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| Share Name | Share Symbol | Market | Type | Share ISIN | Share Description |
|---|---|---|---|---|---|
| Portland Gas | LSE:PTG | London | Ordinary Share | GB00B28YMP66 |
| Price Change | % Change | Share Price | Shares Traded | Last Trade
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| 0.00 | 0.00% | 90.00 | 0.00 | 00:00:00 |
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| Last Trade Time | Trade Type | Trade Size | Trade Price | Currency |
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| - | O | 0 | 90.00 | GBX |
Portland Gas (PTG) Share Charts1 Year Portland Gas Chart |
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1 Month Portland Gas Chart |
Intraday Portland Gas Chart |
| Date | Time | Title | Posts |
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| 02/9/2010 | 07:45 | Portland Gas | 1,180 |
| 14/1/2010 | 16:30 | M & A strong in 2009 this must be the year for PTG.... ???? | 2 |
| 08/4/2009 | 23:10 | Planestation Group | 12,152 |
| 27/12/2008 | 16:36 | Fairlop Waters Planning Applications | 103 |
| 16/12/2008 | 08:42 | SCRUTABLE TURNS BEARISH ON PTG | 14 |
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Posted at 02/6/2009 18:54 by eacn A copy of a post I made on the TR32 thread in response to some questions from Ptolemy (see post 2867):A bit of background before I answer your various points. The winter-summer gas price differential (which drives the "intrinsic" value of gas storage) is driven by varying consumer demand. The size of the differential is affected by availability of supply and the availability of gas storage. In a supply constrained market the greater the storage capacity available the lower the differential. In a free market with constrained supply a balance will be reached where sufficient storage capacity is built to reduce this differential to the operating cost of storage plus a return on capital employed. This is broadly the situation in the US where there is a mature gas storage market and a captive supply of natural gas. In the US a price differential continues to apply, which is why gas storage facilities are still widely used in the US, but the return on equity for the bulk of existing gas storage facilities has fallen as capacity has increased and there is no demand for new projects since available capacity has reached c. 25%. Indeed in times of falling demand marginal storage facilities are being mothballed. [In passing I would note that 25% storage capacity is a natural upper limit in a gas storage market dependent upon depleted field facilities since the cycle times for such facilities are long and increasing demand by more than this amount in the summer period when gas is cheap and being stored distorts spot prices to such an extent that the differential over the storage cycle effectively disappears.] Before the advent of large scale LNG, natural gas markets were purely continental since delivery was solely by pipeline. LNG is beginning to change that and will in future allow greater flexibility of supply in previously continent bound markets. In its infancy, LNG was very expensive and was only used in extremis when network pressure was low. Today large scale LNG is in sight and the cost of LNG will fall, albeit that it will remain more expensive than local sources of natural gas. In the US LNG will have a limited impact while gas supply continues to be broadly in balance with demand, but at times of particularly high demand LNG has a role even in the US because it can be released into the network at much greater rates than available from depleted fields when spot prices spike. This ability to rapidly release gas into the network at times of high demand is called the "extrinsic" value of gas storage, and is an important part of the business model for low cycle time facilities such as Portland. Low cycle times are rarely available from depleted fields (Caythorpe in the UK is an exception), and even where they are available they usually only apply to a proportion of the storage volume, since in depleted field storage the pressure drops as gas is withdrawn from the store and the rate of injection into the network falls. Depleted fields such as Rough in the North Sea have no extrinsic value to speak of because the cycle time (for injection and withdrawal of the entire storage capacity) is nearly a full year. The extrinsic value of a short cycle store will depend upon spot price volatility. In the UK and in the US the base case for short cycle storage indicates that operators can expect their extrinsic revenue to be at least equal their intrinsic revenue, so for a facility such as Portland the owners can expect to charge at least double the price charged for storage at say Rough. In the UK there are plenty of depleted fields in the North Sea, but the cost of development is high. Not only do these fields have to be connected to the network, but they have to be partially filled with gas ("cushion gas") in order to create the necessary base pressure needed to operate a gas store. While the recent budget has allowed developers to claim capital allowances on cushion gas, and proposed changes in the network operating procedures should allow depleted field operators to connect to the network at lower cost from say 2013, these costs are very significant and reduce the ROI for such fields. Furthermore depleted fields can often prove a minefield since depletion of the field often leads to aquifer issues, witness the