Portland Gas Share Discussion Threads

[whiters] 20/8/2008 15:53

Any ideas as to why the latest drop. This now looks very cheap!
Apart from general malaise that is.

[money4me] 18/8/2008 19:10

looks like you'll be able to get them cheaper than that

[eacn] 12/8/2008 04:06

Having said all that if you bought shares today at 330p and held until say August 2011 and the share price was then 500p, that equates to a 15% p.a. compound return, which is not to be sneazed at.

[eacn] 12/8/2008 04:02

holism,

If the management believe their own numbers and projections for future gas storage prices they won't sell for less than £7 a share, which they won't get at this stage imo.

I therefore assume that they are prepared to see it through to completion and first cashflow in 2011 or 2012.

In the meantime they have already indicated that they will continue to look for further gas storage projects (witness the recent presentation - there are two short term prospects under consideration).

There will be newsflow from Larne next year, which if all goes well should underpin the valuation, although that could be offset by any negative news on progress with Portland. I think we have to assume that the new projects are unlikely to push the share price on in the next year or so.

On balance therefore, it would appear that the only potential short term driver for the share price will be the announcement of terms on the farm in. If, as I suspect, this only values the PTG share of Portland at 400p to 450p then there may not be a lot of upside from the current share price in the next 6 months unless someone decides to try a takeover using the Credit Suisse stake as a platform.

I have to say that I regard that as unlikely. Credit Suisse have been supportive of management and are likely to stay so. They can effectively block any takeover given their 25%+ holding, and with management holding such a significant slug of the equity, a hostile bid looks unlikely.

[holism] 08/8/2008 08:03

eacn- thank you for your insight. All very plausible. What concerns me is whether the management has the same objective as the present shareholders. I believe most would support a PG (Portland only)takeover at or above £5 per share.If the company decides to go it alone the share price will dip and stay below the current price until the operational risks are under control.I for one do not want to hold PG long term, this was a shortish play with the potential to get out by end of this year. If the management is not looking to sell outright (and Rothchilds have no incentive to find a buyer either, they would rather raise the finance and keep th cient over many years) how do we get the big boys interested?It is almost worth our while doing the job for the management, the list of potential buyers is fairly short I would imagine.

[bionicdog] 07/8/2008 21:03

All the best people are.

[kj kelley] 07/8/2008 18:40

Deeppockets, yes.

[eacn] 07/8/2008 12:06

holism,

I have posted my views on "fair value" for PTG previously - see posts: 90, 181, 285, 386, 447, 475, 478, 513, and 591 for a running commentary on this issue.

I have, however, warned that fair value, particularly with companies where the cashflow is many years in the future, does not necessarily determine the share price - see post 625 for example.

Based on the recent presentations published on the PTG web site, and changes to operating cost expectations included in a recent Seymour Pierce note (15% increase in operating costs, 10% increase in construction cost to £550M), I have updated my model parameters and obtain the following "fair values" based on the net present value of future cashflows:

Seymour Pierce Assumptions: cira £5
Company Assumptions: circa £7 to £9

Seymour Pierce have assumed that storage prices will track the inflation rate (i.e. no real increases in prices), that the discount rate is 8% and that inflation will run at roughly 3%. The Company, however, assume that prices will escalate in the early years and then stay there. The range of valuations based on the companies assumptions reflects the uncertainty in the price escalation from 2011.

Following the placing I have concluded that the company has taken such a bullish view on future gas storage prices so as to bolster their negotiating stance in the ongoing farm in discussions. If there was no pressing need for the cash (and whatever the company may say about keeping the larne drilling program on track, there is no pressing need) no-one would place stock at 355p if they genuinely believed these future gas storage price projections (since the stock would be worth twice the placing price), particularly if by so doing they were to undermine their position in crucial negotiations with potential farm in partners.

