Broker tips: Heritage Oil, Afren, WH Smith

26th Jan 2011 12:57

Financial services firm Matrix has placed Heritage Oil's rating 'under review' after test results from the Miran West-2 well discovered large quantities of gas, but no oil.Even though Heritage uncovered the largest gas field to be discovered in Iraq for more than 30 years, "we think this is a disappointing result for Heritage," says analyst Vugar Aliyev."Finding a large gas field in Kurdistan presents even greater commercialisation challenges than for oil, and gas is likely to be a lower-value commodity, too. We expect a sharp negative market reaction." Shares declined 16% in early trading on Wednesday.Panmure Gordon agrees that the result may disappoint some investors: "The advantage with oil is that the lead times and unit development costs tend to be smaller, and that the net realisable price tends to be higher (on a barrel equivalent basis). This leaves gas as a poorer cousin to oil," says analyst Peter Hitchens.However, "this level of gas is very exciting, as it should be more than sufficient to allow a major development with sufficient gas to power the nascent gas market in the country and look at the potential of exports." The broker reduces the target price from 550p to 500p but initiates a 'buy'.Broker finnCap has kept its 'sell' rating on Afren after the Africa-focused oil group reported "shockingly weak production numbers" which demonstrate a faster-than-expected decline in its current producing assets.Group production for 2010 averaged approximately 14,320 barrels of oil equivalent per day (boepd), 15% below finnCap's forecasts. The Okoro field contributed 11,200 boepd and the CI-11 produced 2,400 boepd; both figures were 16% lower than estimates. The Lion Gas Plant was in line with 720 boepd."Disappointing production numbers from both the Okoro field and block CI-11 drive further downgrades and come just months after we last slashed our estimates," says analyst Will Amstein. Afren's production guidance for 2011 is 40,000 boepd and in line with finnCap's forecasts, "although we will have to revise our underlying estimates to take into account the weak Okoro and CI-11 numbers."With the shares trading close to 50% above the finnCap's 100p target price, the broker reiterates its 'sell' recommendation.Trading over the Christmas period at newsagent WH Smith was somewhat weaker than Peel Hunt had been expecting, even after taking into account the effects of snow, which were in keeping with the sort of disruption experienced by the rest of the retail sector. In the 21 weeks to 22 January, the newspaper, books and stationery retailer saw high street like for like sales fall by 6%, but there was good news on margins. "Up 160 basis points, gross margin is said to be ahead of expectations, with first half cost savings of £7m offsetting the fall in absolute gross profit," says analyst John Stevenson."On the downside, the growth of e-readers and tablets represents a medium-term threat to books and news, in our view, although management continues to point to low take-up of such devices amongst its core customer [base]."While the group has achieved a strong control of costs and margin delivery, the broker confirms a 'hold' rating and 475p target price.