tale at Esmond and Gordon (see the EO. thread for further details). While offshore development only requires planning where gas is beached, onshore development in the UK is greatly limited by planning issues. Although onshore stores are cheaper to develop the pipeline of projects in the UK is limited and many of these projects remain obstructed. While the government could use the Gas Act to unclog the system, to date they appear reluctant to do so. The UK no longer has 'captive' gas supplies and will soon be required to compete head to head with other European countries for continental gas. So in answer to your questions: A. Imo the gas price differential in the UK will not disappear in 5 to 10 years. If it were to follow the US example the intrinsic value of gas storage might decrease to a base case of 15p a therm in today's money if storage capacity was 20% to 25% of annual demand, but the prospects for that occurring in the UK in the next 10 years are tantamount to zero given the current pipeline of projects. My view is that natural gas supply will continue to be constrained in Europe by Russian ambition, natural depletion of existing fields and increased overall demand for gas. In these circumstances intrinsic values should increase until they meet the natural ceiling imposed by the price of LNG. While LNG prices will fall as more and more Middle Eastern projects capture gas, the cost of compression and transport will continue to ensure that there should be at minimum a 20p intrinsic value for storage. In Portland's case it is important to add in the extrinsic value, which should at least double revenues. Indeed in volatile markets, which we can expect for the foreseeable future while gas storage capacity grows, extrinsic value could be double the intrinsic value in at least 1 out of every 3 years. In calculating the value of a facility, given the discount rates used, the first 5 years of operation have a disproportionate effect on returns. Portland will be one of the first short cycle facilities to come on stream in the UK and the largest by capacity. I therefore expect it to benefit from a significant first mover advantage in obtaining extrinsic returns. So even if intrinsic, and by implication extrinsic, values fall over the next 10 to 15 years, I expect the Portland case to be a strong one. B. There are numerous North Sea depleted fields but for the reasons outlined above the cost of development is non-trivial. IRR's on these projects are usually no better than 10% to 15% and are dependent upon longer term strength in intrinsic values. Portland by comparison is likely to generate a 20% IRR. Having looked carefully at many of the mooted North Sea projects I am confident that there will not be a glut of offshore depleted capacity in the next 10 years. Even if I was wrong Portland is effectively in a different market. C. LNG will become more important but the cost differential between pipeline supply and LNG will remain. Even if this fell to an average of 20p over the annual cycle there would still be room for gas storage. D. Portland should be in a high price zone immediately before funding, and was there in May 2008 following planning and anticipation of funding. The share price reached 430p but today is at 110p having bottomed at 40p. On an announcement of funding, or in the run-up to such an announcement I would expect the share price to reach at least 200p (it could spike higher), depending on the terms of the deal. . I agree that during the construction phase the share price should fall but there will be some additional support from the Larne project newsflow. That said, I would certainly think of selling a proportion of my holding should funding be agreed. Sorry to be so long winded. |
Posted at 15/5/2009 00:03 by eacn kooba,The note says very little about the way in which the company is proposing to raise funding in this round. The CEO and FD, however, were more forthcoming in their recent presentation, the slides for which are on the PTG web site. Seymour Pierce haven't really changed their base view on PTG for well over a year, although their top end estimates of value have fallen. Seymour Pierce take their lead from management who clearly remain convinced of the value of both Portland and Larne. Management are usually too optimistic, so my targets are set well below Seymour Pierce's. It should be added that all of these valuations (both my own and Seymour Pierce's) are based upon NPV models of future cashflows, which only tend to have any relevance to the share price when a takeover or asset disposal is on the cards. If PTG only sell a minority stake in Portland, then NPV models may only have limited relevance, since the projected cashflows are many years hence. While I expect the share price to be strongly influenced by the potential value of Portland, as predicted by these models, if finance is forthcoming, the share price could drop back quite quickly when and if a deal is announced. One factor working to sustain the share price following a successful financing would be the 25% Credit Suisse stake. I do not expect CS to be in this for the long term and I would not be surprised if they decided to flip their stake at some point either following a financing of Portland or after Larne gets planning (assuming that comes after Portland finance). It is not inconceivable, indeed given the Star experience some would say probable, that the sale of the CS stake could lead to or precipitate a takeover of PTG or a sale of its principal assets. |
