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Beaufort Securities Breakfast Today including Nighthawk Energy …

The Markets

Market opening: Markets are likely to open higher today. FTSE 100 futures were trading 16 points up at 7:00 am.

New York: S&P 500 reached a fresh high, as investors grew optimistic of the Fed s policy announcement expected later today. Shares of telecoms and consumer staples witnessed good demand.

Asia: Equities traded higher on expectations that the Federal Reserve will maintain its easy money policy at least until the end of the year.

The Nikkei closed 1.2% up and Hang Seng was trading 1.1% higher at 7:00 am.

Continental Europe: Markets traded higher after and Saipem announced excellent results, fuelling a surge in oil sector stocks. Germany s DAX and France s CAC 40 gained 0.5% and 0.6%, respectively.

UK small caps: Yesterday the FTSE AIM All-Share index closed 0.59 points (+0.07%) higher at 805.29.

Today s news

Japan s industrial output rises in September

Japan s industrial output increased 1.5% m-o-m in September, reversing a 0.9% decline last month, on stronger production of vehicles and electronic components. Production is forecast to jump 4.7% m-o-m in October, as per the Ministry of Economy, Trade and Industry.

China s short-term interest rates climb to highest level in four months

China s money-market rates have again started rising significantly, signalling a repeat of the credit crisis that rattled markets in June this year.

Yesterday, the People s Bank of China tried to inject confidence into the market by issuing 13bn through seven-day reverse repo, but failed. The benchmark seven-day repo was quoted at 5.03% by market close yesterday, according to a fixing by the National Interbank Funding Centre.

Company News

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declared results for Q3 2013 yesterday. Total revenues rose 5% y-o-y to US$ 96.6bn.

The adjusted replacement cost profit (RCP) rose 36.1% from the previous quarter to US$ 3.7bn, but was down 26.4% from Q3 2012. Profit attributable to shareholders was US$ 3.5bn versus US$ 5.3bn in the same period previous year. In the upstream, results came in poor due to divestments and higher non-cash expenses, which was partially offset by higher realisation rate for liquids and gas, increasing underlying volumes and a one-time benefit due to approval for cost pooling settlement agreements between the owners of the Trans Alaska Pipeline System (TAPS).

Underlying production advanced 3.4% to 2.2 billion barrels of oil equivalent per day (bboepd) due to new project volumes in the North Sea & Angola and the absence of seasonal weather-related downtime in the Gulf of Mexico. The full year reported production is expected to drop due to effect of divestments, while the underlying production for the year is expected to rise. Along with its partners, confirmed the installation of the Clair Ridge platform jackets in the North Sea and made significant gas discoveries in Salamat in East Nile Delta and in the Cauvery basin of India.

entered into three farm-out agreements with Kosmos Energy covering three blocks in the Agadir Basin, offshore Morocco post Q3 2013. In the downstream business, the Whiting refinery modernization project remains on track to start the remaining new units associated with the investment by the end of Q4 2013, and the full run-rate capacity is expected to be achieved during Q1 2014. The company sees lower refining margins for the fourth quarter due to high gasoline stocks, new competitor capacity additions and lower seasonal demand.

The lubricant business remained challenging with a marginal increase in the underlying RCP to US$ 325m. The petrochemicals witnessed continuing pressure on margins and volumes, but underlying RCP turned positive to US$ 51m. expenditure would be reported as a separate operating segment after the sale & purchase agreement on 21st March 2013.

Capital expenditure for the quarter stood at US$ 5.9bn and all of it was organic. The organic capital expenditure in 2013 and 2014 is expected to be between US$ 24bn-US$ 25bn for each year. plans to divest up to US$ 10bn of assets before the end of 2015.

The basic earnings per share (EPS) fell to 18.57 cents from 27.74 cents. The Board hiked dividend by 5.6% to 9.5 cents, payable on 20th December 2013.

Our view: , one of the leading oil & gas companies in the Europe, has reported a lukewarm result for the quarter. Revenue rose 5% from comparable period last year, but the RCP dropped as much as 26.4%.

