Metso corporation

Added Metso Corporation to our portfolio.

"Metso is a global supplier of technology and services to customers in the process industries, including mining, construction, pulp and paper, power, and oil and gas."

During first three quarters of this year (2012) 44,8% of net sales came from mining and construction segment. Paper and pulp related segment also includes recycling and Valmet Automotive. 38,6% of net sales came from this segment. Automation segment was responsible of 11,6% of the top line.

Metso is a global market leader in e.g. grinding mills, mining crushers, pulp and paper control valves, and tissue machines. It has many more products in globally in top 3 positions. About 50% of their sales come from developing markets. Services account for 46% of sales. Their order book look solid with approximately 5 billion euros worth of orders at end of Q3 2012. Half of this is for mining and construction. Net sales of Metso corporation was 5,4 billion euros in the first three quarthers of 2012 and 6,5 billion euros in 2011.

Metso pays good dividend and is expected to pay 2,2 euros per share in 2012. That would be 7,6% yield based on closing price of 28,91 euros per share in Helsinki stock exchange (30.11.12). According to Nordnet bank the P/E of Metso is 12,0 while P/B is 2,1 based on the same closing price. 

Metso certainly is not a defensive pick, but it does have quite a bit of service revenue along with its fat order book to carry it forward even if times are turbulent. I decreased our gold position to get money for this purchase. Going forward I believe companies like Metso are a far better bet than gold which itself does not produce yield. However, our remaing gold positions along with our positions in gold mining companies continue still to be significant part of our overall portfolio.

Helsinki Top 10

I use a service provided by Valuatum.com via Pörssisäätiö to screen stocks listed in NASDAQ OMX Helsinki. Currently the results of my personalized screen look like this:

Rank Company (Score)
-----------------------------
#1 Technopolis (2,9)
#2 Citycon (2,8)
>>#3 Fortum (2,7)
>>#4 Orion (2,6)
#5 Sponda (2,6)
#6 Nokian Renkaat (2,5)
#7 Okmetic (2,4)
#8 PKC Group (2,4)
#9 Ponsse (2,3)
>>#10 TeliaSonera (2,3)

>>#23 UPM (2,0)
>>#79 Nokia (1,0)

Parameters used in screen (weight):
-------------------------------------------
P/B 2012 (15%)
P/E 2011, 2012 (5%,5%)
Dividend yield 2011, 2012 (5%,10%)
ROA 2011 (10%)
ROI 3 year average (5%)
ROE 3 year average (5%)
Turnover increase in past 3 years, 2012 (10%)
Gross Margin (10%)
Profit Margin (10%)
Net Profit increase in past 5 years, 2013 (10%)


Our positions are marked with prefix ">>".

Fortum and Orion are value plays with attractive dividend yield. Besides these two, all others in top 5 are property investment companies. So far I haven't initiated any positions in them. They all seem to have quite different focus within Finnish property market. I haven't yet made up my mind which would be the most interesting one for me to consider.

Our positions outside of Top 10 are UPM and Nokia. UPM is mostly value play with low P/B and attractive dividend yield. Their main business is suffering from declining fine paper usage, but they do have also substantial energy business and vast forest holdings.

Nokia, well, does not probably need any introduction. Like UPM their main business is suffering and the whole company can be considered part value play (due to businesses other than smartphones) and turnaround bet (smartphones).

Talvivaara is in trouble

In a country in which silence is preferable option to 'unnecessary' small talk, public demonstrations do not draw a whole lot of people unless something very upsetting has happened. The 3^rd gypsum waste pond leakage in Talvivaara mine was such event. It came on top of many other incidents in the same mine. No wonder the “Stop Talvivaara” movement has gathered a lot of sympathy lately from the general public. The movement has collected close to 20,000 names into petition to close Talvivaara mine.

The political risk is getting larger and larger. Ville Niinistö, minister of the environment, reportedly has said to protestors that unless he was the minister he would have been among them on that day. You better believe that because he is the chairman of The Greens of Finland. Finnish Police is also investigating Talvivaara on three separate counts of suspected environmental crime.

Ville Niinistö, minister of the environment, speaks to protesters on 14^th of November 2012. Picture by Hanna Nikkanen. Some rights reserved.


Talvivaara has approximately 52000 stockholders in Finland. Among them is husband of ex. minister of the environment Paula Lehtomäki of Centre Party of Finland with 51320 shares and their children with 3560 shares [Talouselämä 41/2012]. Talouselämä magazine also counted that so far they have lost  some 160,000 euros with those positions.

 

Among the biggest shareholders is Solidium, a wholly owned holding company of the State of Finland, with 8,89% of the shares. Pension insurance companies Varma and Ilmarinen own 8,71% and 6,15% of the shares respectively. The State of Finland pension fund owns 0,78% and The Local Government Pensions Instution 0,76%. All of these can be considered holdings for the benefit of general public in Finland.