Posted at 24/4/2009 07:23 by eacn Holism,PTG are looking for debt to provide 60% of project finance, and for the debt to be secured by long term storage contracts with equity partners in the Portland holding company. PTG are looking for the EIB (and potentially others) to provide the debt finance. They are projecting that this finance will be available at 8%, which PTG believes to be a market rate for a project of this kind (i.e. relatively low risk - the rate for proven oil and gas field developments would be c. 10%). Of course once Portland is up and running you would expect the company to refinance the debt on improved terms, but although the premium above LIBOR should significantly reduce, the suspicion is that interest rates will be a great deal higher in 2013 than they are today, so 8% as a whole of life rate for the term loan is probably a prudent assumption. It is worth noting that the 8% assumption only holds true if the counterparties to the long term storage contracts offer a solid covenant. This implies that PTG need to be dealing with major players with sound balance sheets. On the face of it PTG should not have a problem attracting such partners given that the projected IRR's are high (between 19% and 25%). I want to satisfy myself that these IRRs are valid for a range of sensitivities, but assuming that they are, that sort of rate of return should prove very attractive if you believe that the development risk (and potential for over-run) is relatively low and that future gas storage prices will not collapse. The evidence that PTG have assembled on both counts strongly supports these assumptions. The fact that players such as Centrica are buying up gas storage assets (albeit all depleted fields) adds weight to the argument. The big risk is that PTG will fail to secure finance before they run out of cash. If PTG is to believed, this is a negligible risk. At the recent result presentation Hindle indicated that there would be no equity fund raising in 2009 and that such a fund raising was not part of their plans at the PTG level, full stop. Given that there was no going concern qualification in the results statement (a fact alluded to by Hindle and the FD at the presentation) indicates that the company has sufficient cash to see it through to end Q1 2010. Even if funding has not been concluded at that stage, it might be possible to bridge any shortfall if a deal was in process. An acid test of progress will come this summer. If PTG order the pipeline materials, it will indicate that they are fairly confident of closing a deal before end Q1 2010. The pipeline needs to be built in 2010 because the Olympic sailing will be using the bay in 2011 and 2012. PTG are understandably keen to get the piepline completed before these activities intervene. Pipeline costs are c. £12M to £13M and PTG have indicated that they can finance these activities without recourse to shareholders if funding discussions are on track. The implication is that the contractors will chip in finance since they are short of work. |
Posted at 21/4/2009 13:29 by eacn money4me,I have now had a first look at the new third party valuation data provided by PTG. This splits down into: an analysis of the future market for gas storage; a projection for gas storage prices; and an audit of the PTG valuation model. PTG are projecting an intrinsic storage price of 22p/therm and an extrinsic gas storage price in the base case of 18p for Portland, rising to 28p for Larne. PTG do not believe that LNG will dent these figures; indeed they argue that LNG will increase volatility (increasing extrinsic revenues). I am reasonably comfortable with these projections, but would expect in the longer term (i.e. post 2020) that volatility and intrinsic prices will fall as gas storage volumes increase. Post 2020 variations, however, are less important in the NPV valuation, and PTG argue that lack of investment in gas storage today will increase volatility and intrinsic prices in the coming decade well beyond their 'conservative' base line price assumptions. The valuation model appears straightforward, as does the audit. As you would expect the key variables are the project cost, the discount rate, the equity to debt split and the interest rate. There would appear to be no adjustment for inflation in the PTG model (in either prices or costs). I note that opex has fallen from 6p a therm to roughly 4.3p a therm (assumes 1.5 cycles p.a. which is significantly less than the theoretical potential of 3.5). I have not validated the NPVs included in the PTG presentation based upon this model, but would expect these to be consistent with their model. I will, however, attempt to replicate the PTG model for completeness. I prefer my own model, which allows for variations in pricing and costs, but it is useful to see how PTG have arrived at their numbers. The PTG model would appear to be out of date, since it takes only limited account of the funding structure proposed in the interims presentation. If I understand this correctly, PTG proposes to raise 60% of the project cost as debt (i.e. c. £270M), with the remaining £180M funded through equity. The debt is to be secured against long term storage contracts entered into by the new equity holders. PTG proposes to sell c. 40% of the equity in the Portland holding company (a subsidiary of PTG) and is not proposing to dilute existing PTG shareholders. Indeed PTG have made clear that they have no plans for equity dilution at