AUDUSD remains in downtrend from 1.0582 (Apr 11 high), the bounce from 0.9434 is likely consolidation of the downtrend. Range trading between 0.9434 and 0.9791 could be expected in a couple of days. Key resistance is at 0.9791, as long as this level holds, the downtrend could be expected to resume, and another fall towards 0.9000 is still possible after consolidation. On the upside, a break above 0.9791 resistance will indicate that the downtrend from 1.0582 had completed at 0.9434 already, then the following upward movement could bring price back to 1.0500 zone.
Q1 gold demand jumps 19% in China, 27% in India
By www.CentralBankNews.info
(Following article is written by Michael Lombardi of Profit Confidential for Central Bank News, which occasionally will carry articles by guest contributors if they are of interest to our readers.)
By Michael Lombardi, MBA for Profit Confidential
This doesn’t make it easy to understand for investors who bought gold stocks and have now seen them go down in price…
But while the prices of gold stocks have pulled back significantly this year, demand for physical gold bullion has gone through the proverbial roof.
The U.S. Mint had to halt the sales of its most-sold 1/10-ounce gold bullion coin. In Australia, the Perth Mint is working in overdrive to fill rising orders. The British Mint reports British consumers’ buying of gold has accelerated as well.
In the first quarter of 2013, total demand for gold bullion from China amounted to 294 tonnes, as jewelry demand in the country increased by 19% from the same period last year. Bar and coin investment demand rose by 22% from the first quarter of 2012. (Source: World Gold Council, May 16, 2013.)
In India, demand for gold bullion came in at 257 tonnes in the first quarter, up 27% from the first quarter of 2012. Retail investments in gold bullion edged up by 52%, and demand for jewelry was up 15% in the first quarter.
Likewise, demand for gold bars and coins in the U.S. were up by 43% in the first quarter of 2013 compared to the first quarter of 2012.
And that’s not all! The biggest driver of gold bullion prices in my opinion, central banks, bought more gold.
The first quarter of 2013 marked the seventh straight quarter when central banks accumulatively added more than 100 tonnes of gold bullion to their reserves. But we still have central banks, such as the Bank of China and the Russian central bank, whose gold bullion reserves are nowhere close to the ones of the U.S. or Germany.
In total, in the first quarter of 2013, overall demand for gold bullion was 963 tonnes.
While the gold bears argue economic conditions in the U.S. are getting better and, thus, the luster of gold bullion has dissipated, the reality is that the global economy is slowing as growth rates become stagnant. At the same time, central banks around the world still think paper money printing will drive their economies toward economic growth.
What holds true, regardless of the bearish pressures for gold bullion prices now, is that fundamental demand is still strong, while the long-term technical uptrend has yet to be broken.
I am still bullish on gold bullion. In the long term, the paper currency will lose its fight against inflation. Just look at the U.S. dollar as an example. In a matter of 100 years, what you could have bought for $1.00 in 1913 now costs you close to $23.50. (Source: Bureau of Labor Statistics web site, last accessed May 17, 2013.)
Central Bank News Link List – Jun 6, 2013: Brazil central bank signals another steep interest rate hike
By www.CentralBankNews.info Here’s today’s Central Bank News’ link list, click through if you missed the previous link list. The list comprises news about central banks that is not covered by Central Bank News. The list is updated during the day with the latest developments so readers don’t miss any important news.
- Brazil central bank signals another steep interest rate hike (Reuters)
- Poloz says dangers of low interest rates not threatening at the moment (Canadian Press)
- Fed’s Plosser: Time to begin gradually phasing out asset buys (MNI)
- Mexico central bank seen holding rates, annual inflation likely up (Reuters)
- Russia’s central bank to hold rates in ‘difficult decision’: chairman (Reuters)
- Bangko Sentral hints at further monetary easing (Inquirer)
- Dimon sees ‘scary’ world as interest rates return to normal (Bloomberg)
- Czech trade data may signal recovery, central bank analyst says (Bloomberg)
- Egypt central bank announces May jump in reserves, fails to explain it (Middle East Online)
- Marcus: low interest rates not the only solution (MoneyWeb)
- Central bank governor on devaluation of the national currency, the Tenge (Tengri News)
- End of U.S. stimulus to keep Latam FX under pressure: Reuters poll (Reuters)
- www.CentralBankNews.info
Seven Biotech Options that Buck Tradition: Christian Glennie
Source: George S. Mack of The Life Sciences Report (6/6/13)
Edison Investment Research assesses the value of emerging companies with a model that assumes revenues and earnings are years away. Then again, every investor does that. What’s unusual is that Edison looks for tomorrow’s upside in companies still small enough to double, triple and quadruple in value down the line. In this interview with The Life Sciences Report, Edison Biotechnology Analyst Christian Glennie applies his valuation skills to seven innovative biotech and specialty pharma companies and discusses the share-moving catalysts that investors need to know about now.
The Life Sciences Report: Let me ask you to go ahead and talk about some of your names. Would you choose a company to start with?
Christian Glennie: Thanks, George. Sucampo Pharmaceuticals Inc. (SCMP:NASDAQ) has had a good run starting from the very solid base it has built over a number of years. The company is founded on a novel technology—prostone-based compounds, which are essentially derivatives of natural fatty acids. It is the only company we know of that is working in this area. The key product so far is Amitiza (lubiprostone), which has been developed to treat a range of constipation disorders. It first launched in 2006, and Takeda Pharmaceutical Co. Ltd. (TKPYY:OTCPK) has been the company’s long-term marketing partner for Amitiza in the U.S.
On April 23 the company announced U.S. Food and Drug Administration (FDA) approval of Amitiza for opioid-induced constipation (OIC), which is a very significant market opportunity. We estimate that approximately 2.5 million (2.5M) patients taking opioids chronically for non-cancer pain will suffer from OIC. The approval puts the product in a strong position, given there are very few competitors in this space, certainly in terms of prescription drugs. We model U.S. peak sales for the product at $665M, of which the opioid-induced constipation application is approximately $200M.
