Here we are in September, nearing quarter four of 2022. In our busy lives, as we navigate a weak economy, the ever-rising cost of living in SA and the constant load-shedding, we tend to forget what a tumultuous year it has been.
In late February Russia jackbooted its way into democratic Ukraine. Everything changed after that; sanctions hit Russia, and the retaliation and consequence of its actions led to a further push in already elevated soft commodity prices. A global rise in food inflation and in all forms of energy followed.
The markets were sent reeling. Oil prices ran, and Russia used the export of gas to Europe as an economic weapon. The effect will be weaker EU economic activity, cutbacks in some key products — including ammonia and fertiliser — and lower global growth, unless you are a country lucky enough to be a major oil and gas producer.
I recently attended the AGM of all the JSE-listed subsidiaries of Hosken Consolidated Investments (HCI). All were interesting. (There’s a company review of Deneb in this issue.) There was a spirited virtual attendance, and CEO Johnny Copelyn, who sat with me in the HCI Sea Point boardroom for several hours, was in a chatty and jolly mood.
He has every right to be. Many of the underlying HCI assets are recovering strongly, especially the hotel, gaming and leisure divisions within Southern Sun and Tsogo. The industrial assets of Deneb and Frontier Transport are no cause for sleepless nights, and eMedia is expanding nicely, though it will have a tougher year ahead due to the softness in advertising — TV advertising had boomed during the post-pandemic economic reopening, but this is now slowing together with the economy, and liquor businesses are advertising less.
However, the star turn at the AGM was HCI. In early February it was trading in the R70s on a fat discount to NAV. Then the sniff of oil from a UK blog about the exploration sector set hearts racing.
HCI has, for some years, had an indirect stake via Africa Energy Corp in several oil blocks off the coast of Namibia and SA. TotalEnergies, the giant French oil major with material African interests, had seemingly hit it big in a block called Venus off Namibia. HCI had a 10% stake in that block.
Within the next year to 18 months HCI could be a different vehicle, all because of an oil well
Initial reports suggested it was a JR Ewing-type find of more than 3-billion barrels. Evaluations are still shrouded in secrecy. HCI said little until it made a February 24 Sens announcement about a “light oil discovery”. But the company had already started trotting higher in the preceding week, as the UK blog news leaked into the market. So when HCI gave an inkling on Sens of what was happening, the stock was off to the races. By the end of April, the company was at R167 a share and, as I write, the stock is trading at R188 and in the year to date is ahead 160%. It’s been a real gusher.
HCI now trades at a 6% premium to NAV and much of this is due to the great unknown — how much oil is down there, and what could HCI’s 10% stake be worth? At the AGM little was given away, but Copelyn did say that a second well to test flow and recoverability would be drilled by year-end, and that by the next AGM, clarity would be gained about the size and value of Venus. Estimates of HCI’s stake being worth R9bn-R20bn have been bandied about in the market.
HCI has stated that it will sell its Venus stake as it simply cannot afford to take up its rights to production. That cost may be $10bn-$15bn.
This oil news is what’s driving HCI. The cash windfall will be a boost for Copelyn. It will enable HCI’s central debt to be repaid, and then there will be hope for some restructuring and value unlock from the investment holding company. Within the next year to 18 months HCI could be a different vehicle, all because of an oil well. And there are other wells that also offer opportunities, so Venus may not be the last oil venture for HCI.
The easy money at the company has been made, but the JR Ewing of Sea Point may just yet surprise us. For that reason, I’m holding on to my HCI shares.
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