Kistos Holdings Analysis - What is going on with one of the most promising companies of 2022?
Furthermore, The Week in the Markets & Portfolio Management
Hi there,
This week, we analyse the situation of Kistos Holdings and attempt to answer the question of how much this company worth.
The Week in the Markets: Commentary on the main drivers that have moved the markets this week and a new section (Zoom) to delve into detail on the most relevant event of the week.
Kistos PLC analysis: Analysis of all assets, explanation and application of taxes in the three jurisdictions, and detailed model of Kistos' current situation to facilitate the best decision-making. Similarly, we share our conclusions and management of the situation (which we have been discussing for several months) as of today.
Portfolio Management: A lot of movement this week, with small caps in discretionary consumer spending continuing to lead. We also discuss derivatives and other assets in detail
Before we begin, we want to express our gratitude for the tremendous reception that this Substack has received in the few months we have been on this platform. You are now more than 3500 readers every Sunday, and almost 100 of you have placed your trust in us as premium subscribers.
As a token of appreciation, we have active during the month of December our first commercial campaign and offering you a 15% discount on the current price of the Substack for the annual (and quarterly) subscription - code MORAM2024sale (€14.75/month + VAT). This offer will be valid via our website (we also use Stripe as the payment gateway). For those who sign up before the 15th December, we have a small surprise in the form of a Spreadsheet to share with you ;).
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The Week in the Markets
(Note: we publish The Week in the Markets every Saturday between 9 & 10 am CET on our website - https://moram.eu - so the price of non-stop assets is updated at that time)
A week filled with macroeconomic data, during which major European and U.S. indices closed positively. Notably, European indices showed resilience, driven by growing expectations that central banks will initiate interest rate cuts in 1H24. Meanwhile, in the U.S., indices continue to advance, with both the Nasdaq 100 and the S&P 500 reaching yearly highs.
By market capitalization, small companies have outperformed for the fifth consecutive week. While they were the most affected earlier in the year, they have now recovered over 10% more than mega caps (the 'magnificent seven' and others) since the last announcement of the U.S. CPI.
In terms of sectors, discretionary consumption performed the best, aided (in part) by the University of Michigan’s preliminary gauge of consumer sentiment in December, which jumped to its highest level since August, calming inflation fears. On the flip side, the energy sector bore the brunt of the impact The market is beginning to realize that OPEC+ is running out of ammunition, and WTI has seen a decline of over 20% in 4Q23. Canadian oil companies, in particular, were most affected due to the widening differential with WTI. Friday saw a rebound, partly due to overselling but also guided by news on the Venezuela-Guyana situation, where Maduro continues to escalate tensions. This situation warrants close monitoring, as any developments could have a bullish impact on oil.
Regarding European natural gas, inventories have been depleted at a faster pace than the 5-year average over the last two weeks, now standing at 91% capacity. The “end-of-winter projection” industry consensus is at 52%, far from causing market tightness similar to the past two years. The TTF has fallen below €40/MWh this week.
A news development that could reshape the global LNG landscape is the announcement of Woodside and Santos seeking a global scale in LNG with a $52 billion merger. If successful, a significant portion of Australian LNG would be consolidated. In this sector, economies of scale are increasingly important, and this potential merger is a testament to that (you can find details of all their assets in our recently published 'Guide to the LNG Industry').
In terms of currencies, it was a good week for the U.S. dollar, potential reason for the poor performance of emerging market indexes. China, for the second consecutive week, had the worst performance, losing another 4%.
However, the standout performer this week, overshadowing everything else, was Bitcoin. It has surged more than 165% year-to-date, including another 14% this week. Similarly, other altcoins have also experienced significant gains, with their higher beta making them susceptible to both upward and downward movements."
Zoom of the Week
We introduce this new subsection because we believe it is interesting to delve a bit deeper into noteworthy events of the past few days or macro situations that can be briefly explained. This week, our focus is on Bitcoin. Not because we are big fans or detractors of it. We are investors as impartial as possible to any asset/company and strive to be positioned in what financially makes the most sense at each moment.
During this past week, the cryptocurrency market capitalization has risen from $1.45 trillion to $1.65 trillion. To put things in perspective, this is equivalent to the market capitalization of McDonald's, Netflix, or Shell. Adding a bit more context, gold has a market cap of $13.5 trillion, Apple of $3.04 trillion, Saudi Aramco of $2.13 trillion, and silver of $1.3 trillion. Similarly, the peak valuation of the crypto world occurred in November 2021 at $2.92 trillion.
Out of this $1.65 trillion, $0.86 trillion corresponds to Bitcoin, leaving the rest of the assets valued at around $800 billion. At the previous peak, Bitcoin reached a value of about $1.3 trillion, and the rest of the crypto assets were valued at $1.6 trillion.
To understand what is driving this rally in 2023, attention must be paid to one past events:
US Regional banking crisis in March
and three short-term potential factors:
ETF approval by SEC (expected in January 2024, and BlackRock seems to be buying daily to prepare for this event).
