Hardy Oil & Gas profits from refocus

The Investment Column
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The Independent Online
Hardy Oil & Gas is emerging from two years of reshaping under chief executive John Walmsley, the former Enterprise Oil finance director. Mr Walmsley's portfolio reshuffle reached its peak earlier this year with the $179m sale of US assets to Enron Corporation, in effect wiping out debt at the British group.

That sale and the start of production from the North Sea's Banff field in September have yet to be fully reflected in the figures, which saw net profits jump from pounds 254,000 to pounds 2.58m in the six months to September. A 21 per cent jump in the realised oil price and cost reductions more than offset the 15 per cent drop in daily oil production to 10,800 barrels of oil equivalent as a result of the US disposal.

The group has reached provisional agreement for the sale of its Libyan, Algerian and Namibian interests and most of the assets in the Netherlands are also expected to go soon, completing the last tidying up of the portfolio. With those proceeds, net debt of just pounds 8.6m in September and a new pounds 175m syndicated credit facility, the group's own resources should easily contain planned expenditure of pounds 250m over the next five years.

Around half of that total will be used on the development of the Elgin gas condensate field in the North Sea, due to more than double Hardy's production when it comes on stream around the turn of the century. Much of the rest is likely to go towards the Bayu gas condensate field in the Timor Sea, which, assuming it gets the go-ahead next year, should push production to around 35,000 barrels of oil equivalent a day by 2002 or 2003.

So, with government assent received for the first stage of development of the Miano gas field in Pakistan, the long-term future of Hardy looks assured. But that is not going to satisfy the new management team around Mr Walmsley. The market is expecting it to use a share price which has outperformed the rest of the market by nearly 50 per cent since the start of 1995 to mount a chunky acquisition. Hardy's dilemma is the 20 per cent surge in the oil price this year, which has buoyed its own share price, but has also pushed up the price of desirable acquisitions, be they oil assets or companies. The group may have its work cut out to find suitable buys within its focus of the North Sea, now mature, and the Far East, where British rivals Premier, Cairn and Clyde are already trawling for acquisitions.

A falling oil price next year may also hit the sector, but the shares, up 3p at 268.5p, still look reasonable value, given the management and their relatively narrow premium to net asset value, put at 264p a share by NatWest Securities. A further prop may be provided if the Santa Fe oil assets being sold by the Kuwaitis go at the rumoured 25-50 per cent premium to net assets.

Osborne

imitates Topsy

Messrs Osborne and Little are rich enough now not to care too much about the perversity of the stock market, but the bored banker and his art school chum who created their eponymous wallpaper company almost 30 years ago will be forgiven a raised eyebrow at the City's reaction to yesterday's figures. After a 19 per cent rise in interim profits and a 78 per cent hike in the half-time dividend payout, the shares tumbled 92.5p to 842.5p.

Actually the fall was not so surprising when you consider the shares were trading at only 760p a couple of weeks ago. These are one of the tightest held and so volatile shares on the market, more than 50 per cent owned by its founders and subject to some pretty violent swings as market makers cover their exposed positions.

That effect works in reverse and anyone with the prescience to ride the recovery at the smart Chelsea furnisher since it slipped into the red in 1993 has profited handsomely. From a low point of 58p back in the recession the shares have grown like Topsy - incredibly, Osborne & Little is valued at more than pounds 50m.

Half-year figures showed pre-tax profits jumping from pounds 1.69m to pounds 2.02m, struck from a 16 per cent rise in sales to pounds 14.8m. Unusually for a British retailer, Osborne has struck it rich in the US where sales in the half increased by 23 per cent. Turnover in America outstrips sales at home.

In addition to good growth in its existing lines, Osborne made a significant leap forward during the year when it acquired the right to sell Liberty Furnishings throughout the world (except Japan) for the next 15 years. Thanks to the problems afflicting the Liberty group, its furnishings arm had been sorely neglected and Osborne should be able to squeeze out a great deal more than its current pounds 1.5m sales.

Looking ahead, increased penetration in the US and the nascent consumer boom at home should continue to drive profits, even if the rest of the world, principally Europe, is signally failing to join in the party. Having grown at 14 per cent in the six months to September, sales in Britain are running 20 per cent ahead of last year.

On that basis, forecast profits of pounds 4.7m for the year to next March look conservative and the company should make more than pounds 5.3m to March 1998. Sadly, most of the good news is already in the price and a prospective price-earnings ratio in the high teens means the shares have had the best of their run.

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