no shortage of small companies, which have been funded by other people’s money, that now look attractive targets.
In the medium to long term, we are looking at a relatively healthy and well prepared commercial industry, with the state influenced sector under invested and in a weaker position. This might not be good for the economy as again it indicates supply and demand imbalances, but the oil major’s plan for volatile oil prices, they always have done and always will do.
So the fall in demand will impact the large oil companies, but this is a short term impact and many of these firms have been around for a long time and are used to planning for economic cycles. The cycle is key to the reason why these companies now make a compelling case for investment. If we assume that within 3 -5 years the world economy starts to grow again, and continues its upward path of growth, which it always has done, the long term benefits of cheaper reserves and under investment by others will be good for the future of the independent oil companies.
With good yields, strong balance sheets and a long term growing market, it gives a strong argument for investing into the likes of Exxon (XOM), Chevron (CVX), BP (BP) and Shell (RDS.A) over the next twelve months as a traditional buy and hold stock.
Portfolio - New holdings added
The markets have continued the wild swings and made some good value companies even cheaper. It's been widely reported that this may be due to fund redemptions, be they hedge funds, institutional funds or unit trusts. There is a flight to cash and when you need cash you sell liquid assets. For this reason I've added to holdings in three companies which look even cheaper, this wasn't the intention but these companies have fallen by a third in the last two weeks. An opportunity not to miss. From a value investment perspective these look good value as dividend paying stocks. They may be cheaper in a few months time but at this price i am happy to buy more:
So £1500 added to the following holdings (Euro= 1.20, $ = 1.50)Manage Security Cameco Corp. 178 shares added at $12.78
Areva Ci 6 shares added at e355
Veolia Environnement 128 shares added at e17.60
The rest of the portfolio has suffered falls, as have the above so the summary now looks like:
Totals £38,097.10
P?L -£4,133.46
Cash Balance £57,575.37
So £1500 added to the following holdings (Euro= 1.20, $ = 1.50)Manage Security Cameco Corp. 178 shares added at $12.78
Areva Ci 6 shares added at e355
Veolia Environnement 128 shares added at e17.60
The rest of the portfolio has suffered falls, as have the above so the summary now looks like:
Totals £38,097.10
P?L -£4,133.46
Cash Balance £57,575.37
Tuesday, 14 October 2008
Portfolio - Time to invest
Since September the markets have been very volatile, to say the least. Now seems a reasonable time to start the portfolio off. We will start with £100,000 and invest today £40,000 with the rested invested over the remainder of this year and next.
Why? Too many unknowns to be investing in the last month but now the capital markets problems have been addressed, well partly, it allows a portfolio to be start to be built. A recession is likely, whereas the credit markets ceasing to function is being addressed (although the press struggle to understand the difference).
From this point the only market timing will be buying shares when they match the criteria layed out in the first blog entry. I do think the various indexes will fall over the next 6 months, a recession in the uk is highly likely, the state of the economy and public finances were dire before any nationalisations and buying of banks.. (however this might seem like the deal of a lifetime in 10 years).
So below are the investments from the first £40,000. To recap, these are buy and hold investments and unlikely to be sold, but maybe if they become excessively overvalued.
The investments follow the value investing priciples and are in the main dividend paying stocks or funds that contain dividend paying stocks.
A brief reason for purchase is included below.
Euro exchange rate £1 = 1.25
Dollar exchange rate £1 = 1.75
Dividends LSE dividends will be received automatically into the portfolio as cash.
Overseas dividends to be added annually.