The company also reported decline in profits and the total upstream production. s outlook for production in the upstream and refining margins in the downstream also stood negative. Overall, the downstream business experienced tough market environment.

However, also brought about some positive news for the investors, in terms of some new discoveries and further progress at the Whiting refinery modernization project. Besides, the announced hike in the quarterly dividends and the huge divestment plans ensure significant cash returns to the shareholders. However, these asset sales, though increasing the immediate returns, point towards the struggling state of the industry due to rising costs.

Given the tough trading environment faced by currently, its future prospects look a little uncertain. We downgrade our view on the stock to a Hold.

Lloyds Banking Group ()

Lloyds Banking Group announced the interim management statement for Q3 2013 and for the nine-months ended September, yesterday. Underlying profit for the quarter jumped 83% y-o-y to 1.5bn and spiked 136% to 4.4bn for the nine months ended September.

The performance for the nine months was helped by a 13s increase in net interest margins based on total underlying income to 2.06% and a 127s hike in the return on risk weighted assets to 2.01%. On a statutory basis, the group reported 1,694m profit against a loss of 607m last year, which included an additional charge of 750m for legacy PPI business for the wrongly sold loan insurance. The net post-tax profit stood at 280m versus a post-tax loss of 1,036m last year, leading to an EPS of 0.4p vis- -vis a loss per share of 1.6p last year.

Group loan to deposit ratio improved to 114%, while core ratio was maintained at 100%. The non-core assets reduced 29% to 70bn on a pro forma basis. In the core business, underlying profit surged 20% to 5.5bn, returns on risk-weighted assets increased 60s to 3.17% and the margins improved 12s to 2.44%.

The core loans & advances climbed 4.7bn to 430bn for the nine months and mortgage lending returned to growth in Q3 2013. In September, the group launched TSB a new bank and re-launched Lloyds Bank. UK government partially sold off its ownership in the bank in September.

Lloyds expects the net interest margin to be marginally up at 2.11% for 2013. The non-core assets are expected to be about 66bn, with non-retail non-core assets of 26bn at the year end. The costs and capital position guidance for the year was maintained at the same level.

Our view: Lloyds Banking Group delivered strong results in the first nine months of current year.

The underlying profits have jumped significantly on account of improving margins and improving loan figures. Despite being hit by the PPI legacy claims, the profits have remained at attractive levels. The group put in great focus on customer relationships through constant efforts for service improvements and complaint reduction.

The key ratios including the loan to deposit ratio have been kept at satisfactory levels. Additionally, the launch of TSB and Lloyds Bank is likely to enhance brand positioning for the group. Based on the current solid performance, we expect the group to start the dividend payments from the coming quarter.

Considering the ongoing recovery in the UK economy, strong fundamentals of Lloyds and with the mortgage lending growth back on track, the future performance outlook for the group looks positive. We assign a Buy rating for this stock.

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Yesterday, Nighthawk announced a farm-out agreement with an undisclosed private, Denver-based oil and gas company (farmee) for 4,572 acres of its 100% owned and operated Jolly Ranch project in the Denver-Julesburg Basin, Colorado. The farmee company would acquire a 50% working interest (WI) and 40% revenue interest into the project by drilling three vertical wells on the farm-out acreage as the operator.

Wells would be drilled with primary targets in the Pennsylvanian Cherokee and Marmaton horizons. This drilling is expected to start by 30th April 2014. The farmee would also carry all costs for Nighthawk s remaining 50% WI through to the tanks.

Well locations would be mutually agreed between the two parties. Nighthawk and the farmee would also exchange 3D seismic information, the agreement stated.

Our view: This recent deal would help in acquiring funds to improve the commercialisation and development prospects of the Jolly Ranch project. The farmee s prior experience at the nearby located Pennsylvanian Cherokee and Marmaton horizons provides further benefits to Nighthawk by enhancing the success probability of the planned drill operation.