the PTG level. At the presentation PTG stated that the pricing of the long term storage contracts would be set at a level that allowed the Portland holding company to service the debt and cover other cashflows (e.g. tax, etc.), but no more. Not all buyers of equity would be expected to enter into storage contracts (some buyers might be financial investors – viz. infrastructure funds) but the implication is that sufficient storage will be pre-sold to secure the entire debt. To illustrate this proposal, say that the interest rate on the debt is 8% for a 10 year term loan of £450M. Then the debt service cost per annum is c. £67M, which is equivalent to 18.6p / therm on 360M therms (1bcm of gas). The PTG proposal is to sell long term storage contracts to reputable third parties with good credit ratings for some or all of the 360M therms capacity at 18.6p/therm and to use these contracts as security for the debt. Buyers of these contracts will be also required to subscribe for equity in the Portland holding company and to pay a price for this equity that will reflect the disparity between the 18.6p/therm storage price and the true market value of Portland storage. In the PTG base case, where true market value is 40p/therm, the simplistic price for this equity (assuming all contracts are at 18.6p/therm and all the equity is sold) is the NPV of 21.4p/therm for 360M therms for the length of the contracts (say 20 years), with the discount rate set at the required hurdle rate (IRR). This amounts to c. £375M for a hurdle rate of 20%, and falls to c. £200M for the same hurdle rate but with the true market value per therm of storage reduced to 30p. In the scenario described the bulk of this funding would revert to PTG, or a subsidiary of PTG, and might well be subject to a tax charge (although PTG appear to have been doing some tax planning for this eventuality). The figures above are lower than those quoted by PTG, but their numbers were based upon the holding company investing £180M with a loan of £270M and with only 40% of the equity sold. I have yet to validate these numbers. |
Posted at 11/11/2008 08:41 by eacn Chrismez,The fall in PTG's share price has been on modest volume. The share price does not therefore necessarily reflect the price at which the company can be acquired. To gain control of PTG, a predator would need to acquire at least 50% of the shares, and for a full takeover at least 75% of the shares (this is the level at which you can force through a scheme of arrangement, which allows the predator to buy out the remaining holders - historically the rule of thumb was 90%, the level at which the predator can enforce the "mop up" of minority holdings under the Companies Act). With the management holding c. 23% and Credit Suisse 25%, it is highly unlikely that a predator can gain control of PTG if this is opposed by both management and Credit Suisse. A predator can only force through a takeover with the agreement of Credit Suisse. We know that in July Credit Suisse acquired £9M of PTG shares at a price of 355p. We also know that management recently took shares in lieu of bonuses at 409p a share. We can therefore conclude that both parties believed PTG to be worth a great deal more than the current share price only a few months ago. Is it possible that these shareholders are now prepared to sell the company for 100p a share? I doubt it. While it is currently the vogue to assume that bank funding is impossible to obtain, in the real economy lending continues. Within the last 4 weeks, an SME of which I am a director, raised an 8 digit sum from UK banks at a few percent above LIBOR on an unsecured basis. Note the word unsecured. With LIBOR falling and the UK yield curve now restored to a healthy incline, and likely to improve further with base rate set to fall to 2% in 2009, it is reasonable to suppose that lending will come back in Q1 and Q2 2009, albeit on the sort of conservative basis that was seen in the late 1980's and early 1990's. PTG should therefore be able to raise some funds through debt markets in 2009. But perhaps more importantly a predator should also be able to raise funds via debt in H1 2009, probably on the basis of a £ of debt for a £ of equity. That should ease the rate of return expectations since debt will come more cheaply than equity capital. Management are therefore correct to call a timeout on negotiations at this stage, in the hope that improvements in the debt markets will lead to better farm-in / sale terms in 2009. That in itself does not ensure that PTG will get more than 100p per share for Portland in 2009. However, 100p a share for Portland, which is roughly equivalent to PTG agreeing to cede circa 85% of the revenue share to a JV partner in return for covering the development cost, implies that Portland is worth less than Caythorpe. Caythorpe involved £100M of CAPEX for 7.5bcf of storage and a cycle time roughly equivalent to Portland. Portland offers roughly 5 times as much storage at 5 times the CAPEX (i.e. the same CAPEX cost per therm/SBU) for the same cycle time (i.e. the same intrinsic and extrinsic value per therm/SBU). That strongly suggests that Portland should be worth 5 times Caythorpe since storage prices for the two facilities should be closely matched. Now, Caythorpe negotiations were probably a few months ahead of those for Portland, and may not, therefore, have fully factored in the sea change in the debt markets that occurred in October. However, even taking that into account, I