TLSR: Christian, to be clear, that $665M represents the total of peak sales in the U.S., and that figure is partnered with Takeda. Is that right?
CG: Yes. The drug is sold by Takeda, Sucampo’s U.S. partner. Takeda has an opportunity to invigorate the brand. Sales have been solid but not spectacular. Revenues have been increasing year over year, but not at huge growth rates. I see an opportunity for the company to reposition and reinvigorate Amitiza with a new marketing effort.
The approval also distinguishes the product from a new competitor on the scene, Linzess (linaclotide) from Ironwood Pharmaceuticals Inc. (IRWD:NASDAQ) and Forest Laboratories Inc. (FRX:NYSE), which was launched at the end of last year. So far, in our analysis, it looks like prescriptions of Amitiza are holding up. Our theory has always been that the entrance of Linzess would actually help grow the market for use of prescription drugs for constipation disorders. The cascade of treatment protocols for constipation starts with dietary and lifestyle changes, followed by regular over-the-counter laxatives and prescription-type laxatives before patients and physicians move on to targeted agents.
TLSR: So what is Amitiza’s advantage in OIC over its pipeline competitors?
CG: The advantage of Amitiza is that it acts directly on the epithelial secretory glands to stimulate mucosal secretion of water and sodium chloride. This increases liquidity in the gut to help soften stools and aid motility. By acting directly, Amitiza bypasses the negative secretory actions of opioids on receptors in the gut, which causes the constipation. In contrast, mu-opioid antagonists block these receptors. But the real issue for this class at the moment is FDA concern over cardiovascular safety associated with the chronic use of these drugs. The approvability of these agents are in doubt until the FDA completes its review of the field.
TLSR: How do you value this company?
CG: We currently have a valuation of $420M, which is $10/share. It’s not a price target. It’s rather a valuation as of discounted cash flow (DCF) to where we believe the shares should be trading today. Once Amitiza rolls out commercially in Europe there will be upside, as we don’t currently include European sales in our DCF model. But this is more of a 2014 story.
TLSR: Let’s go ahead to your next idea.
CG: Biotie Therapies Corp. (OTCMKTS:BIOZF), based in Finland, is interesting on two levels. First, it has just introduced a drug into Europe called Selincro (nalmefene), an opioid antagonist, which is intended for alcohol dependence. Selincro was launched through Biotie’s Danish pharma partner H. Lundbeck A/S (HLUKY:OTCPK; LUN:OMX).
The drug is an alternative approach to alcohol dependence. Current therapy is targeted at complete abstinence from alcohol consumption, which presents obvious challenges since abstinence may not be a realistic or attainable treatment goal. The difference with Selincro is that it actually helps moderate consumption, and that over a period of time—months and years—it has significant long-term health benefits.
TLSR: I’m sure there are social implications to this newer thinking. How much support is there for this kind of shift from such an old, entrenched model?
CG: There are huge implications on both the social and health levels. Acceptance of the therapy is going to require a paradigm shift in the treatment of alcohol independence in Europe, where the overriding theme is still very much about abstinence, just as it is in the U.S. A lot of data about the drug’s benefits is emerging from clinical trials and supportive work by key opinion leaders, talking about how more realistic treatment goals should have significant benefits. Initial uptake of the product is likely to be fairly slow. A significant education and awareness program is required from Lundbeck, but in the long run we see peak annual sales in Europe in excess of €300M ($392M).
TLSR: Because of the educational component and the paradigm shift required, what period of time are you talking about for peak sales?
CG: That peak would be about 10 years out—in 2023 or so—and the product has a 10-year exclusivity. The peak is at the end of that period.
TLSR: Is there any prospect of getting the product approved in the U.S.? Is a new drug application (NDA) or supplemental NDA anticipated?
CG: No, not at this stage. The company simply wouldn’t have the intellectual property (IP) protection to make it worthwhile at this stage. The product itself, nalmefene, has been available in other forms in the U.S. If Selincro were to launch in the U.S., it might only have three years of new product exclusivity, and three years is probably not worth the investment.
The key is establishing the therapy in Europe, because of the potential for approval in eastern European countries outside the European Union, as well as in places like Russia, which could be a significant market. There are plans to develop a market in Japan as well.
TLSR: I understand why a slow uptake is anticipated. You would be fighting a lot of tradition. But I’m wondering, who are the clinicians being targeted in Europe? Psychiatrists? Treatment centers? Where do you start?
CG: The drug will be targeted at the specialists, but also general practitioners in Europe. Selincro does have to be part of a broader treatment program that includes psychosocial support. Some clinicians will still focus on complete abstinence as the ultimate endgame, but a product like Selincro should help patients along that path. Abstinence is not the explicit initial treatment aim for the product, but ultimately any product that helps patients reduce alcohol consumption should bring them farther down the path to complete abstinence.
TLSR: You said you liked Biotie on two levels. Is the Parkinson’s disease product, the selective adenosine 2a receptor (A2A) antagonist tozadenant (SYN115), driving any value here?
CG: Yes. Because Selincro is licensed to Lundbeck, the key operational focus of Biotie is tozadenant, which is, as you say, an A2A antagonist. It has a partner in UCB S.A. (UCB:BSE) for that program, but the deal has been structured such that Biotie is responsible for development of the pivotal phase 3 program. UCB will pay milestones as the drug goes through the various stages. Although UCB is helping fund the trials, it is Biotie’s responsibility to conduct them.
