1 pointWritten by Kyle Rodda - IG Australia Overnight bounce: A bounce in equities has finally arrived, unwinding some of the week’s heavy losses. As it currently stands, the NASDAQ – ground zero for much of the recent market correction – is leading the pack, up 1-and-a-half per cent for the day, followed by the S&P, which is up 0.8 per cent, and the Dow Jones, which is up 0.65 per cent. Volumes are down generally speaking, so the recovery today lacks bite – though the Thanksgiving holiday in the US may somewhat be behind this, meaning an apparent lack of conviction in this relief rally could be explained away. Meaningful price action in other areas of the market that gives a solid read on the current psychology of traders is absent: US Treasuries have been comparatively inactive, with yields remaining contained across the curve, and the US Dollar is slightly lower, without demonstrating remarkable activity itself. Risk assets: Certain assets have benefitted from the lull in panic-selling. To preface: the VIX has receded to a reading of 20, from highs around 23 yesterday. In currency land, the Australian Dollar and New Zealand Dollar, as risk proxies, have ticked higher to 0.7265 and 0.6795. Obviously, the reduced anxiety amongst traders has meant the converse is true for haven currencies like the Japanese Yen, which is trading above 113 today. The Euro and Pound remain in the 1.13 and 1.27 handle respectively, most unmoved by the day’s sentiment. While credit spreads, which have blown out recently as risk-sentiment evaporated, have finally come-in. To counter the notion of complete risk-off: Gold has caught a bid, to trade at $US1227, or thereabouts, with its rally attributable largely to a modestly weaker greenback. Global indices: But overall, risk appetite has been ever so slightly whetted, even if it is only temporary. European equity indices were well into the green, aided by a skerrick of positivity generated by good news relating to the Italian budget crisis. The DAX was up 1.61 per cent and the FTSE added1.47 per cent, shaking-off the mixed lead from Asia, which saw the Hang Seng up 0.51 per cent and the CSI300 up 0.25 per cent, but the Nikkei down 0.35 per cent and the ASX200 down 0.51 per cent. A bounce in commodity prices has fed into and supported the solid sentiment in equities, especially as it relates to oil, which rallied off its lows to trade just below $US54 in WTI terms and hold within the mid-$US63 handle in Brent Crude terms. Slow news day: If this all sounds dry, it’s because that in the context of the volatility experienced in the past week – if not almost 2-months – it very much is. Little has catalysed the overnight bounce. The major themes are still hovering about, and the questions implied by them have barely been answered. The big data release overnight – in fact, it’s probably the biggest for the week – was US Core Durable Goods numbers, and they disappointed. That release, very marginally, added to the chorus of pundits suggesting that the US Federal Reserve’s hiking path may be a little flatter than recently thought. As far as what can be inferred from the data, the US economy is cooling off, implying the “data dependent” Fed will lack the reason to aggressively hike interest rates. Fed-watch: A lot of these matters relating to the Fed will be clarified when a slew of board members speak next week. The markets attitude though is simpler to read: Fed Funds futures have reduced their bets on the number of rate hikes from that central bank to 2 and a bit from here. December’s telegraphed hike is being priced again at a 75 per cent chance, but after, if traders are a good barometer, rates in 2019 are looking very flat. A more dovish Fed, in the absence of developments in other issues like the Trade War or Brexit, is what is aiding the staunching of risk-off sentiment. It opens the risk now that markets could be all too wrong, and a spike in volatility will arrive if traders were to once again adjust expectations. A softer outlook: But with the volatility we’ve seen in markets, corporate earnings petering out, and economic growth cooling, the assumption of a more reserved Fed isn’t outlandish. It perhaps reflects the broader risks in the markets and economy too: the Trade War is ongoing, Brexit is falling apart, China is slowing, oil is tumbling, and Italy’s fiscal situation could blow up any day. Given such a landscape, an inevitable pull back by the Fed, timed with lower activity in financial markets, is very understandable – the game of chicken being played by markets and the Fed may have been won by the former. It could all turn on a dime very quickly of course, but as it stands now, the current environment is leading market participants to the conclusion that a period of soft growth, lower earnings growth and a more neutral Fed is upon us. ASX200: So: as it all related to the Australian share market in the here and now: our bounce today, according to SPI futures, will begin with an approximately 25 point jump at the open. Yesterday’s performance was naturally poor, but some solace can be taken in the fact the market bounced off the 5600-support level. The edging higher throughout the day’s trade was helped by a solid run from CSL, which rallied after Morningstar upgraded that company’s stock to “buy”. The banks also experienced some buying; however, breadth was very low, revealing the lack of conviction in yesterday’s modest upward swing. Today ought to see a broad pick-up, in sympathy with Wall Street’s trade: meaningful technical levels within reach on the daily chart are hard to find, but maybe the barometer is how closely a track towards the 5700 can be established.