remain of the view that Portland remains worth a multiple of the price achieved for Caythorpe. I do, however, remain nervous that management doesn't have the foresight or skill set needed to realise that value. While they currently have the cash to survive, I am concerned that they are proposing to spend some of that cash on continued development before securing full funding. I can see no logic in such an approach. Portland is not a wasting asset, and while there may be some marginal reduction in the project's NPV as a result of delays ( since in the longer term gas storage prices are likely to fall), at present any concern on that front is outweighed by the need to conserve cash. I am also very nervous that piecemeal fund raising of £12M in Q1 2009 will be unnecessarily dilutive. P.S. Can anyone download the report and accounts? According to my system the PDF is corrupt. I don't get a printed copy since my shares are in nominee. |
Posted at 10/11/2008 11:03 by chrismez eacn - good posts (as usual) but can you please explain to me why Centrica or anyone else for that matter would pay 200p for Portland when they could buy the entire company for half that price including Larne. With the PTG share price where it is currently, an offer of 100p for the entire issued capital would have to be viewed seriously simply because there aren't that many companies out there at the moment with serious amounts of cash to splosh around on purchases. Cash is king and those with plenty of it are in an extremely strong bargaining position. Secondly, many companies with plenty of cash are going to hoard that cash to see them thru this crisis which still has a long way to go. IMHO companies will not be reckless with their cash and will only spend it when they are getting an absolute bargain. |
Posted at 06/11/2008 07:57 by eacn Clearsoup,Re: post 761, thanks for the sentiment. My investment in PTG makes up less than 5% of my active trading portfolio and less than 2% of my assets so PTG's fall while painful is not terminal. Taking into account share sales made at the time that planning permission was granted, I am currently just under 40% down on my PTG investment, with a break even at around 210p. I remain of the view that if the board of PTG saw the light and abandoned the "independent gas storage" business model, they could yet realize at least 200p for Portland, possibly more. My overall reaction to yesterday's RNS was in fact relief. Any sort of JV, particularly one with multiple partners, was never an attractive option for shareholders. As I said in a post a few weeks ago, the PTG board needed to take a timeout on the process and reconsider the options, which is what I hope they will now do. By opting for the JV route PTG was consigning its share price to the doldrums for years to come. An independent gas storage business, as opposed to a business that finds and develops gas storage projects for sale, should rightly be valued on a multiple of earnings not on the value of its assets. As such a JV would not generate value for shareholders for years to come, whereas an outright sale should generate value in the next year or two. My thinking has always been that short term cash in the hand is generally preferable to future value based upon projected cashflows in years to come. When meaningful projected cashflows are as far away as 2015, I would favour short term cash unless the discount rate for future cashflows is greater than 20%. So, for example, if PTG was to generate post tax revenues of say £30M in 2015 from a 30% share in Portland, then on a PE of 8 PTG would be worth £240M in 2015 or roughly £3 a share assuming 80 million shares in issue (i.e. assuming limited further dilution). If today's share price was, say, 80p then that implies that the projected future fair value of £3 is being discounted at a rate of 20% p.a. (i.e. £3 in 2015 is equivalent to 80p in today's money if you use a discount rate of 20%). On that basis I would on balance prefer to hold on for £3 in 2015 rather than sell Portland for the equivalent of 80p. However, that comparison ignores the option of selling Portland for cash in the short term. Today's share price reflects the fact that the company continues to issue RNS's which reject that option. The insistence on keeping a 50% share in the asset is what is killing both the negotiations and the SP, because the potential JV partners aren't prepared to stump up for all the development costs on that basis and PTG is not in a position to raise cash to make up the difference. PTG need to face facts. The company is not going to raise the £100 million or so of finance it needs to retain a 50% stake in 2009 without massive dilution of shareholders. That will not generate long term value for existing shareholders, and may well be opposed by Credit Suisse. Sooner or later the board is going to realize that a sale is the only option, and at that point the share price should rerate to reflect the potential for short term gain. 80p a share implies that Portland is worth £64 million, which is less than the £75 million price paid for Caythorpe only a few weeks ago, a much smaller facility with an equivalent cycle time to Portland. I find it difficult to believe that Portland could not be sold for at least £150 million today, even in these difficult markets, which is equivalent to 190p a share. I note that Daniel Stewart was only recently suggesting a price of 250p a share or c. £200 million for Portland, based on a trade sale. If, however, the