Biotie had the phase 2b data readout earlier this year, and we are very encouraged by the data. When we compare tozadenant to other A2A receptor antagonist candidates, Merck & Co. Inc.’s (MRK:NYSE)preladenant and Kyowa Hakko Kirin Co. Ltd.’s (4151:TYO) istradefylline (KW-6002), in terms of phase 2 data, efficacy and reducing Parkinson’s “off” time, the benefits of Biotie’s therapy were more significant. We view Merck’s recent decision to abandon development of preladenant after the failure to demonstrate efficacy in three phase 3 trials as a potential positive for Biotie in the long run, given that tozadenant is now the leading A2A candidate in development.
The benefits of tozadenant were also evident in the actual disease score. When you score Parkinson’s patients on the extent of the severity of their disease, tozadenant presented significant improvements in that measure. That was encouragement to proceed to phase 3.
TLSR: What’s the next story you wanted to talk about?
CG: Turning to a near-term catalyst story, NovaBay Pharmaceuticals Inc. (NBY:NYSE) should get readouts from three phase 2 trials on its aganocide technology in H2/13. Aganocides are synthetic, stable analogs of N-chlorotaurine, which are produced by white blood cells as an endogenous antiseptic to kill foreign microbes. NovaBay has produced a lot of data to show that its agent, NVC-422 (auriclosene), has the ability to overcome bacterial resistance, which is a key issue for the healthcare industry as a whole.
TLSR: What about the trials getting ready to give a readout?
CG: The trials are in viral conjunctivitis, impetigo and urinary catheter blockage and encrustation. They all will report in H2/13. The company has a significant partner for its impetigo program in Galderma Pharma SA, a private Swiss company specializing in dermatology products. We currently have NovaBay valued at about $1.90/share. But if all of the trials read out strongly positive, I’ve put the valuation in the region of $3.50/share, which would justify phase 3 probabilities.
TLSR: Christian, NovaBay has a $50M market cap. The company’s lead compound, NVC-422, will not be used internally but on mucous membranes, sclera or/and the eardrum. But even with those limitations, it still can mitigate or even prevent the use of antibiotics in so many indications. For instance, children with conjunctivitis could be treated and sent back to school without having antibiotic eye drops. Clinicians all over the globe are looking for antibiotic substitutes. Is this product and platform seen as not being very sophisticated, in part because it is a topical medication?
CG: Ultimately it comes down to data. That’s why these trials are so key. They are, by far, the most extensive trials that NVC-422 has undergone. The previous trial in viral conjunctivitis was mixed. It was a phase 2-type study, not as well designed or powered as the current study, and it produced mixed data. The back story is that Alcon Laboratories (a subsidiary of Novartis AG [NVS:NYSE]) was a partner of NovaBay in the eye disorders setting, and terminated the agreement after those results came out. That was obviously disappointing. But if the phase 3 data is positive, then, yes, the stock is significantly lower than where it could be.
TLSR: What’s the next name you’d like to visit?
CG: Another catalyst story for 2013 is Cleveland BioLabs (CBLI:NASDAQ). This is a very different story. In the near term it’s a biodefense play, but its longer-term potential is in oncology. The company’s compound, entolimod (CBLB502) is a medical countermeasure to radiation. It is going through the U.S. government’s Biomedical Advanced Research and Development Authority (BARDA) to fund development and for potential supply contracts for stockpiles. It’s critical to understand that the regulatory pathway is very different. The FDA created the Animal Efficacy Rule for these kinds of biodefense products; companies need to demonstrate the efficacy of a product in animal studies, but only need to demonstrate safety in humans.
The key catalyst for Cleveland BioLabs in the near term is the award of a development contract from BARDA, which is due any time now. It could be worth up to $50M, but it is not an upfront payment. BARDA will reimburse the company for further studies on entolimod.
TLSR: What is entolimod? What is the mechanism that makes it both potentially efficacious in radiation injury and in oncology?
CG: It’s being classified as a TLR5 (toll-like receptor 5) agonist, which is fairly unique within the TLR class of potential anticancer agents. Two opposite therapeutic concepts are at work here. One is that entolimod can suppress apoptosis (cell death) in normal cells, which helps protect against damage induced by radiation. The second is that it also helps activate apoptosis in tumor cells, specifically in TLR5+ tumors, by mobilizing an innate immune response.
TLSR: I understand that the near-term catalyst is getting the development contract from BARDA, but then what does Cleveland have to do? What are the next events?
CG: The company has done a number of studies demonstrating the efficacy of entolimod in nonhuman primates, but the company needs to do another set of animal studies, and another set of clinical human safety studies. The target would be to file a biologic license application (BLA) toward the end of 2014. The other major potential catalyst would be a procurement contract, whereby BARDA would commit to buying X number of doses from Cleveland BioLabs over a certain number of years. Looking at previous contracts that have been handed out by BARDA for products targeting anthrax or smallpox, I estimate an order in the region of 300,000 (300K) doses, which would equate to a contract of more than $200M to Cleveland.
But timing that kind of contract is uncertain. I provisionally have an estimate that it might come in 2015, which might coincide with an FDA approval on the biologic license. However, FDA approval is not a prerequisite for a supply contract with the U.S. government. A number of other products—again, for anthrax and smallpox—have already been delivered to the U.S. government but have not gotten formal FDA approval. The procurement agreement would be a significant event.
TLSR: What’s the next name you’d like to mention?
CG: Medigene AG (OTCMKTS:MDGEF) is a German company with a longer-term play in terms of catalysts. It is focused on the development of a product called RhuDex, a CD80 antagonist to treat autoimmune disorders. RhuDex is an immunomodulator that potentially blocks the interaction between CD80 on antigen-presenting cells and CD28 on T cells, preventing the overstimulation of T-cells that is often involved in autoimmune disorders. The company has done initial studies in rheumatoid arthritis (RA)—mainly safety studies—but it has decided to focus on primary biliary cirrhosis (PBC), a rare autoimmune disease of the liver. This is very much of an orphan disease indication, with the key market for PBC in the 200–300K patient range across the U.S., Europe and Japan.