Company & Holding & Price & Amount Invested & Why
LSE
BATM Advanced 5,813 --- 42.25 --- £2,455.99 --- growth, strong b/sheet
BP 572 --- 446.75 --- £2,555.41 --- steady & yield
BT Group 1,712 --- 150.00 --- £2,568.00 --- steady & yield
GlaxoSmithKline 224 --- 1,118.00 --- £2,504.32 --- steady & yield
HSBC Infrastructure 2,212 --- 113.00 --- £2,499.56 --- steady & yield
Hargreaves Services 433 --- 577.50 --- £2,500.58 --- growth
National Grid 371 --- 678.00 --- £2,515.38 --- steady & yield
NYSE
Berkshire Hath Holdings 1 --- $4,002 --- $4,002.00 --- a virtual value fund
Cameco Corp. 57 --- $16.57 --- $4,258.49 --- nuclear industry growth
PAR
Areva Ci 6 --- €514.88 --- €3,089.28 --- nuclear industry growth
Veolia Environnement 120 --- €25.59 --- €3,070.80 --- water industry growth
Unit Trust
CF Junior Oils Trust 2,192 --- 113.86 --- £2,495.81 --- undervalued
Exchange Traded Fund
Ft Ise Water Index 243 --- $17.34 --- $4,214.59 --- water industry growth
Market Vectors-Nuclear 243 --- $17.70 --- $4,301.10 --- nuclear industry growth
Spdr S&P Bric 40 183 --- $16.94 --- $3,100.02 --- undervalued & growth
OEIC
Neptune Russia 1,552 --- 161.20 --- £2,501.82 --- Undervalued & growth
Totals £38,833.66
Profit/Loss -£107.12
Cash Balance £60,958.39
Why? Too many unknowns to be investing in the last month but now the capital markets problems have been addressed, well partly, it allows a portfolio to be start to be built. A recession is likely, whereas the credit markets ceasing to function is being addressed (although the press struggle to understand the difference).
From this point the only market timing will be buying shares when they match the criteria layed out in the first blog entry. I do think the various indexes will fall over the next 6 months, a recession in the uk is highly likely, the state of the economy and public finances were dire before any nationalisations and buying of banks.. (however this might seem like the deal of a lifetime in 10 years).
So below are the investments from the first £40,000. To recap, these are buy and hold investments and unlikely to be sold, but maybe if they become excessively overvalued.
The investments follow the value investing priciples and are in the main dividend paying stocks or funds that contain dividend paying stocks.
A brief reason for purchase is included below.
Euro exchange rate £1 = 1.25
Dollar exchange rate £1 = 1.75
Dividends LSE dividends will be received automatically into the portfolio as cash.
Overseas dividends to be added annually.
Company & Holding & Price & Amount Invested & Why
LSE
BATM Advanced 5,813 --- 42.25 --- £2,455.99 --- growth, strong b/sheet
BP 572 --- 446.75 --- £2,555.41 --- steady & yield
BT Group 1,712 --- 150.00 --- £2,568.00 --- steady & yield
GlaxoSmithKline 224 --- 1,118.00 --- £2,504.32 --- steady & yield
HSBC Infrastructure 2,212 --- 113.00 --- £2,499.56 --- steady & yield
Hargreaves Services 433 --- 577.50 --- £2,500.58 --- growth
National Grid 371 --- 678.00 --- £2,515.38 --- steady & yield
NYSE
Berkshire Hath Holdings 1 --- $4,002 --- $4,002.00 --- a virtual value fund
Cameco Corp. 57 --- $16.57 --- $4,258.49 --- nuclear industry growth
PAR
Areva Ci 6 --- €514.88 --- €3,089.28 --- nuclear industry growth
Veolia Environnement 120 --- €25.59 --- €3,070.80 --- water industry growth
Unit Trust
CF Junior Oils Trust 2,192 --- 113.86 --- £2,495.81 --- undervalued
Exchange Traded Fund
Ft Ise Water Index 243 --- $17.34 --- $4,214.59 --- water industry growth
Market Vectors-Nuclear 243 --- $17.70 --- $4,301.10 --- nuclear industry growth
Spdr S&P Bric 40 183 --- $16.94 --- $3,100.02 --- undervalued & growth
OEIC
Neptune Russia 1,552 --- 161.20 --- £2,501.82 --- Undervalued & growth
Totals £38,833.66
Profit/Loss -£107.12
Cash Balance £60,958.39
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