Besides, the start of drilling at the Big Sky 12-11 well at Arikaree Creek two weeks back provides additional upside to Nighthawk. Recently, the company had reported an increase in the combined production from Smoky Hill and Jolly Ranch projects to 1,661 barrels per day (d) in August from 1,512 d in July. The strong likelihood of further increase in the oil prices brightens the future prospects for the company.

Given the aggressive exploration & development strategy of the company combined with a highly productive set of assets, we believe there is a significant opportunity for the company to expand its production and resource base, going forward. We maintain a Speculative Buy rating for the stock.

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Nostra Terra provided its third quarter operational and production update yesterday. During the period, the company reached a decision to rework the CT3 (Gant 1-27H) well (12.58% WI).

After the drill out, an average production rate of 471 average barrels of oil equivalent per day (boepd) was achieved in the 10 days of production, up from the original rate of 348 boepd. The CT5 (Kirtley 1-34H) well began production during Q3 2013 at an initial rate of 448 boepd, more than double the original expectations. The CT7 (LSEPMU 7-3H) well evaluating the Mississippian formation has been drilled and completed, and is currently undergoing production testing.

At present, five wells at Chisholm Trail are under production, with several new wells expected to be drilled by year end. The third Verde well is also undergoing production testing currently.

Our view: The third quarter has been quite eventful and positive for Nostra Terra. The company has registered good progress at the Chisholm Trail prospect during the period.

The production upgrade for the CT3 (Gant 1-27H) well and the encouraging initial production for the CT5 (Kirtley 1-34H) well are notable achievements of the company for the quarter. The production testing at two wells and the start of drilling at prospective targets offers further upside potential. The recent acquisition of new acreage in the Chisholm Trail prospect gave the company an exposure to 21 prospective drilling locations.

Given a strong operational performance for the quarter and the lucrative potential of the company s assets, we remain optimistic about a meaningful addition to the share price, and thus keep our Speculative Buy rating for the stock.

Economic News

UK mortgage approvals

The number of mortgage approvals for house purchases in the UK rose to 66,735 in September, reaching the highest level since February 2008, against a market estimate of 66,000, the Bank of England said yesterday. Mortgage approvals for August were revised upwards to 63,396 from a previously reported 62,226.

US PPI

US producer price index (PPI) dropped 0.1% m-o-m in September following an increase of 0.3% in August, the Bureau of Labor Statistics said yesterday. The reading was contrary to the market forecast of a 0.2% rise.

Core producer prices, which exclude food and energy, advanced 0.1% after a flat reading in August and were in-line with the economists expectations. Y-o-y, prices were up 0.3% in September, slower than the August spike of 1.4%, and market expectations of a 0.6% increase. Core prices advanced 1.2% y-o-y in September, as expected by the economists, vis- -vis a 1.1% growth witnessed in the previous month.

US retail sales advance

US advance retail sales declined 0.1% m-o-m in September after rising 0.2% in August, the Commerce Department said yesterday.

Economists had expected an unchanged reading for the month. Most of the decline came from a 2.2% fall in sales of motor vehicle and parts excluding which retail sales rose 0.4% m-o-m in September compared to a 0.1% increase in the previous month. For the year, retail sales surged 3.2% in September.

US consumer confidence index

The US consumer confidence index dropped sharply lower to 71.2 in October from an upwardly revised 80.2 in September, the Conference Board said yesterday.

Economists forecasted the index to drop slightly to 75. The expectations index plunged to 71.5 in October from 84.7 in September, while the present situation index declined to 70.7 from 73.5. Consumers expecting business conditions to improve over the next six months slid to 16% from 20.6%.

The outlook for the labour market exhibited further pessimism, with the proportion of consumers expecting more jobs in the months ahead declining to 15.3% from 16.1%.

However, the proportion of consumers expecting their incomes to increase rose to 15.8% in October from 15.1% in September.

Taken from:
Beaufort Securities Breakfast Today including Nighthawk Energy …

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