Developing RhuDex for PBC could be very lucrative compared to trying to develop it for RA. The clinical timelines are significantly shortened. Also, the company has approximately $22.2M in cash at the moment, which is sufficient to get a phase 2 study in PBC going.
In looking at Medigene, investors will find a big valuation discrepancy versus another company also targeting PBC, Intercept Pharmaceuticals Inc. (ICPT:NASDAQ), which did a $75M initial public offering (IPO) in H2/12. It has more than just a PBC opportunity, but Intercept’s value has been underscored by the potential in PBC. It has done significant subsequent fundraisings, and now has a market valuation of about $530M, versus Medigene with a $37M valuation.
Intercept is in the middle of a pivotal study for its PBC candidate. The phase 2 that Medigene is running is of a similar design to Intercept’s phase 2 trial. It will start in H1/14, and we hope to get some data by the end of 2015.
TLSR: Medigene also has a phase 2 candidate, a newer version of an old cytotoxic agent. Could this drive any value?
CG: Yes. In fact, Medigene has just secured SynCore Biotechnology Co. Ltd. (a member of the Sinphar Pharmaceutical Group) as its global development partner for EndoTAG, a novel lipid-based formulation of paclitaxel. The theory here is that the positively charged lipid formulation targets the negatively charged endothelial cells lining the blood vessels that feed tumor cells. Phase 2 data suggests an overall survival benefit when EndoTAG is added to paclitaxel in patients with triple-negative breast (HER2/neu-negative, estrogen receptor-negative and progesterone receptor-negative) cancer, compared to paclitaxel alone. The SynCore deal ends uncertainty about the drug’s future after a long search for a partner, and a global phase 3 trial is now targeted to start in H2/14. We estimate a potential market launch in 2019.
TLSR: So the primary value driver is RhuDex, followed by EndoTag, is that right?
CG: EndoTag probably accounts for about one-third of the valuation. But in the longer term, the story is very much about RhuDex in PBC.
TLSR: Staying with EndoTag for a moment, I saw a note that five out of a total six patients had a complete response in triple-negative breast cancer. That was certainly a very small number of patients, but it makes me want to see what happens with further development. Triple-negative breast cancer is a truly unmet need in oncology.
CG: Yes, very much so. A number of products are being developed for the setting, but, as you say, it’s a tough form of cancer that does not respond to standard hormonal therapies or targeted agents, with chemotherapy being the only treatment option.
TLSR: Did you have another name you could share?
CG: Mast Therapeutics Inc. (MSTX:NYSE.A) is in a completely different area of disease. It used to be called Adventrx Pharmaceuticals, but changed its name in March of this year. It is currently developing MST-188 (purified poloxamer 188), which is in a phase 3 pivotal trial for sickle-cell disease.
Poloxamer 188 is essentially a polymer surfactant that helps to improve blood flow. The drug binds to hydrophobic surfaces of damaged cell membranes and restores these surfaces to a more natural and healthier hydrated state. This is particularly important for sickled blood cells because they block small blood vessels, which leads to a number of complications, one of which is vaso-occlusive crisis, an acute episode that causes immense pain. Many patients experience these crises frequently through a year, and severe cases may require hospitalization for five to seven days. At the moment, the only available therapies are analgesics and fluids. MST-188 could apply to a number of disease indications involving impaired blood flow.
TLSR: Peripheral artery disease perhaps?
CG: Yes. At the moment Mast has plans to do a proof of concept-type study in acute limb ischemia in combination with standard thrombolytic agents. The concept is that MST-188 could be a positive addition to a number of therapies in a number of settings. By helping restore blood flow, clinicians could reduce the duration of crisis episodes in sickle cell patients, a huge benefit because the more often patients have these events, the greater the cumulative effect, causing gradual massive damage to various organs.
TLSR: What about a catalyst? When and what?
CG: The sickle cell study has just gotten underway this year. In terms of completion of the study and getting the data, we’re looking at 2015. Similar to Medigene, data for MST-188 in sickle cell are a little way off, but the company does have a number of potential proof-of-concept studies to run, which hopefully will be supportive of MST-188. Ultimately, the key valuation driver would be the sickle cell study.
TLSR: What about staying power? Mast is a small company with a $32M market cap. Is it funded well enough to complete a lengthy study?
CG: It is reasonably well funded, with $32M in cash as of Q1/13. Sickle cell is not an area that has attracted huge investment or interest from big pharma, but it’s interesting that within the last couple of years, the likes of Pfizer Inc. (PFE:NYSE) and Novartis AG have gotten involved in the sickle-cell space by licensing a couple of mid-stage development products for the disease. That provides reasonable validation of the interest in the space.
TLSR: MST-188 is not proposed as a chronic therapy, is it? It may be used for a few days—two to three days, correct?
CG: Exactly. The drug would be used in conjunction with intravenous analgesics and fluid drips. The idea is to reduce the duration of crisis, but hopefully there would be other benefits—reduction in pain, reduction in time to hospital discharge and the like.
TLSR: Christian, I know you follow Athersys Inc. (ATHX:NASDAQ). Could you speak to it?
CG: We’ve certainly been interested in Athersys, but we have not initiated full coverage. I’m interested and excited by the MultiStem (multipotent adult progenitor cell) technology it is developing. It has Pfizer as a partner in ulcerative colitis. The real big ticket item, potentially, is the outcome of its phase 2 trial in ischemic stroke trial, with results expected in 2014. This could be transformational for the company. It’s an exciting story and definitely a company to watch.
TLSR: Many thanks to you. I’ve enjoyed this very much.
CG: Yes, I have enjoyed it as well. Thank you too.