board persist in pursuing the "independent gas storage" model, and try to retain a 50% share in Portland, the share price will decline further and there is a good chance that shareholders will baulk at any dilutive fundraising. Institutional shareholders are rarely investors for the long term (i.e. for 5 or more years) and Credit Suisse's record suggests that they, quite reasonably, have shorter investment horizons. I would not be in the least surprised to find out that they have just sold down their stake in Encore, and I would not be surprised if they baulked at a plan for PTG which involved significant dilution. My major mistake has been in failing to take the company at its word: I assumed that they would sell Portland if the opportunity was there, whereas they have consistently said that they wanted to be an independent gas storage business. These two different approaches make a world of difference to the share price. |
Posted at 04/11/2008 10:04 by eacn darlocst, As I noted in an earlier post, depleted fields are a riskier proposition than salt caverns and are more capital intensive. At best E&G is going to cost more to develop and have a shorter life than previously assumed, and at worst the project may no longer be viable. With the lower resevoir in doubt at Esmond, the IRR for the project may fall significantly since the infrastructure CAPEX is not proportional to storage volume. If the Hewett upper/lower resevoir volumes are a guide, E&G may only be viable for 60% of its planned capacity, or may require more cushion gas (at higher pressures) to allow the lower resevoir to operate. This is not to say that today's announcement is terminal for E&G, but for the time beinng at least investors can't assume the asset has any significant economic value. Despite having concerns about offshore depleted fields, I recently bought a few EO. on the basis that if the E&G test result was positive the EO. share price could jump to 50p and if it was negative the PTG share price would probably react positively. I saw this as a relatively low risk bet since Breagh underpinned an EO. NAV of around 20p. I was well aware that this was a binary bet on the E&G test result (with anything other than a total positive being classed a failure). Unfortunately the bet hasn't paid off, but with a bit of luck we will see some PTG upside in compensation. |
Posted at 18/9/2008 13:00 by eacn holism,Asset auctions often develop an internal logic of their own, which has little or no connection to the gyrations in the public markets. It may well be that the bidders for Portland (and the RNS clearly suggests that there are more than one) will be wrapped up in their NPVs and IRRs, rather than relying on the market to provide a valuation. While I think the placing was a mistake, I remain of the view that PTG should be able to raise 100% of the capex funding for Portland in return for a revenue share, regardless of the credit crunch. Strangely, it remains possible to borrow money for longer term infrastructure projects from UK banks, despite the credit crunch. I sit on a board that has recently borrowed an 8 digit sum from a UK lender, for just such a project, and without offering security. Real world lending is not yet dead. An important question is how will we know what the terms of a farm in deal mean for shareholders? When brokers talk about a farm in deal being worth 400p a share, or some such, what exactly do they mean? The answer is that such terms are just shorthand for a complex set of assumptions. With Portland the key variables are future storage rates, operating costs and bidder's minimum acceptable risked rates of return ("hurdle rates"). There are a variety of views in the market on all three variables. Seymour Pierce have modelled on the basis that storage rates will be constant in real terms at 40p/therm (in today's money), with the risk being a 10% escalation in capex, a 15% escalation in projected day 1 operating costs in real terms and a 3% inflation rate. On that basis the post tax risked rate of return for bidders would be around 13% for a 50% revenue share. On an unrisked basis that would be a 14% IRR. The company, on the other hand, appear to take the view that storage rates will remain relatively flat until 2012, then rise rapidly in the period up to 2020, flattening off thereafter in real terms. The company appears to assume a minimum starting rate of 30p/therm in 2011, rising to 41p by 2014, with average 5% p.a. real increases in prices till 2019, and none thereafter. These prices, it is claimed, are minima and do not reflect the extrinsic premium that PTG expect to be able to command. The company also assumes that operating costs will be 6p/therm (presumably in today's money - this is higher than the Seymour Pierce figure), although these should be offset by operational charges (the Seymour Pierce operational cost may be lower than the company's because of this factor, which is bundled into the SBU fee structure, where there are additional charges for injection and removal of gas). Ignoring any offset from operational charges, the company's figures also imply a post tax risked rate of return for a 50% revenue share of around 12.5%. As I understand it, Daniel Stewart, don't differ greatly on future storage prices, but expect bidders to demand a greater risked return. The following table sets out my calculation of the revised revenue share required by the bidder to deliver a given risked rate of return ("IRR"), using either the