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SMALL CAP SHARE IDEAS: Union Jack Oil spreads its bets with three promising onshore assets

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 Union Jack Oil has a simple business model.

‘We cherry-pick what we think are the nicest deals around and take an interest,’ says David Bramhill, chief executive.

As the name suggests, these are in the UK and all onshore.

‘We like 10 per cent -20 per cent stakes, so if something goes wrong, you haven’t killed the company,’ says Bramhill.

Union Jack Oil is an onshore oil and gas exploration company

Union Jack Oil is an onshore oil and gas exploration company

Union Jack Oil is an onshore oil and gas exploration company

Onshore in the UK, there is a 40 per cent – 50 per cent and sometimes even a 60 per cent chance of success, he says, unlike offshore where the odds can rise to an 8:1 shot.

‘And we don’t do 8:1 bets,’ he adds.

Recent success with the drill bit at West Newton in East Yorkshire suggests while it might sound simple, the strategy can also be very effective.

Union Jack took a 16.67 per cent stake in West Newton at the end of 2018 ahead of a drilling programme designed to prove what was believed to be a sizeable gas discovery.

Results in June from the A2 appraisal well indicated there was a sizeable gas discovery, but subsequent work has also indicated an additional bonus.

Analysis from the operator suggests that the Kirkham Abbey reservoir at West Newton might prove to be among the largest oil discoveries so far made onshore in the UK.

According to the latest update, Kirkham Abbey contains 146.4million barrels of oil in place and 211.5billion cubic feet (bcf) of gas on a base or most conservative estimate.

In the best-case scenario, these numbers rise to 283million barrels of oil and 265.9 bcf of gas. Even at the base case level, the numbers are a significant upgrade to the 2017 figures contained in the current competent person’s report.

‘The estimated resource volumes therefore firmly categorise West Newton as having significant ‘company maker’ potential in our view,’ according to SP Angel, Union Jack’s broker.

An ongoing extended well test of A-2 is underway, which will more accurately measure how much is being produced.

Next year will also see more appraisal drilling with wells at B1 and B2 that SP Angel suggest has the potential to boost the value further as the geology of the Kirkham Abbey reservoir becomes better understood.

A 3D seismic programme over other possible prospects within the licence area is being considered.

West Newton, though, is only one of three potentially game-changing irons in the fire for Union Jack. At Wressle, Union Jack has a 27.5 per cent working interest.

Last week, a public inquiry into whether to allow the Wressle development concluded within three days instead of the six days originally set aside. North Lincolnshire Council presented no evidence at the inquiry.

Shortly after the inquiry’s conclusion Union Jack said it expected to get a verdict after the general election on 12 December but before the end of the year.

If development is allowed, first commercial oil is expected to flow at 500 barrels per day gross, which brokers suggest would generate around $3million a year in revenues net to Union Jack with an oil price around the $60 a barrel mark.

Union Jack also has a 22 per cent stake in the Bicscathorpe development in Lincolnshire, where an independent reassessment of a well, drilled earlier in the year, has identified a 35million column of good quality oil.

However, the consortium members think the main target at the prospect has yet to be tested.

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‘The primary target reservoir at Biscathorpe, the Basal Westphalian sandstone, was likely absent at the Biscathorpe-2 location and remains untested by the well.’

Next steps will be either a sidetrack to the suspended Biscathorpe-2 well or reprocessing 3D seismic data to identify a new location.

Union Jack still believes Biscathorpe remains one of the UK’s largest onshore unappraised conventional hydrocarbon targets.

The company’s net cash in September amounted to £2.8million and if Wressle is given the go-ahead that will give a boost to cashflow reasonably quickly.

Oil production in the UK is a political issue but Wressle, like Union Jack’s other two main assets, is conventional and none of its projects will involve fracking now or in the future, it says.

SP Angel upgraded its price target for Union Jack to 0.84p following the West Newton oil estimates. That compares to a market price of 0.24p, valuing the company at £30million, and that points to a lot of upside for the stock if it is right.

 

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Onion farmers harvest premature crop to cash in on high prices in mandis

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The significance of the current arrivals can be gauged from the fact that the Lasalgaon mandi alone witnesses 22,000-25,000 tonnes of arrivals every day during the peak harvesting season

Farmers in Nashik district, Maharashtra — a major producer of onion— have started harvesting the premature crop to cash in on the high prices in mandis.

Farmers expect prices to decline on increasing import and arrivals from local sources. Before that, however, they want to take advantage of high prices by selling premature bulbs.