My guess is that farm in partners have poured cold water on these bullish assumptions and are arguing for terms that would value PTG's share of the project at 400p or less. This would be consistent with a placing at 355p, which is roughly 10% below a 400p valuation, reflecting the 'normal' discount for placings.

A 400p valuation would also be consistent with a current storage price of 30p a therm (which is roughly where it would be today if Portland were operational based on current Rough figures) with no escalation in real terms over the lifetime of the valuation (i.e to 2050 since all my NPVs for this time period) and a discount rate of 8%.

I am sure the management will be arguing for a better deal, but on the evidence of the recent placing, it would appear that they will probably settle for a 400p valuation if the farm in partner picks up the full development cost for 50% of the revenue stream and offers some kickbacks if gas prices escalate in the way the company project.

This is not of course the price at which the board would be prepared to sell Portland outright: you would might a 30% to 40% premium for control imo, suggesting a take-out price for Portland alone of 500p to 550p.

If there is no take-out, a farm in on the above terms will allow for significant further appreciation in the share price over the next 3 to 5 years if the company's bullish assumptions on gas storage pricing prove correct. Indeed a farm in partner will be able to say that PTG shareholders will still see 50% of the benefit of price appreciation it that does indeed occur and may be prepared to structure the deal so as to hand over more than 50% of such appreciation, thereby netralising any argument management may have for a higher price today.

[deeppockets] 07/8/2008 11:08

KJ

Do you live in Surrey as the village I live in has very similar circumstances with tesco etc?!

[kj kelley] 07/8/2008 10:54

eacn, its quite interesting to share one anothers experiences and views. Thanks for taking the time.

Regards,
KJ

[eacn] 07/8/2008 00:19

I doubt the 4.5% figure because I don't expect all of the relevant projects to go-live in the timescales suggested in Andrew Hindle's presentation. If they all come on-stream to schedule his figure will be correct.

I can't agree with your remarks regarding the powers of the OFT and the Competition Commission. I have been involved in two OFT enquiries, one as an expert witness and the other in connection with the sale of a business I ran to a competitor. As a result I am painfully aware of the sweeping nature of the powers these bodies possess.

In both cases I was compelled to provide information which could be used in evidence against me if the OFT so decided, and was denied the right to have a lawyer present when giving testimony. As an expert witness my testimony carried no right of immunity as in a court of law. The OFT was free to reveal my testimony to the parties who were the subject of the enquiry and they in turn had the right to take action against me personally if they disputed my evidence. In both cases I was required to give of my time gratis.

The micro nature of an OFT enquiry has to be seen to be believed and the outcome can turn on highly localised issues. The dominance of Tesco and the threat it poses to independent convenience stores was carefully considered by the OFT in an enquiry in 2006 and in a number of cases Tesco (and other major retailers) were required to divest sites to avoid dominating a particular geography.

This does not mean to say that I believe that the OFT will prevent the takeover of Portland, but when operational the OFT may require the owner of Portland to make a percentage of storage available to competitors.

[kj kelley] 06/8/2008 13:48

eacn, if you doubt the figure of 4.5% I suggest you take it up with Portland as it comes from the presentation you recommended. I am sure they are not putting out misleading information.

I do appreciate your views but one of my gripes about the UK is the lack of an effective monopoly/oligopoly control. The monopolies commission and the OFT are toothless organisations due mainly to the lack of effective terms of reference from the government.

As anecdotes to illustrate the point, in my village we have three chemists - two are Lloyds, the second one being acquired as part of a takeover. We have a Tesco superstore 1.5 miles away, a Tesco convenience store in my village and now Tesco have acquired a site from under the nose of Waitrose and plan to open another convenice store in the village! Gas suppliers, electricity suppliers and water suppliers are all oligopolies - i.e. there are few competitors that control the UK market. The monopolies commission and the OFT have allowed the takeovers post privatisation that have created this situation. I could go on and on....

No, the authorities will not prevent a takeover of Portland. In fact they might well wish to see a major company (with the experience of handling major projects efficiently) handle the Portland project, which is so critical to the UK!