Christian Glennie joined the healthcare team at Edison Investment Research in January 2012 and has 11 years’ experience covering the global biotech/pharmaceutical sector as an analyst and a journalist. He came to Edison having held senior analyst and editorial roles at EvaluatePharma and EP Vantage.Glennie also has prior experience as a marketing analyst at Zeneca Agrochemicals.
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DISCLOSURE:
1) George S. Mack conducted this interview for The Life Sciences Report and provides services to The Life Sciences Report as an independent contractor. He or his family own shares of the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of The Life Sciences Report:Athersys Inc., Merck & Co. Streetwise Reports does not accept stock in exchange for its services or as sponsorship payment. Merck & Co. Inc. is not affiliated with Streetwise Reports.
3) Christian Glennie: I or my family own shares of the following companies mentioned in this interview: None. I personally am or my family is paid by the following companies mentioned in this interview: None. My company has a financial relationship with the following companies mentioned in this interview: Sucampo Pharmaceuticals Inc., Biotie Therapies Corp., Novabay Pharmaceuticals Inc., Cleveland BioLabs Inc., Medigene AG, Mast Therapeutics Inc., Athersys Inc. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview.
4) Interviews are edited for clarity. Streetwise Reports does not make editorial comments or change experts’ statements without their consent.
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Realize the Full Potential of Natural Gas: Jeff Grampp
Source: Peter Byrne of The Energy Report (6/6/13)
Ramping up domestic North American liquid natural gas production for export to pricier international markets could be a game changer for struggling junior explorers. In this interview with The Energy Report, C. K. Cooper & Company’s Jeff Grampp tells us why drilling in domestic gas fields for export is a good idea. . .if the Feds play along. And he identifies promising juniors with leaseholds in particularly desirable fields.
The Energy Report: Jeff, if the Obama administration continues to authorize liquid natural gas (LNG) exports, will that benefit the juniors as well as the big producers?
Jeff Grampp: I believe all U.S. natural gas producers will generally benefit from an increase in LNG exports. Historically, the pricing dynamics of natural gas in the U.S. have been linked to local supply-demand dynamics. With an increase in the potential to export, domestic natural gas producers would be able to access higher priced markets internationally, particularly in Europe and Asia. There will also be local economic benefits tied to the creation of jobs at newly constructed exporting facilities.
Of course, an increase in natural gas prices potentially could burden U.S. consumers. Politicians will have to gauge public opinion as new export facilities open and if natural gas prices increase. I believe the situation will not necessarily be governed by Economics 101, where the U.S. would maximize exporting to realize higher international prices, because powerful political factors will be in play.
TER: How does the domestic supply situation affect consumer prices?
JG: We have seen a recent correction from when prices bottomed at the sub-$2 per thousand cubic feet (Mcf) level. The natural gas rig count has gone down tremendously over the last couple of years. But, at the same time, there remains pent-up potential gas supply that’s not being tapped, due to the more attractive economics of the oil- and liquids-rich plays. As natural gas prices creep up and export facilities enter the equation, producers may increase activities in natural gas plays. We could also see a yo-yo effect as prices go up, and supply may build up incrementally. But if supply ramps up too much, of course, then prices could fall.
TER: Will exporting gas from North America reduce the supply available for domestic consumption?
JG: If producers can sell natural gas at much higher prices internationally, then it would obviously make sense to access those markets. Supply could be diverted from domestic consumption for export, possibly leading to more uniform global natural gas prices, which would be more similar to oil. As it currently stands, oil is the more transportable commodity, so oil prices tend to trade more in sync around the world, whereas natural gas supply-demand dynamics have historically been a function of regional supply-demand factors. But with more global exports potentially in play, we could see natural gas prices trade more in line internationally in the near future. Therefore, we could see natural gas prices fall in regions where they are higher, and in lower-priced regions, such as the U.S., prices could rise.
TER: What are the obstacles for opening up the North American market to export?
JG: I believe the federal government will be reluctant to allow substantial exports of natural gas early on, given our dependence on fossil fuels to run the economy. The federal government will likely be hesitant to ramp up LNG export facilities, even though international demand may warrant more facilities. The Feds are taking a measured approach in their approval of export facilities, as they are watching to see how early facilities play out before accelerating the permitting process. There are also environmental concerns to consider, in terms of where these operations can be built, especially in Alaska. But there is also political pressure to open up the market for exporting.
TER: If we do start exporting more natural gas from the U.S., what kind of competition would we face globally?
JG: Australia exports LNG. Some U.S. producers are also looking at exporting LNG from their international assets. A vast amount of natural gas potential globally is not being fully realized, partly due to regional supply-demand dynamics. Traditionally, if natural gas demand is low in a local economy, it has not made sense to develop the resource because exporting potential was limited. But if producers can access international markets, where prices are higher and supply is limited, it definitely makes sense to develop the assets.
TER: Is there demand for U.S.-derived LNG in the Latin American and Central American markets?
JG: The demand in those developing economies is not as robust as in Europe and Asia, as they tend to rely more on diesel fuels and oil than upon natural gas.
TER: How do you assess President Obama’s recent statement that energy is booming in America?
JG: It truly is booming, due to the technological revolution in horizontal drilling and increased exploitation of oil and gas deposits that were previously considered to be uneconomic. As technology continues to evolve, and with more efficient fracture stimulation and completion methodologies, many previously marginal plays will begin to bear fruit.
TER: With junior energy stocks at all-time lows, what should investors look for when assessing a mid- or micro-cap company in exploration and production (E&P)?
JG: We’ve actually seen a number of quality junior players appreciate nicely recently. At C. K. Cooper & Company, we look for strong management teams with proven track records. We also try to identify companies with growing production bases and a strong level of current running room for exploiting potential drilling locations. Accessing capital markets to acquire drilling locations and production can work, but there can also be a lot of uncertainty in terms of available capital and obtaining the right asset to integrate into a company, so we like to find companies with solid assets in place, rather than those that will rely primarily on potential future acquisitions.