Good-quality onion was quoted at Rs 93.50 a kg on the higher side on Wednesday in the benchmark Lasalgaon mandi of Nashik — Asia’s largest onion selling market yard — a rise of Rs 2.60 a kg from its prevailing prices on Tuesday.

On the lower side, however, the poorest-quality onion was selling at Rs 25.50 a kg on Wednesday as against Rs 20 a kg on Tuesday.

Thus, the model price of onion works out to Rs 70-75 a kg in Lasalgaon, translating into Rs 100-125 a kg in the retail markets of the country. Early 2019, however, were hovering around Rs 2-3 a kg in the wholesale mandis of Nashik.

“The early crop arrival from Rajasthan exhausted in a few weeks this year. The seasonal crop was reported to have been damaged in major growing states, especially Maharashtra, due to excessive rain. Farmers are bringing in pre- and un-matured crops for selling in mandis. Around 25 per cent of arrivals in Lasalgaon mandi is of pre- and un-matured onion of the current season,” said Jaydatta Holkar, chairman, Lasalgaon mandi.

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Onion arrivals in the Lasalgaon mandi were reported at a mere at around 400 tonnes (400 trucks of around 1 tonne each) on Wednesday as compared to 440 tonne on Tuesday.

The significance of the current arrivals can be gauged from the fact that the Lasalgaon mandi alone witnesses 22,000-25,000 tonnes of arrivals every day during the peak harvesting season.

“Since the government has imposed a stock limit on stockists and retailers, farmers are bringing in limited quantities of the new season crop to avoid spoilage. Traders, in turn, dry their purchased onion in the sun to reduce moisture and fetch higher price,” said Sanjay Sanap, an onion wholesaler in Nashik.

India’s annual onion production is estimated at around 23 million tonnes. With an annual export between 3 and 4 million tonnes, India’s onion consumption is projected at 19-20 million tonnes.

Meanwhile, MMTC has contracted for 11,000 tonnes of onion import from Turkey after the government-owned commodity-trading company signed an import deal of 6,900 tonnes earlier to increase its supply and eventually cool down prices.

Holkar, however, has demanded the government withdraw the stock limit, which was halved on Tuesday to 5 tonnes for retailers and 25 tonnes for wholesalers from their earlier limits of 10 tonnes and 50 tonnes, respectively.

First Published: Sat, December 07 2019. 23:33 IST

Source: Business Standard

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Softening cotton prices revive sentiment for spinning mills in H2FY20

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Consumption seen rising 5% to 28.8 mn bales this year, compared to 27.4 mn bales last year

Spinning mills in the country are on the cusp of a revival in the second half of the current financial year due to a sharp decline in raw material prices as well as stable realisations from yarns.

prices have declined by more than 8 per cent since April with the benchmark MCX variety ginned trading at Rs 18,650 a bale (170 kg) on Saturday against Rs 22,600 a bale in the first week of April. By contrast, however, cotton yarn prices remained stable at Rs 250 a kg of fair trade combed of 42 count variety.

are currently subdued. But steady improvement in cotton yarn demand works out better for spinning mills,” said Atul Ganatra, president, Cotton Association of India (CAI).

R K Dalmia, senior president, Century Textiles and Industries, believes that cotton price decline may not necessarily prompt fabric manufacturers to cut their product prices. However, it would certainly help improve profitability in the quarters to come.

Meanwhile, the Indian cotton scenario was adverse for spinners in H1FY20 as prices fell significantly globally to around 50- 60 cents/lb (pound) whereas domestic cotton prices were stable in the range of 80 cents/lb (owing to shortage of the cotton crop).

On the other hand, international yarn rates corrected with a steep decline in cotton prices.

“Despite more than 8 per cent correction in domestic cotton prices since April, which narrowed the premium over international cotton, domestic cotton continued to be expensive till October (around 2 per cent premium in October against 7 per cent premium in the quarter ended September).

This affected the competitiveness of domestic spinners,” said Jayanta Roy, senior vice-president and group head, corporate sector ratings, ICRA.

In a further support to the cotton price decline, the Cotton Advisory Board, under the Union ministry of commerce, has forecast India’s cotton output to rise by 9 per cent to 36 million bales this year compared to 33 million bales last year.

Since the board has estimated cotton consumption to rise by 6 per cent (3 per cent less than the growth in production), the fibre’s prices are expected to remain subdued this year. The board forecasts that consumption of cotton by mills will rise by 5 per cent to 28.8 million bales this year compared to 27.4 million bales last year.

Therefore, in the first six months between April and September, the country’s average monthly exports (yarn) fell by 28 per cent to 74 million kg against the average of 102 million kg in the previous year. Cotton yarn exports to China for the first six months dropped to 20 million kg against 40 million kg in the corresponding period last year.