We all know what leverage the major international companies, and governments, have in the energy sector. British Energy is a case in point? Why else would the UK government be willing to allow the French government to effectively take ownership of several UK nuclear power stations.

[holism] 06/8/2008 11:32

eacn. How do you arrive at your figures? There doesn't appear to be any logic to your conclusion but then I couldn't understand why they raised money at £3.50 odd.

[eacn] 06/8/2008 10:39

KJ Kelley,

As I have posted previously, I continue to believe that UK gas suppliers will be eyeing up the Portland project as a potential acquisition, even though when it first comes on stream they may not be permitted to make exclusive use of the facility. I note the points you have made about German gas storage ownership, but from experience can atest that the OFT and the Competition Commission tend to take a much tougher line than the German authorities in such matters, particularly where there is potentially a direct impact on consumer pricing.

While by 2019 Portland may only represent 4.5% of UK gas storage capacity (and I personally doubt that number) it is important to remember that it will represent a much higher proportion of short cycle storage, and will thus have a much larger impact on the gas spot market. If you read the MMC report into the Rough acquisition you will see that this was a key consideration.

When considered in this context, the 14% market share of Wingas in Germany is less significant than it might at first seem: firstly overall capacity is sufficient to cover the full intrinsic swing; and, secondly Wingas do not have sufficient short cycle storage to dominate the intraday gas market.

Ultimately these considerations are probably secondary but they may place something of a cap on the earnings UK gas suppliers can extract from self owned short cycle storage facilities.

Having said all that I have lowered my odds of an acquisition following the bizarre recent placing. I now believe that a farm-in is more likely and will be pleasantly surprised if the farm-in deal terms suggest a value of more than 400p for PTG's retained interest in Portland, given that they were prepared to place stock at 355p. That suggests an share price of around 450p increasing to 500p or so if Larne drilling confirms the seismic.

[kj kelley] 06/8/2008 09:24

eacn,

Thanks for the reference - an interesting presentation. I do see Hindle's comment quoted on page 17 as a defensive positioning, trying to substantiate Portland's independance.

From the presentation its apparent that by 2015 when Portland is expected to be complete, it will represent 13.5% of completed UK gas storage. By 2019 it would only represent 4.5% This would not represent a monopoly position and would be considered small by the European authorities.

(In an aside it is interesting to observe how our continental friends deal with such issues. I remember when I was in Germany the legislation forbidding car mascots on new cars was introduced. The chairman of Mercedes went off to Brussels, wined and dined the relevant Eurocrat, and gained exemption as a special case. Something that still exists today and you see the mascot on new Mercedes but on no other new car. The Europeans cetainly know how to find their way through restrictive legislation.)

In nay case in Germany again, Wingas has a 14% share of the German gas market and is owned by BASF and Gazprom.

I don't think there will be a problem in acquiring the Portland project, as a project. I do think market share issues would only be considered when 2015/2019 arrives and not prevent an acquisition of the Portland project or the company.

Acquiring the company would give the acquirer two projects including Larne Lough (Ireland is considered a separate area for market share) and allow it to own a gas storage company. Then in any discussions with the authorities about market share, the company could make a case to the relevant authorities that Portland was operating on arms length basis.

The future is most likely to see UK gas suppliers owning their own storage, in my opinion. Its sensible for them to have security of supply and, to a lesser degree, not to have to pay a third party the margin of profit that it could retain for themselves.

So in the position of a gas supplier, I would be inclined to move first and secure my future supply. Such a move would have every advantage and no downsides for these wealthy gas companies.

[eacn] 05/8/2008 22:00

KJ Kelley,

See Andrew Hindle's presentation at the Energy Ireland Conference on 11th June (page 17 - the presentation can be found on the PTG web site).

"European legislation dictates that storage facilities used solely by a single market participant must be small and not distort the market"

When Portland reaches full capacity it will form a material part of the UK gas storage market and can therefore be expected to be covered by this legislation for some time (that is until significant further capacity becomes available).