TER: Is the problem of finding capital improving for the juniors?
JG: Given today’s very favorable interest rate environment for issuers, the debt market can often be an attractive source of capital, if junior E&P firms are prudent. Investors should watch out for firms that have overleveraged through accessing the debt side too much. The equity side remains difficult. There is only so much capital available, and equity investors are being judicious in allocating capital to only the companies with the highest returning prospects.
TER: Is this a good time to buy in the mid-cap E&P sector?
JG: There are good buying opportunities. We just initiated on Midstates Petroleum Company, Inc. (MPO:NYSE) with a Buy rating and an $11 price target. The company had an initial public offering (IPO) in April 2012 with some conventional Gulf Coast assets, and it made two producing property acquisitions this past year in the Mississippi Lime and Anadarko Basin. These two assets give Midstates significant running room in two midcontinent plays with lower-risk, liquids-rich horizontal drilling opportunities. On the Gulf Coast assets, Midstates is testing horizontal wells in conventional reservoirs with some pretty encouraging early results. The firm has a very strong management team, and we see a lot of upside with the name.
TER: What names are attractive to you in the natural gas space?
JG: On the gas side, we like FX Energy Inc. (FXEN:NASDAQ), which has assets in Poland. It has several large exploratory blocks and recently announced a very solid production test on an exploration well in a 100%-owned block outside of its Fences concession. The Fences concession has been one of FX Energy’s more successful blocks and news of the company’s drilling success outside of the Fences concession is particularly positive. FX Energy plans to drill more wells near this most recent find after it acquires three-dimensional seismic data and there is good potential in 2013 for FX Energy to capitalize on its recent success.
TER: How do international pricing dynamics affect FX Energy’s position in the Polish market?
JG: Most of Poland’s natural gas is supplied by Russia, with natural gas prices in Poland being quite high given its lack of domestic production. FX Energy’s strategy has been to take advantage of the localized natural gas pricing dynamic. In the long term, it would not be out of the question for Polish imports of LNG to impact natural gas prices in Poland, but it seems unlikely to have a major impact over the next couple of years. For the time being, these guys are producing natural gas in the right place given that they receive nearly $7 per Mcf.
TER: Moving back to North America, are there any other companies that canny investors should buy?
JG: We really like the Wattenberg Field names at C. K. Cooper & Company. We cover Bonanza Creek Energy Inc. (BCEI:NYSE), PDC Energy Inc. (PDCE:NASDAQ) and Synergy Resources Corp. (SYRG:NYSE.MKT), which all operate in the Wattenberg Field. We like finding smaller players in areas with a lot of offset operator activity, particularly by the larger independents and majors. The two largest players in the Wattenberg Field are Noble Energy Inc. (NBL:NYSE) and Anadarko Petroleum Corp. (APC:NYSE). Both of these companies are spending billions of dollars testing aggressive down-spacing and upside potential in a variety of targets in the field. That activity allows the smaller firms to sit back and watch, and then play catch-up in the patterns that work. Noble and Anadarko are testing different “benches” in the Niobrara and the underlying Codell formation. Their de-risking of the potential of the targets then trickles down to the Bonanzas, PDCs, and Synergys. These smaller companies are starting to do their own testing of aggressive horizontal targets, because the big guys have shown that it works.
TER: How big is the Wattenberg Field?
JG: It is a relatively smaller field within the DJ Basin in northeastern Colorado. It’s a liquids-rich play with well costs typically running between $4–5 million ($4–5M). Noble is also drilling long lateral wells to enhance recoveries, and is seeing encouraging results. Companies are targeting different benches within the Niobrara Formation, which are generally referred to as the A bench, the B bench and the C bench. The Codell Formation underlies the Niobrara and is also prospective for horizontal development, potentially yielding four different horizontal targets. And the firms are testing down-spacing, with as tight as 40-acre spacing for a horizontal well. Ultimately, there could be between 8 and 16 horizontal wells per target in a section, which could translate to significant value for these companies’ leaseholds.
TER: How do you assess the potential for mergers and acquisitions (M&A) in the Wattenberg, given the lack of equity capital available at the moment?
JG: M&A definitely comes into play in the Wattenberg. Given that the Wattenberg is a relatively small field, with very few players holding significant acreage positions, it stands to reason that Noble or Anadarko could look at expanding their positions through M&A deals. Conversely, a large company not yet in the Wattenberg Field would likely need to go through one of the smaller companies with leaseholds to establish a sizeable position. Many E&Ps have also tried to find similar success outside of the Wattenberg Field in the greater DJ Basin, but results have been mixed. We really like the Wattenberg Field because it offers good upside potential that is lower risk.
TER: Do companies like Noble and Anadarko have capital available for M&A?
JG: Their ability to raise capital would likely be a little easier than smaller independents, given their size, reputation and longevity as public companies. They are not small companies with unproven management teams trying to raise equity to explore vast acreage positions. The capital markets generally like having the comfort of knowing their capital is being allocated to something that could generate a solid return and is also lower risk. For the larger players, convincing the market that expanding leaseholds in the Wattenberg Field is a good play should be a no-brainer.
TER: How do you set your buy and sell target prices?
JG: Our price targets are generally based on net asset value. We evaluate the company’s current proved reserves and back out any debt and senior securities to get a proved value for the common equity. We then value the upside potential on the company’s acreage by calculating how many wells it could potentially drill, and estimating how much a given well is worth on a net present value (NPV) basis. We then assume that these wells get developed over a number of years to arrive at an NPV of the company’s entire leasehold position. We believe this generates a value that is comparable to what a fair value price would be for the company in an M&A deal, which is often how value is realized for micro-, small-, or mid-cap names.