1 pointTiming Is Everything Whoever suggested that timing is key when investing in resource stocks may have had President Energy in mind. From dusters in Australia and Paraguay to problems in the US, it's a company that has gone the long way round to reach its current position. And, in my view, that position is very strong. Focus On Argentina Broadly speaking, President is a company with oil producing and exploration assets in the US, Argentina and Paraguay. However, its main production focus is on Argentina. It produces around 325 BOEPD in the US in an operation that basically ticks over – it recently completed a deal that should add to this production but it's relatively small-scale. Having lost some US$100 million in Paraguay in 2014, this is now on the back burner. However, the company has substantial acreage in the country and has expressed its intent to return to drilling, albeit at a far lower cost in terms of capital expenditure. Should it be able to open up Paraguay to oil production, the upside will probably be enormous. That takes us to its bread and butter: Argentina. The Turning Point President's acquisition of the Puesto Flores and Estancia Vieja concessions from Chevron in September 2017, in my opinion, radically transformed the company. Although it was already established in Argentina through its ownership of the Puesto Guardian concession, it was not going anywhere in terms of production. The workovers were proving problematic and it had serious issues with Chinese manufactured pumps that impeded its growth. However, the company seems to have grasped with both hands the opportunities presented by Puesto Flores and Estancia Vieja and has moved at a breakneck speed. In little over a year, it has doubled oil output from its Puesto Flores acreage. As I write, it's midway into a three well drilling programme that was targeting an extra 600 BOPD from Puesto Flores. This morning it announced that it had achieved that target from its first well and that has now gone into production. It aimed at exiting 2018 with total production in excess of 3,000 BOEPD but appears to have already breached that figure. The company has three gas wells on long-term testing at its Estancia Vieja assets. But the problem was getting the gas to market. Building a pipeline would have been prohibitively expensive. However, the company appears to have found a solution through the acquisition of the Las Bases and Puesto Prado concessions. Not only will they provide extra production as well as exploration potential but they come with pipelines that can be used to get the gas out of Estancia Vieja. From early 2019, it's planning on using at least some of the gas to become energy self-sufficient in Puesto Flores and Estancia Vieja – this is projected to save it some US$130,000 per month. Incidentally, it has the added benefit of being royalty-free due to it not being sold on the open market. It might also be worth bearing in mind that Argentina wants to develop its own gas industry for strategic reasons – some 23% of the gas it consumes is imported. Significant Management And Institutional Shareholdings Unlike many listed companies, the CEO, Peter Levine, has substantial skin in the game. He owns just under 30% of the equity. When shareholders bleed so does he. It may be worth remembering that he built and sold a Russian focused oil company, Imperial Energy, for US$2.6 billion in 2008. He has done it before. The company also has significant institutional support, including the IFC, an arm of the World Bank. So What Do We Get From The Numbers? Firstly, I think that we need to accept that President after its 2017 acquisition from Chevron is a new beast. What has gone before will have little bearing going forward. That said, it currently has 1P reserves of about 15 MMBOE and 2P of 27 MMBOE. However, this does not include the results of its current drilling campaign and neither does it take into consideration its Estancia Vieja gas assets. Its netbacks for Puesto Flores now run at some US$40 per barrel (Before General and Administrative costs). It should be remembered that the company receives a local Argentine price for oil – currently, this is around US$66 per barrel for its Puesto Flores output: This accounts for around 2,700 BOPD out of a total output of what is now around 3,400 BOEPD. In terms of cash generation, for Q3 2018 it produced some US$6.8 million in free cash flow, before General and Administrative expenses. Representing a 59% increase on the previous quarter. The litmus test will be the next set of results. But, from early 2018 the company seems to be generating significant amounts of cash and that does not appear to be disappearing into overheads. At the same time, it's investing to develop its assets. And What's The Downside? The most obvious issue is the price of oil and I will not bother guessing where it will go. The company has received a local Argentine price that was set by the Government and gave a degree of stability for several months at a time. That said, the authorities seem to be heading towards a market-based model. However, with increasing production the company appears to be gaining economies of scale - its well operating costs per barrel were down 20% in Q3 compared to Q2. It does have a buffer against falling prices. It needs to develop its Puesto Guardian assets. Why? Because that's where most of its reserves, some 18.6 MMBO of 2P, are located. To that end, the company has announced a drilling programme of three wells to commence in 2019. With production of around 450 BOPD, it's profitable but there is potential for a great deal more – both its costs are higher and the price it obtains for its oil is lower than its Puesto Flores assets. Incidentally, it should be borne in mind that the company has a licence running to 2050 for Puesto Guardian and it has already carried out all the necessary mandatory work. Although it has tried and failed to discover commercial quantities of oil in Paraguay, it appears determined to try again. However, this time its approach will be different and so will the cost – it's looking at spending some US$12/13 million on a well. Economically, Argentina is in the doldrums. However, this appears to be having little or no negative impact on the company. With a cost base largely in Argentine Pesos but an output priced in US Dollars, I would suggest the Peso's decline has probably been a benefit. Finally, the market reforms of the Argentine President, Mauricio Macri, are being delayed due to the economic crisis. But President Energy does not seem fazed. There is no sign, as yet, of a left-wing demon waiting in the wings. As with any resource stock, there is an inherent risk. And, as always, do your own research and take professional advice. By the way, I am a President Energy shareholder.