Savannah Energy PLC (LON: SAVE) shares have jumped 25% on their relisting this morning. The suspension was because they were discussing a significant takeover of local assets in their operating area of West Africa. There’s been no movement in the quoted stock price since that suspension last June so one way of thinking of today’s price move is simply that stored energy.
There has also been a placing to raise $65 million to complete that acquisition. So, again, another way to think of the current valuation is that the acquisition is viewed as positive and so the price rises.
The placing was at 19.35p per share, which doesn’t seem to involve excessive dilution, so maybe that is right.
There is though another way to view this entirely. Remember, all share prices are about what people think is going to happen, not what has. Nor, even, really about what will happen but what people think. So, Savannah Energy is valued on its operations, this latest expansion of them but also what investors think about the general market more widely. Which is where it’s possible to take a more contrarian view.
For what’s the thing we all know about natural gas prices currently? That they’re through the roof and that’s why all the retail energy suppliers here in the UK are going bust. That’s got to be good for a natural gas supplier even if they’re in Nigeria, right?
Well, no, not necessarily. The natural gas market isn’t a globally fungible one – that means prices vary by geography. For it’s an expensive thing to transport and that transportation can’t be done on a whime. Either a pipeline must be built or an LNG plant. What this means is that the natural gas market is in fact a patchwork of regional markets – those are connected by pipeline internally but not all of them are then connected to the other regional markets. This is why the Henry Hub (that is, US domestic gas) price can be a fraction of the European one as it is right now.
The Nigerian gas price does not move in lockstep with the European one, nor even with the LNG price. We cannot, therefore, assume that Savannah Energy is benefitting from those globally high prices just because it’s in the natural gas business.
To the extent that the current rise in the Savannah Energy share price is a result of considerations around the placing and acquisition then that’s bullish. To the extent that it’s an excitement about global gas prices that don’t quite apply then that can be seen as bearish. The question becomes, in constructing a trading position, which influence do we think is greater in the explanation of the current price and which will win out in the future?
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Tim Worstall is a freelance writer specialising in economics and the financial markets.