TER: Do you have any final investing advice for people looking to get into or stay in the junior energy space?
JG: It’s important to identify a strong management team that can execute a development plan. Look for companies with strong assets and good offset operator activity that will allow them to risk share or jointly determine the best and most efficient way to develop the assets.
TER: Thank you very much, Jeff.
JG: You are welcome, Peter.
Jeff Grampp is a senior analyst in the research group at C. K. Cooper & Company, a full-service investment bank. Grampp joined C. K. Cooper & Company in 2011 and has been instrumental in publishing research and assisting in covering E&P companies across the firm’s entire oil and gas universe. Grampp is primarily responsible for covering the E&P sector at C. K. Cooper, with a focus on mid- to micro-cap names. He is currently a CFA Level III candidate and is a licensed FINRA broker: Series 7, 63, 86 and 87. He received his master’s degree in business administration from Chapman University, where he also received a bachelor’s degree in business administration and accounting with emphases in finance and marketing.
DISCLOSURE:
1) Peter Byrne conducted this interview for The Energy Report and provides services to The Energy Report as an independent contractor. He or his family own shares of the following companies mentioned in this interview: none.
2) The following companies mentioned in the interview are sponsors of The Energy Report: FX Energy Inc. Streetwise Reports does not accept stock in exchange for its services or as sponsorship payment.
3) Jeff Grampp: I or my family own shares of the following companies mentioned in this interview: None. I personally am or my family is paid by the following companies mentioned in this interview: None. My company has a financial relationship with the following companies mentioned in this interview: Bonanza Creek Energy Inc. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview.
4) Interviews are edited for clarity. Streetwise Reports does not make editorial comments or change experts’ statements without their consent.
5) The interview does not constitute investment advice. Each reader is encouraged to consult with his or her individual financial professional and any action a reader takes as a result of information presented here is his or her own responsibility. By opening this page, each reader accepts and agrees to Streetwise Reports’ terms of use and full legal disclaimer.
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Serbia cuts rate 25 bps, future depends on government
By www.CentralBankNews.info Serbia’s central bank cut its policy rate by a further 25 basis points to 11.0 percent as it expects inflationary pressures to continue to ease in coming months but it cautioned that its future policy stance would depend on government measures to cut deficits and reform public finance.
The National Bank of Serbia (NBS), which cut its rate by 50 basis points last month due to a drop in inflationary pressure, said May inflation data should confirm its view of declining inflation, with the annual inflation rate returning to the central bank’s target range of 4.0 percent, plus/minus 1.5 percentage points, by October.
In April, Serbia’s inflation rate rose slightly to 11.4 percent from 11.2 percent. Last month the central banks said it expected inflation to return to its target range in the fourth quarter of this year.
Most economists had expected the central bank to keep its rate steady in light of a depreciation in the dinar since mid-May.
The NBS, which intervened last week to slow the fall in the dinar, said its executive board “attributed current developments in the foreign exchange market to trends in international financial markets and great investor risk aversion.”
Today the dinar traded around 114 to the euro, down 1.6 percent from the start of the year, but up from a spike to 118 late last month.
The central bank said it expected the decline in inflation to be sustained by its recent policy measures, lower food prices in the new agricultural season and “additional fiscal consolidation measures that will eliminate uncertainty with regard to the future economic policy.”
Economists have attributed to pressure on the dinar to a report from the International Monetary Fund that said the government deficit would exceed 8 percent of Gross Domestic Product, more than double the 3.6 percent target, unless policies change.
The IMF also said following its mission to Serbia that the central bank had limited room to ease policy until inflation slows and recommended that the government cut spending by at least two percentage points of GDP.
Last month the central bank cut its 2013 growth forecast to 2.0 percent from a previous 2.5 percent.
In the first quarter, the economy expanded by an annual 1.9 percent, sharply up from a contraction of 2.0 percent in the fourth quarter.
Beginning in June 2012, the Serbian central bank raised rates eight times in a row in response to rising inflation – it high a 2012 high of 12.9 percent in October – but then paused in March and April this year before cutting in May.
Uganda cuts rate 100 bps as inflation outlook improves
By www.CentralBankNews.info Uganda’s central bank cut its central bank rate (CBR) by 100 basis points to 11.0 percent to stimulate domestic demand while the outlook for inflation improves and the forecast is cut.
It is the Bank of Uganda’s (BOU) first rate cut since December after cuts totaling 1,100 basis points in 2012.
Uganda’s headline inflation rate in May rose slightly to an annual rate of 3.6 percent from 3.4 percent in April but core inflation eased to 5.6 percent from 5.8 percent, “an indication that inflationary pressures have remained muted,” the BoU said.
The BoU now forecasts that core inflation will stabilise around the bank’s 5.0 percent medium-term inflation target over the next 12 months, with the balance of risks now neutral. In April the BOU forecast core inflation of 1-2 percentage points above the target over the next few months before easing toward the target later this year.
The change in forecast is mainly due to weaker-than-expected household consumption, which is likely to dampen demand side pressures on consumer prices, and a higher-than-expected appreciation of the the exchange rate, which dampens prices of imported consumer goods.
Economic growth in the current 2012/13 fiscal year, which ends June 30, is now forecast to be higher than in 2011/12, driven by a recovery in demand for exports and investments.
The BOU said that in 2013/14 it was unlikely that net export demand would continue to provide the primary source of growth so domestic demand will have to contribute more and household consumption will have to rebound. Investment is also expected to rise, driven by both the public and private sectors.
Last month the BOU projected Gross Domestic Product growth of 5.3 percent in 2012/13 and 6-7 percent in 2013/14.