Besides direct investments in Talvivaara, Finnish Government has high stakes in the mining sector overall. Finland has been consistently ranked as one of the best places in the world for mining investments. There is a mining boom going on in Finland. Finnish Government needs those investments because most mining prospects are in Northern and Eastern Finland where new jobs are badly needed.

Mining investments are made for tens of years and political stability and predictability are extremely important. Thus, it seems unlikely to me that extreme measures would be used such as closing the mine permanently. After all, The Greens of Finland is a rather small party with only 10 seats in the Parliament of Finland. This is not to say that there would not be MPs with sympathies towards “Stop Talvivaara” movement in other parties.

 

Production at the mine started in October 2008 and production ramp up is still ongoing. The current environmental permit is for 30,000 tonne annual capacity and does not cover uranium extraction. The company has been seeking both permit to increase annual capacity and permit for uranium extraction. Given the environmental problems, I doubt that they will get permission to increase volume. On the other hand with all of their production problems they won’t be near their full capacity any time soon.

 

The target for year 2011 was originally set to produce 30,000-35,000 tonnes of nickel. The company has lowered its guidance on Nickel production already twice this year (to 17,000 tonnes) It is unlikely that the company meets even that because their metals recovery plant has been suspended since November 4th 2012. The company told on 21st of November that it has been permitted to re-start the plant and it will ramp it up by 25th of November.

 

Even before the massive leakage from gypsum pond, the company had suspended ore production because unusually heavy rains forced the company to use the open pit mine to store some 1,7 million tons of excess water. This does not affect metal production potential short term because so much ore is stored in the heaps. However, it won’t certainly help them either.

 

The Talvivaara mining company will make this year net loss far bigger then the net loss of 10,5 million euros last year. Net loss for the first three quarters alone has been 44,5 million euros. At the end of Q3 (30th of September, 2012) the company had 87,3 million euros of cash and cash equivalents. Debt level stood at 601,9 million euros at the end of the quarter. Debt-to-equity ratio stood at 140,6%.

 

Analyst estimate according to Kauppalehti (kol 21.11.12) that the company might need up to 150 million of extra funding. Talvivaara’s management is admitting that their cash position is challenging on mid to long term. This means they will need more funding one way or another. This isn’t good news for the current shareholders.

 

I conclude my post with a quote from my previous analysis on Talvivaara:

"There is nothing Talvivaara can do about Nickel prices. There is, however, a lot it can do about environmental problems and bad press. If not handled properly these might become blocking points for uranium extraction and ramp up to full capacity (not to mention production expansion / mine area expansion)."

 

 

Full disclosure: The author does not have any positions in Talvivaara and there are no plans to initiate any in the immediate future.

 

Comparison of offshore oil and gas drill contractors

About two yeas ago Seeking Alpha published my blog post titled The End Of Oil's Golden Age. That was my first article with them and so far the only one that have made to editor's picks list. I recommend reading it as a background for my interest in oil and gas sector and drilling contractors in particular.

Back then, the offshore drill contractors and rig owners popped up in my stock screens often since they (then) got the right stuff: Growing revenues, relatively low debt burden, excellent margins, low valuations in terms of P/E, P/B and price per cash flow. Back then I took a look at four companies listen in USA: Transocean (RIG), Diamond Offshore Drilling (DO), Noble Corporation (NE) and Atwood Oceanics (ATW). Since then I have added Seadrill (SDRL) and Ensco (ESV) to my list of companies to follow from this sector.

Summary of selected offshore drill contractors listed in USA (data source: finwiz.com)

Compared to Fred Olsen Energy (listed in Oslo, Norway) these companies are much larger apart from Atwood Oceanics, which is of same size in terms of market cap. Compared to two years ago the debt burden of many companies have grown considerably. They seem to take advantage of low interest rates and have ordered new deep water drill ships and rigs.

Fred Olsen Energy compares quite favorably to these companies. It has lower P/E (2011) and far better ROE (Return on equity). P/B on the other hand is on the high side while P/S on the low side. Debt burden is about average (0.7x equity). Seadrill has by far the most long term debt (1.5x equity). That's too much for my taste. ATW, DO and ESV have least long term debt per equity (between 0.3 and 0.4 times equity).

Dividend yield isn't particularly good in the companies listed in USA. Only Seadrill offers excellent dividend at 8.6%. The next best, Ensco, is expected to pay 2,7%. These estimates, listed in finwiz.com, seem to assume that last year dividend level is kept also next year.

I used to hold some Noble Corp. stock, but sold that at some point of time. I continue to hold Fred Olsen Energy (see previous post).

Fred Olsen Energy and deep waters

It's been a while since I took a good look at Fred Olsen Energy (Oslo OSE: FOE), which according to company web site

"provides exploration and production services to the offshore oil and gas industry building on 150 years experience in shipping and more than 35 years in offshore drilling." 