Halving in April 2024 - Where the production rate of Bitcoin will be halved.
2024 is a presidential election year in the US, and rate cuts are expected to begin as early as March.
This simply represents the most objective explanation possible of what is happening and not our opinion on whether the market will go up or down, nor any recommendation of anything. It is purely educational and informational.
Macro data:
Europe:
Germany CPI (Nov) act: 2.3%, exp: 2.3%, prev: 3%. Services PMI (Nov) act: 49.6, exp: 48.7, prev: 48.2
UK Services PMI (Nov) act: 50.9, exp: 50.5, prev: 49.5
US:
US ISM Services (Nov) act: 52.7, exp: 52.3, prev: 51.8 US ISM Prices Paid (Nov) act: 58.3, exp: 58, prev: 58.6 US ISM Employment (Nov) act: 50.7, exp: 51.4, prev: 50.2
US unemployment rate also surprised by falling back to 3.7% from a two-year high of 3.9% in October.
The non-farm payrolls increased by 199,000 in November, surpassing the 150,000 in October ( & 180,000 expected) The return of 50,000 workers from strikes explains the difference
Rest of the World
GDP Japan: shrank 0.7% in Q3, an expected 0.5%, and a strong rebound of the Japanese Yen against the dollar.
In terms of Portfolio Management, we are pleased to be well-positioned in several trends that are leading the equity market, and with exposure to other assets (both more and less liquid) that are bringing us many joys. We will discuss this in detail later; first, let's talk about Kistos.
Kistos Holdings - Analysis December 2023
Kistos was one of our largest positions last year, second only to Golar LNG. It rose by more than 60% until the arrival of Windfall Taxes in Europe and the UK, causing the company to decline by more than 70% from its peak in August 2022.
Last year, we wrote an investment thesis on Kistos that surpassed all our records and has garnered over 12,000 views to date. Today's objective is to analyse the company's assets and its current situation, providing a detailed valuation of Kistos (model included) and our thoughts about the current situation.
Before delving into the detailed analysis of assets and valuation, here's a brief reminder of what the company does.
Introduction to Kistos PLC
Kistos is an investment company focused on opportunities in the transition energy market. It conducted its IPO in November 2020, raising £31.75 million. The company's strategy involves capitalizing on opportunities where businesses are seeking to sell valuable assets for various reasons such as ESG pressure, non-core assets, new regulations, etc. Kistos aims to acquire these assets at low prices and extend their useful lives through techniques like infill drilling.
In April 2021, Kistos secured additional capital to fund the acquisition of Tulip Oil for €223 million, comprising €140 million plus an €87 million bond refinancing and other adjustments. Tulip Oil was a privately held exploration and production operator in the oil and gas sector with assets in the North Sea and Germany.
Subsequently, in January 2022, Kistos acquired a 20% interest in the Greater Laggan Area in the UK for $125 million. The acquisition was self-paid within a year, thanks to high natural gas prices and the deal structure. Total, the seller, retains a 40% stake in the Greater Laggan Area and operates it.
In April 2023, Kistos acquired Mime Petroleum, a Norwegian-based oil company under financial stress due to delays in its main project (Balder Future project) and delayed production from Ringhorne wells. The main equity holder, Bluewater (a Private Equity firm), decided to divest from certain oil and gas assets, including Mime, due to the delays and the need for additional equity injection.
These three acquisitions collectively contribute approximately 9.5kboepd net to Kistos, and there are no hedging in place.
An important point to understand Kistos is its CEO, Andrew Austin, and RockRose, Kistos' previous company led by Mr. Austin and much of Kistos' management. RockRose Energy, where Mr. Austin was the CEO, operated in the North Sea and delivered a 42x return for Rockrose shareholders, pursuing a strategy similar to what he is implementing in Kistos, again in the North Sea.
What makes this company special, and what things have gone wrong in the last 12 months?
As a summary, the key points we discussed in the thesis last year were as follows:
The structural deficit of natural gas in Europe, heightened by sanctions on Russia, will keep natural gas prices high in Europe for the foreseeable future. The main reason is that Europe took the wrong approach to the green transition, and the consequences are expected to persist for years.
A superlative management team with experience in the North Sea, an outstanding M&A track record, and strong shareholder alignment, holding around a 20% stake in the company.
However, the situation is radically different now due to several reason, some of them:
The performance of the assets has fallen significantly short of the planned outcomes in recent months, even considering that they were acquired in an advanced state of their useful life.
Similarly, there have been unforeseen issues with the assets (currently GLA is idle), and there have been cost overruns in the Mime project (Balder).
Another important point is that the announcement of the WTI (Well Test Incident) scared away investors from the industry, and most companies in the sector are experiencing a similar fate.
As we have mentioned, the goal for today is to analyze each of the assets, model them in the current scenario, and share our conclusions and management of the situation (which we have been discussing for several months) as of today.