Investment Column: British sea power should boost Premier Oil

CRH; William Sinclair Holdings
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The Independent Online

Our view: Buy

Share price: 1209p (+50p)

Premier Oil is certainly entering 2010 at quite a pace. The oil and gas group said yesterday it was doing a deal with Serica Energy to take a 50 per cent stake in the Central North Sea block that includes the Oates and Bowers Palaeocene prospects.

Premier will operate the block, as well as paying exploration costs estimated by analysts to be about £12.5m. Premier has high hopes, predicting anywhere between 25 million and 107 million barrels of oil equivalent (boe) in Oates, which it considers to be a moderate to low risk prospect.

If that goes well, it will follow up with Bowers, which could yield between 10 million and 65 million boe. Drilling will start at Oates late in the second or into the third quarter of next year, and analysts at Oriel Securities estimate a 30 per cent chance of success. The Serica deal follows Premier's $501m (£312m) acquisition of Oilexco North Sea last May, and is another part of the strategy to build its UK business.

Simon Lockett, the chief executive of Premier, said: "The Oates prospect is an excellent near term opportunity to add reserves via organic growth in this new core area."

Yesterday's news sent Premier's stock up by 4.3 per cent, and there is plenty of scope for further gains. As well as the UK developments during 2010, Premier is also expanding its Asian business, with four wells to be drilled in the Nam Con Son Basin in Vietnam over the next 18 months. It has additional plans on a similar scale in Norway.

Alan Green, an analyst at Brand UK, thinks Premier has a sound global portfolio of oil prospects and that it is well placed to benefit from any upturn in the oil price.

"The shares are some way off the recent year highs, and the developments today provide a catalyst to propel the price back to those levels," he said. We agree. Buy.


Our view: Sell

Share price: €18.77 (-70 cents)

Shares in CRH have been strong performers since hitting their nadir in March. The Irish company is the world's second-biggest maker of building materials and, as such, it would be a mistake to judge it against the economy of its home country. There were things to like about yesterday's trading statement too.

CRH is raising its cost savings target to €1.65bn annually from the €1.45bn targeted in July, and the rate of decline in both sales and profits is easing while net debt is down. But that is about as good as it gets. Yesterday's trading statement was a gloomy one, certainly far more gloomy than that of peers such as the French cement maker Lafarge, which sees recovery in developed markets by the second half of 2010. CRH, by contrast, says trading conditions remain difficult and that the timing of any "sustained" pick up is "unclear". That may be down to a bit of expectation management on the part of its executives – if you're going to set targets, make sure you can beat them. Better still, don't set any targets at all.

All the same, some observes hoped for better than the likely 55 per cent fall in profits to €750m, which tells its own story. There is scope for CRH to surprise on the upside, particularly if the US performs better than expected. But the shares have enjoyed a good run and are not especially cheap at 12.5 times this year's forecast earnings. We therefore say sell, and seek brighter opportunities elsewhere.

William Sinclair Holdings

Our view: Hold

Share price: 93.7p (+11.7p)

Peat bogs are not an obvious investment choice, but punters with money in the commercial horticulture group William Sinclair, which is also one of the country's biggest peat suppliers, have seen plenty of growth in recent months.

Not only is William Sinclair among a dwindling number of Aim-listed companies to pay a dividend (and it has done so throughout the recession), the stock has put on more than 80 per cent in the past 12 months, despite a poor peat harvest and some woeful weather, which the group counts among its biggest risks.

However, the impressive performance of the stock does make us a little nervous.

Analysts at house broker Arbuthnot argue that the price will climb to 96p, a point that we are already close to, suggesting that, for investors, William Sinclair is starting to run out of steam.

As a small-cap bet, William Sinclair could well be a winner, but there are alternative dividend payers out there where the share price still has further potential for gains.

We by no means think William Sinclair is a bad bet, and the dividend would persuade us to hold, but the lack of potential growth would prevent us from being a buyer. If the shares soften, investors should be interested, but sit tight for now. Hold.