Natural Gas price, Amec, Kentz, and Fortune Oil

WTI $104.26 -1.04 , Brent $107.09 -1.06 , B/WTI Diff – $2.83 +1.46 , Natural Gas $3.24 -8c

Good morning

So President Obama has said no to a meeting with Mr Putin as he shows his anger at the treatment of whistle-blower Snowden, what I don’t understand is how a snotty little kid like that ever got any secrets in the first place. Interestingly President Obama is meeting the Greek PM at The White House today, shows it’s not what you know…………………………..

I write about Amec below but listening to Samir Brikho, CEO this morning talking about the UK energy policy almost made me give him a round of applause, he said that without a recession the lights would have already gone out in the UK and that he had never seen a country as good as the UK without an energy policy. No idea whether its nuclear, solar, conventional or unconventional gas or wind and that’s coming from somebody who really does know rather than just writes about it!

Oil Price

The oil price fell again as crude inventories fell by 1.32m bbls, slightly more than the 927,000 consensus forecast but also as US gasoline stocks rose unexpectedly. As we are less than a month away from the end of the driving season (Labor day, this year 2nd September) expect gasoline demand to start falling and a switch to autumn product requirements to change.

Natural Gas

One other thing is the price of natural gas which you may have noticed, continues to slide, today it is $3.24. Whilst one expects this to an extent in the summer as stocks are rebuilt, the EIA continue to suggest that domestic supply is abundant leaving us to check out the demand side of the equation. I don’t have too much of a problem with gas demand and of course at close to $3 it becomes highly competitive for the fall and winter power generation with coal. The chart says it needs to bottom out around here!

Amec

Amec provided interim results today which showed the power of the buy-back, something I have never liked. Revenue was down 1% and pre-tax profit was down 2% as a strong conventional oil and gas performance was offset by a 25% fall in mining revenues and a phasing down of the Canadian oil sands business. Despite this (and the effect on PBT of the hit by the pensions accounting) the £400m share buyback meant that adjusted, diluted EPS were up 16% giving the board the ability to raise the dividend 15%.

Amec throws off cash, so the perennial question is what to do with it? The buyback last year was as a result of not finding enough acquisitions to make during the year and this year will be no different. Decision time will be in the fourth quarter which isn’t far away so watch this space, no deals and the money comes back, either by buyback or special dividend and we know the CFO likes the earnings enhancing former route..

One other thing, they still claim to have a ‘good pipeline’ of potential deals all of which are in the oil and gas sector, also they would like them to be in engineering and good ‘geographic spread’ would be ‘helpful’. I am sure that Amec has spoken to Kentz in the past but I wonder if the CFO’s slide rule has been out again?

The bottom line is that with drags on the revenue as Mining and oil sands the rest of the business is going to have to motor hard to effectively stand still but the existing conventional oil and gas is good and growing well. The likelihood of some sort of corporate activity in the last quarter may hold the price up but the fundamentals look dull to me at the moment.

Kentz

Kentz has announced that it has signed three framework agreements in Southern Africa, two of the contracts are with an international oil major and one is with a Southern African power utility and all are for engineering solutions in EPC management.

There is no value in these contracts per se as they are only framework agreements, but they should lead to work for these clients on a long term basis.

I am assured that these are blue chip names and I suspect that they may already be clients of Kentz in South Africa, the fact that they last for 3-5 years is also very encouraging. More encouraging is that they are in the EPC business, an area that Kentz have been making a big effort to build up in recently.

We have recently initiated coverage on Kentz (Target price 550p) and completed a highly successful roadshow with CEO Christian Brown, and remain very positive on the shares even after the recent run. The chart below shows a good breakout, any confirmation of this should lead to an ascent to the all-time high of 503p and beyond. Still a BUY

Fortune Oil

Following its announcement yesterday regarding the acquisition of the remaining 15% interest in Fortune Gas Investment Holdings we have analysed the complicated deal and our comments are below. We think that this is highly beneficial as it delivers a special dividend and the continued but cleaner way for Fortune to create shareholder value in China.

Dougie’s note is below, if you would like the PDF then as usual please just ask for it.

Fortune Oil Plc#

Building Value in China
Complicated, but Beneficial

Fortune Oil has announced what is a very complicated, but ultimately beneficial, package of transactions which aim to drive future share price performance and increase its exposure to the growing Chinese gas market.

1. Fortune has acquired the remaining 15% interest in Fortune Gas Investment Holdings Ltd (FGIH), for a total consideration of US$60m. This interest is currently owned by Wilmar International Ltd (WIL SP) and has been conditionally sold to China Gas Holdings Limited (384 HK).

2. Fortune has arranged a working capital loan via a Vitol-backed vehicle, to bridge commitments while it awaits Ministry of Commerce of the People’s Republic of China (MOFCOM) approval for its asset disposal to China Gas Holdings.

Deals Create Shareholder Value

The short-term benefit for existing shareholders is the special dividend of 2.36p/share, which should counter the dilutive effect (c600m new shares to be issued) of these transactions.

In the longer term, the acquisition of Wilmar’s interest will increase Fortune’s exposure to China Gas Holdings (CGH), and therefore to the rapidly expanding Chinese gas market. Vitol’s involvement in today’s announcement shows that it, too, has expansion plans in China, and this relationship should yield additional growth in due course.

Target Price and Recommendation

Given the share price performance since March, this news should come as some relief to the current shareholders, as it delivers a special dividend as well as the opportunity to create more value in China.

We continue to be of the view that Fortune Oil is a misunderstood company and is undervalued on its CGH interest, alone, with the Fortune portfolio in for “free”.

We maintain coverage with a BUY recommendation and target price of 20p.

And finally…

Tee off today in the US PGA Championship 2013 from the Oak Hill Country Club in Rochester New York. Up til now this year all three majors have been won by members of the world top five, who says it couldn’t happen again?

An amazing T20 match last night as Hampshire and Lancashire literally slugged it out for a place at finals day. In 40 overs there were 403 runs scored and Hampshire held out to win by one run.

In Suarezgate the manager has told Luis to train alone after being accused of ‘total disrespect’ for the club. He will probably get his wish to leave but for now may have bitten off more than he can chew…………..

Good luck to St Johnstone who host Minsk in the second leg of the Europa Cup tonight……..

And a four foot shark has been found on a subway train in New York, makes a change from six foot sharks heading for Wall Street……………………..