Byford Dolphin oil exploration rig in dry dock at Invergordon (Scotland) on 2008 (source: User Jetset / Wikipedia)

We have had that stock now over 2 years in the portfolio. At the time of writing it had closed at 255 NOK about +44% above our purchase price of 176,50 NOK in Oslo Børs (stock exchange of Oslo, Norway). The yield has been good. They have paid 20 NOK dividend per share this year and last year making the yield 11,3% p.a. for the original investment. However, the company has stated to pursue strategy to pay a dividend of NOK 10 per share. In the last two years the company has paid extraordinary dividend of NOK 10 per share. A concervative future yield estimate is thus to be calculated with NOK 10 per share meaning 3,9% yield at NOK 255 stock price level.

Market cap of the company is NOK 17 billion (about USD 3 billion). P/E (2011) is 8,2. This assumes net result after tax to be NOK 2083 million (result for 2011). The company has been making about NOK 2 billion net result for last 5 years except for 2009 (2,7 billion) and for 2007 (1,4 billion). Nordnet gives the following financial figures for current share price of NOK 255:

• ROE 28%
• P/E 8,7
• P/B 2,4
• P/S 2,8 

The income statement for the first half of 2012 looks solid. With total revenues of 3348 million NOK the company delivered net profit of 984 million NOK. That's 29,4% out of revenue! The balance sheet looks OK to me. Most of the assets are tied into property, plant & equipment (drill ships and rigs etc.). There is enough cash to cover for twice the amount of current interest bearing debt. In general current assets are >50% bigger than current liabilities. Equity at 7667 million NOK is bigger than non-current interest bearing debt at 5231 million NOK. To me it seems the company is not overly leveraged.

Net cash flow from operating activities look good. However, the company has been making sizable investments in 2Q 2012 and therefore net change of cash has been negative. Dividend of 1325 million NOK paid in Q2 2012 is less than net cash flow from operating activities from 1H 2012 alone (1606 million NOK) so even the elevated dividend level of NOK 20 does not look high compared to cash flow.
 

The Company, subsidiaries and major owners

Fred. Olsen Energy ASA, headquartered in Oslo, Norway,  is a holding company and provides management services to the subsidiaries within the Group:

• Dolphin Drilling AS (HQ Stavanger, Norway, 100% owned)
• Dolphin Drilling Ltd. (HQ Aberdeen, Scotland/UK, 100% owned)
• Harland and Wolff Group Plc. (HQ Belfast, Northern Ireland/UK, 92.2% owned)

The drilling segment delivers practically all of the net result. The Engineering & fabrication segment (Harland and Wolff) is small in comparison.
 

The Dolphin Drilling companies form the drilling contracting business activities of Fred. Olsen Energy ASA.

 "Dolphin Drilling is one of the longest established independent drilling contracting companies in the offshore arena tracing its roots back to the earliest offshore exploration activity in the North Sea in the mid nineteen sixties. The Fred Olsen family’s interest pre-dates this with a history in shipping activity stretching over 150 years."

The Olsen family is a major shareholder (53.4%) via their holding companies:

• Bonheur ASA
• Ganger Rolf ASA

The Fleet

 

 

 

 

Fleet summary. Information from company web site and annual report 2011.

 

The offshore fleet of Fred. Olsen Energy ASA with subsidiaries consists of two deepwater units and six mid-water semi-submersible drilling rigs in addition to one accommodation unit. The Group has two newbuilds under construction, an ultra deepwater drillship scheduled to be delivered in 3Q 2013 and an ultra deepwater semi submersible for harsh environment scheduled to be delivered in 1Q 2015.

 

Contractual situation looks pretty good. There are long contracts for both drill ships with Anadarko Petroleum Co. There is also long contracts for Byford Dolphin and Borgsten Dolphin. Rest are ending between Q4 2012 and Q1 2014 according to company web site.

 

Deepwater drilling vessels - semisubmersible and drilling ship (source: Wikipedia)

 

It's worth to note that Blackford Dolphin, the deep water semi-submersible drilling rig, was estimated to be worth 3459 million NOK at end of 2011 according to annual report. Alone that's about third of net book value of all their rigs and drillships. Basically over half of assets were tied to two deep water units and the ultra-deep water Bolette Dolphin drill ship under construction at end of 2011. With the ultra-deep water semi-submersible drilling rig targeted to be finished 2015 the company will have significant portion of company net assets in the deep water and ultra-deep water segments.

 

The definition of "deep water" seems to vary in the industry and has shifted over the years with technical advances. This company considers 1000-1750 feet mid-water, while U.S. government definition of deep water shifted from 1000 feet to 500 feet after Deepwater Horizon -accident in Gulf of Mexico. The 500 feet limit seems to come from the fact that the intervention in the well at the seafloor switches from divers to Remotely Operated Vehicles (ROVs) at about 500 feet. A government report from UK concluded this also to be an obvious threshold for deep water operations. According to this definition all the the assets of Fred Olsen Energy are "deep water" or "ultra deep".

 

Regardless of the definitions, it seems that the offshore oil exploration and production is moving to ever deeper depths. An interesting perspective is that 162 year old oil industry started deep water exploration in 1975 and production 20 years later in 1995. Anyway, deep waters is where the day rates are today the highest and that's also where the demand increasingly is likely to be for drill ships and rigs.