company's or Seymour Pierce's assumptions on storage rates, costs and cost risks: Implied Revenue Share for Bidder Target IRR share price Assumptions Company Assumption 12.5% 48% 50% 15% 62% 65% 17.5% 77% 80% Any valuation of PTG is clearly linked to its ultimate revenue share from Portland. While I would expect bidders to value their potential share of Portland on the basis of a target IRR, I am less convinced that using the converse of an IRR, that is an NPV, to calculate a share price valuation for PTG is meaningful. That said, it is a starting point. An alternative would be to calculate the profits in say 2014 and calculate a market cap based on a multiple of dividend yield (i.e. a utility type PE) and then calculate this value in today's money. The problem with both approaches is that we are trying to value an asset based on future expectations of cashflows, which are always prone to a high degree of error and uncertainty (in both directions). Such methods give a very wide spread of valuations depending upon the input assumptions. My preferred method is to use a takeout valuation: if the bidder is prepared to invest up to £550M for X% of the post tax revenue share, it seems reasonable to assume that someone would be prepared to buy £550M*(1-X)/X for the remainder of the post tax revenue share. On that basis, using the Company's figures (excluding any extrinsic value premium for storage prices) I calculate the following valuations for PTG's share of Portland: Bidder's Revenue Share Value of PTG's Share (pence per share) 50% 580p 55% 480p 60% 395p 65% 320p 70% 260p 75% 200p 80% 150p These figures are only intended as a rough guide and will clearly vary depending upon your view of cost risks and future storage prices. They are also influenced to a lesser extent by your view on the discount rate (I have used a figure of 8%) since I have valued each parties share of the revenue using an NPV calculation. However, since it is a relative valuation, the criticism of NPVs made above is largely countered, and indeed if the valuation was done simply on the long term ratio of revenue for the two parties you would get a similar result. I hope that this table will prove to be a useful rough guide when evaluating the terms of the farm in bid, as and when it is agreed, since it will no doubt be couched in terms of capex covered for a given percentage of revenue share, rather than in pence per share terms. From the table it is evident that if you believe that bidders will want a 15% risked rate of return then the shares are not worth much more than say 350p including Larne. If the risked rate of return were 17.5% then you could drop that figure to 180p, which would appear to be Daniel Stewart's position. Investors in PTG can draw comfort, however, from takeout prices for other UK storage facilities, agreed in less volatile times, when gas supplies were considered more secure and the outlook for spot rate volatility was more benign. These suggest that buyers are prepared to invest at risked rates of well below 15%. |
Posted at 21/7/2008 15:11 by eacn scruff1, I don't know why DS issued a sell note, but they are not the first to have dismissed this stock on the basis of limited research.Many investors look at PTG and infer that it is grossly overvalued because: it will not generate any cash flow until 2011 at the earliest; it has yet to build the facility at Portland; and, it has still to obtain planning permission for the Portland pipeline. To many that suggests that the shares should be at a very significant discount to the NPV of the future projected cashflows. PTG is a bit like a junior mining stock which has reached the bankable feasibility stage. Such junior mining stocks exhibit many similar characteristics to PTG: cashflow many years in the future; mine yet to be built; and, permits yet to be granted. If DS are thinking of PTG like a junior miner then they will have noticed that PTG trades at a premium to junior miners. That premium is there because the market is assuming that: PTG will find a farm-in partner on favourable terms; PTG is a potential takeover target because it owns a very scarce commodity; and, the UK market for gas is becoming increasingly volatile and inflexible, suggesting that Portland will command a premium price for storage. If you don't believe or don't accept that these factors should have a bearing in the price then you will regard PTG as over-priced. Presumably this is DS's position. There is always a danger of getting ahead of oneself on valuation. Last year I invested in TMC, a junior miner with rights to a large nickel laterite deposit. I modelled the cashflow, based upon the company's projections and my views on the nickel price and came to the conclusion that the stock was worth over £5. So I bought a few at around £1.50 and then some more at around £2.50. The price peaked at £4.75 but within a month had tanked to around £1.60 at which point I sold at a loss. My mistake was to suppose that the value of future cashflows was a fair proxy for pricing the shares today. It generally isn't, since those cashflows aren't guaranteed and in a bear market cash is king. If PTG fail to close a farm-in deal or does so on less favourable terms that those already suggested by the company, or on terms that expose PTG to cash calls to cover development risks then the PTG share price may suffer a similar fate to that of TMC. In my view that is unlikley, but not impossible. |
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