[lanaken] 05/8/2008 09:21

Credit Suisse Europe have some form in the gas storage sector. They held a substantial stake in STAR before they sold it to Petronas. Same again will happen here I would think. When and to whom are the questions. They also have picked up 5% I think of Encore.

[eacn] 04/8/2008 23:56

Chrismez,

Credit Suisse have belatedly announced that they took the bulk of the placing stock. This doesn't surprise me since they have been with PTG from the early days. The tardiness of the reporting is unfortunate.

Prior to the placing Credit Suisse had 14,885,924 shares (see RNS of 15.02.2008) which represented approximately 21.95%. They appear to have acquired c. 2,500,000 shares in the placing at £3.55 (a total cost of £8.875M) which increased their holding to c. 17.4M shares.

Credit Suisse's total investment is nowhere near £61M. They first notified the market of their holding in March 2006 when Credit Suisse Securities (Europe) Limited ("CSSEL") "as a result of recent purchases" held 1,638,333 Egdon shares representing approximately 3.18%. The share price was roughly 140p at the time (pre de-merger).

They have built their stake since then, participating in placings and buying stock in the market and from other institutions - see for example:

24.03.2006 2,263,333 Shares 3.96%
02.04.2006 3,463,333 Shares 6.06%
07.11.2006 6,313,333 Shares 9.64%
23.07.2007 10,750,272 Shares 16.42%
27.09.2007 12,087,561 Shares 17.83%

This is not a complete list.

The RNS on 27.09.2007 followed a placing of 325,582 shares at 215p per share to raise £5 million before expenses. The RNS implied that Credit Suisse obtained their shares through the market.

At a guess I would say that Credit Suisse have bought stock at an average stock price below £2. I suspect that the holding is a nominee holding rather than an investment by a Credit Suisse fund.

[eacn] 04/8/2008 23:23

Before everyone runs away with the idea that a major player will acquire the Portland facility for their exclusive use, be aware that this would be forbidden under current gas market rules.

[chrismez] 04/8/2008 21:26

Kelley - interesting thoughts. Lets suppose that that CS have acquired the stake either (a) for themselves because they see a bidding war breaking out in due course amongst the big gas players and they reckon they'll sell on at a handsome premium or (b) on behalf of a beneficiary (in which case don't the rules require publication of the interested party) who is looking to perhaps build up a significant stake.

Either way I don't understand the drop here. This is usually good news when an Insti takes such a significant stake. The only possible downside is that the size of the stake may affect the stock's liquidity but hell who cares about that when an Insti is prepared to invest at circa £3.50 for 17.5m shares = £61,000,000 in these really difficult times.

Thats a £61m vote of confidence - doesn't make sene to me at the moment - be interested in eacn's views.

I think things are beginning to happen now (with the placing and CS taking 25%) - should be an interesting last five months of the year.

[whiters] 04/8/2008 19:11

But why the drop?

[talha2] 04/8/2008 17:59

corporate action this year here and EO. imo

[kj kelley] 04/8/2008 17:47

Credit Suisse, or whoever is the beneficiary, is probably not making a long term investment. The holding is now over 25% and the shareholder will have some sway in any issue that comes to a vote.

Given the low level of gas storage in the UK, I would guess that one or more of the gas suppliers will want to secure storage for itself.

Portland's storage project is the major one planned in the UK and a takover or sale of the Portland project must be a possibility. Otherwise gas suppliers will have to bid against each other to use this storage facility. If I were a gas supplier I would not want to enter that form of lottery and risk not being able to supply my customers.

The gas suppliers will not want to see a competitor acquire this storage and miss this opportunity. Therefore I expect some corporate action this year.

This is only my opinion but doesn't it make sense?

[bionicdog] 30/7/2008 15:26

Not exactly the surge that we envisaged. Still , they should never have raised money at that level.