Private sector credit demand remains constrained by high bank lending rates and structural factors and the BOU said strong credit growth will be important in boosting demand, saying its rate cut should “also be a signal for commercial banks to reduce their lending rates further in order to boost demand for bank credit.”
The BOU said it would maintain its band around the central bank rate at plus/minus 2 percentage points and the margin on the rediscount rate at 3 percentage points.
In 2011 the BOU raised rates to a high of 23.0 percent in response to a rise in inflation to an all-time high of 30.5 percent in October 2011. Inflation then started to drop and hit a two-year low of 3.5 percent in February this year as the central bank slashed rates last year.
Sizemore Capital June 2013 Model Commentary
What now?
This is the question on every income investor’s mind. After a five-month start to the year in which income-focused investments went nearly parabolic, concerns that the Fed might—just might—start winding down its quantitative easing sent the share prices of REITs, MLPs, utilities, and other popular investments into a tailspin.
The JP Morgan Alerian MLP ETN ($AMJ) and the Vanguard REIT ETF ($VNQ)—both holdings in the Strategic Growth Allocation—dropped by 6% and 10%, respectively, from their May 21 highs through June 4, at time of writing.
Some of Sizemore Capital’s favorite income securities held in the Dividend Growth Portfolio—such as Realty Income ($O), National Retail Properties ($NNN), and Martin Midstream ($MMLP) were down by 20%, 17%, and 10%, respectively.
After dramatic reversals like these, it’s easy to panic. But let’s put them in perspective. Even after the May bloodletting, all of these securities are positive for the year, and after including dividends all are up by over 10%. The price correction we saw was simply a shakeout. The hot money had run the prices of these securities up, and when the hot money abandoned them they simply wiped away the speculative froth.
Interestingly, REITs and utilities took a harder hit than MLPs. Though I have no hard evidence to support this, my theory as to why this happened was that MLPs tend to have greater ownership by individual income investors and tend to be less affected by the hot money’s changing moods.
So, back to the original question, what now? In an environment of rising rates, does a dividend growth strategy still make sense?
It does, but only if you do it right. Sizemore Capital has very little exposure to bonds and no exposure at all to slow-growth income investments such as utilities. In this environment—and in any environment of non-zero inflation—future dividend growth is more important than the current payout.
This is why we are overweight in the sectors with what we consider the right mix of decent current income and excellent potential growth in income—sectors such as retail REITs, mid-stream MLPs, and “Big Tech” companies such as Microsoft ($MSFT), Intel ($INTC), and Cisco Systems ($CSCO).
And to be clear, I am by no means certain that the rise in interest rates will go much higher than it already has in the near term. As the experience of Japan proved, market yields can stay low for much longer than anyone expects during a prolonged period of debt deflation and aging demographics.
But to the extent that rates do rise, you want to own assets that stand to benefit from an improving economy and that have room to raise their cash payouts at a rate that will keep pace with rising market yields. On this count, midstream pipeline MLPs and most categories of REITs easily qualify. Rising interest rates raise their borrowing costs and cut growth prospects at the margin. And because these securities have become bond substitutes of late, falling bond prices (i.e. rising yields) mean falling stock prices.
But given that the 10-year Treasury still only yields 2.1%, a 4%+ dividend yield an a high-quality real estate and infrastructure portfolio still makes them vastly superior investments for income investors. The dividend payout can be expected to grow over time with only modest risk of loss, whereas Treasuries are only “risk free” if you ignore inflation.
We may see more turbulence in dividend-focused investments as institutional investors rotate into more aggressive sectors. I’m ok with that, and I intend to use any further weakness as a buying opportunity.
Disclosures: All securities mentioned are held in Sizemore Capital portfolios.
Charles Sizemore is the manager of the Strategic Growth Allocation, the Dividend Growth Portfolio and two other models on Covestor.
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ECB holds rate, trims 2013 growth, inflation forecasts
U.S. Market Shrugs Off Setbacks
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Wall Street just saw its first two-day selloff in a month, but the weakness was nowhere near as intense as it was in Asia, where stocks in Japan tumbled 7% and Singapore suffered its biggest loss in a year.
Despite all the confusion about whether the Federal Reserve is or isn’t close to curtailing its stimulus program, U.S. investors once again showed the willingness to buy off the lows, with stocks finishing with only modest declines.
Wall Street is nothing short of resilient, says Jason Weisberg, Managing Director of Seaport Securities.
“This market has absorbed every negative headline that’s been thrown at it,” said Weisberg. “Whether its geopolitical, economic, corporate earnings, domestic politics, terrorism, the threat of a nuclear strike by North Korea, every negative headline that this market could possibly see has been thrown at it and it has shrugged every headline off that’s been negative time and time again.”
St. Louis Fed President James Bullard may have helped. Speaking in London, he said he doesn’t think the Fed is “that close” to withdrawing stimulus.
Hewlett-Packard (HPQ) was upgraded at Jefferies, and nearly a dozen Wall Street firms raised price targets on the stock one day after the tech company raised its outlook for the year. HPQ shares surged 17% to their best close in just over a year.
After the bell, a net loss at music streaming company Pandora (P) was in line with forecasts, and the revenue outlook for the current quarter is above forecasts. As for its customer base – user growth was 35% above year-ago levels.
On the economic calendar: new home sales. Purchases jumped 2.3% in April with the median price of a new home surging to a record high above $271,000.
Meanwhile, applications for jobless benefits reversed a prior gain. The data coincides with the week the Labor Department takes the survey used for the monthly jobs report.
Not all the data was upbeat, though. Manufacturing activity hit a preliminary seven-month low this month, according to financial data firm Markit.
In European action, stocks were down 2% across the board. Reasons cited: fear of a pullback in stimulus by the Federal Reserve, and weak manufacturing data out of China.
Article By WallStreetDaily.com
Original Article: U.S. Market Shrugs Off Setbacks