“Recently, Indian cotton prices fell, with the new cotton trickling in, in tandem with international prices. Also, yarn prices have remained stable, thereby improving the profitability scenario for Indian spinning companies like Vardhman Textiles (VTL). Hence, we believe H2 should be better than H1 in terms of spread for VTL that continues to operate at full yarn capacity,” said Bharat Chhoda, an analyst at ICICI Securities.

Hoping for revival

• Cotton prices down 8% since April, yarn prices remain stable

• Spinning mills post weak profit in H1FY20

• Cotton Advisory Board forecasts 9% jump in cotton production

• Indian cotton situation was adverse for spinners in H1FY20 as prices fell significantly globally to around 50-60 cents/lb

• Spinning mills hope for revival in sentiment in H2FY20

First Published: Sat, December 07 2019. 23:29 IST

Source: Business Standard

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FM hints at I-T rate cuts, more stimulus measures to boost slowing economy

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Says govt is taking steps towards a harassment-free taxation regime

Finance Minister on Saturday said the government was looking at lowering and rationalising the personal rates, as well as working on more sector-specific measures to boost the slowing

“(This is) one among the many things we are looking at,” she said at the Hindustan Times Leadership Summit here, while responding to a question on the personal rate cuts and rationalisation.

A task force headed by Akhilesh Ranjan, former member of the Central Board of (CBDT), has already submitted its report to the finance minister, but its contents have not been made public. It is learnt to have recommended an increase in the threshold limit from the current level of Rs 2.5 lakh a year, and overhauling the tax slabs.

Sitharaman also said the government was taking steps towards creating a simplified taxation structure to ensure that assessees were not harassed. “I am duly following it. We have moved to faceless scrutiny in We have already started expanding it to indirect taxes as well,” she said.

She said she had asked businessmen to come to her office or that of the revenue secretary in case there was any harassment by tax officials.

The finance minister said the government wanted to remove complexities in the entire taxation structure in the long run. “We want to make sure that there are no ifs and buts in the entire taxation structure.”

Sitharaman was a bit evasive when asked whether more stimulus measures would be announced, but did say that the government was working on them. “If I say yes, you will ask when. You will get back to me to say ‘are you not too close to the Budget?’ I will not say yes…. At the same time, I will not say no, because we are working on them.”

She, however, said the government would remain within the glide path recommended by the FRBM (Fiscal Responsibility and Budget Management) panel, even as many economists were telling the government to pause on the path and give more stimulus.

The finance minister said the public and private sector banks had distributed nearly Rs 5 trillion to the people in the hinterland as part of the outreach drive to boost consumption in the month of October and November.

The latest official data showed that gross domestic product (GDP) grew at 4.5 per cent during July-September, its slowest pace in over six years.

“I would like to tell you that the 4.5 per cent figure is for July, August and September. Post July, through August and September, we kept coming out with announcements and interventions. Nearly Rs 5 trillion were given in 400 districts of the country, in the hinterland and not in metropolitan cities,” she said.

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Besides, she said, 72 million farmers benefited from the first two tranches of PM-Kisan, which gives Rs 2,000 each to farmers every four months. “The figure has come down a bit after that. But we are making sure that these accounts are Aadhaar-seeded so that the money does not go into the ghost accounts,” she said.

Without elaborating much, she said goods and services tax would be streamlined. “We shall have very good and streamlined GST.” She said distortions had crept into the GST structure as the rates were cut and input tax credit got smaller. “In enthusiasm to reduce more taxes, credit became miniscule and the framework agreed up on the phase one of GST got distorted.”

On the states’ concern over delay in the payment of compensation to them, she said the cess component of GST was not adequate to compensate states. “State finance ministers met me. Their concerns are genuine. We will honour our commitment.”

To a query whether the GST rates would be hiked, she said it was a prerogative of the GST Council and she did not want to pre-empt it.

On the current problems of the financial sector, she said banks started getting into the role of long-term finance institutions, resulting in the asset-liability mismatch. Later, non-banking finance companies also saw this mismatch, she added.

“The RBI is constantly monitoring the health of NBFCs and I am in touch with them. I don’t want anyone to fall off the cliff,” she said.

On the credibility of the official data, she said the government was seized of the matter.

The finance minister said while the target of $5 trillion was a macro picture, the government wanted to ensure that everyone had a house, each house had a toilet and electricity, and that people had good health insurance.

First Published: Sat, December 07 2019. 23:28 IST

Source: Business Standard

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