Nexus Energy (ASX:NXS) is small cap emerging oil and gas producer, with operations focused on the Gippsland Basin, offshore Victoria and the Browse Basin, offshore Western Australia.

In 2009, NXS transitioned from explorer to producer with the start-up of the Longtom gas project.

The Longtom project was plagued by production problems in late 2010 due to the detection of mercury in its gas.  However those issues have since been resolved and the project has been delivering record production of late.

A lot of interest currently surrounds NXS’s 85% stake in the Crux liquids project (15% Osaka Gas-owned), which is Shell-operated and has a reserve estimate of around 75 million barrels of oil.

With liquefied natural gas (LNG) seeing global demand as an alternative fuel source, NXS and its peers are in good standing owing to the LNG boom and recovering commodities market.

The company is in the midst of securing financing for its share of Crux’s development, and a final investment decision (FID) is expected by the end of the year.

The Crux of the matter

Nexus is looking to commercialise the Crux project, but before a FID can be reached, it must secure financing.  The group is currently trying to obtain up to US$1 billion in financing, with the lenders currently conducting due diligence.

Encouragingly, NXS has also identified a potential JV partner for the project, and is expecting a binding proposal in the next few weeks.

NXS’ proposed 35% sell-down of its equity stake in the project, combined with the potential US$1 billion in debt financing, are signs that the group is on track achieve the FID by the proposed target date.

The economics of the project have already been confirmed under varying capex and schedule sensitivities.  Construction of the project is expected to total around $1.78 billion.

Therefore, achieving FID by the target date will help alleviate concerns over NXS’ ability to fund the project’s developments costs.

Whilst the stock has rallied ahead of the FID, we believe the market has yet to fully price in the huge revenue potential of the project (assuming a positive FID).

The Longtom and short of it

In late October, NXS reported Longtom gas production of 6.4 petajoules (PJ), which was 7.4% higher than the previous quarter.

Saleable gas production totaled 6.2 PJ, which was up 6.7% on June quarter output. This drove revenue up from $27 million to $29 million in the same period.

The increase in Longtom output has continued the turnaround in this asset, which faced production issues early in the financial year due to mercury detection in the delivered gas.

The installation of mercury removal equipment has so far allowed Nexus Energy to meet gas nominations under its contract with customer, Santos.

Future growth will come from the exploration of Longtom South, which is a prospect located 4km south of Longtom.

Given the proximity of the two fields, it wouldn’t cost NXS as much to develop Longtom South. If gas is ultimately discovered, it will provide another source of cash flow, thus increasing the company’s value.

Outlook

NXS has had a fantastic turnaround in the past few months, as anticipation builds ahead of its proposed FID by the end of the year.

The company is in the midst of securing financing for the project and is also in negotiations to sell down part of its stake.

That’s not to say either of these will definitely happen, as there is always the chance of NXS failing to obtain the required funding.

However, NXS hasn’t indicated any issues with the FID process thus far.  Therefore we believe the potential payoff from taking a position in Nexus Energy is worth the risk.

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Myer Holdings (ASX:MYR) is one of Australia’s largest department store groups targeting a wide spectrum of consumers.

Myer has a national network of stores in Australia. It retails designer, national, and international fashion and apparel for men, women and children.

MYR focuses on its retail presence and execution, and also operates a consumer loyalty program.

A cloudy macroeconomic picture has been a major thorn for MYR and its retail peers in recent times.

However, the RBA’s recent rate cut could be the first sign of a near-term turnaround in the company’s fortunes.

Although MYR’s first quarter sales were weak, we see a pickup in momentum heading into 2012, which makes the stock an attractive proposition around current levels.

Confidence is key

MYR’s troubles have stemmed largely from concerns about the Australian economy, specifically the deterioration in consumer sentiment.

Consumer sentiment has remained weak for much of the past year amid global market volatility and the RBA’s hawkish stance on monetary policy.

This has prompted consumers to save more and cut back on discretionary spending, which has hit the sales of retailers such as MYR and David Jones.

However, things have improved in recent weeks, particularly with the RBA’s recent dovishness translating into an interest rate cut this month.

Consumer sentiment shot up 6.3% this month in response to the rate cut as well as the potential for further easing.

When combined with the Aussie dollar’s recent decline, the economic conditions are ripe for a near-term pickup in domestic consumer spending. This should come as a welcome relief for MYR’s sales heading into 2012.

Deflating trading conditions

Yesterday MYR reported a 3.5% fall in 1Q12 sales from a year earlier to $$681.million. On a like-for-like basis, sales were down 5.1%.

The group experienced a tough trading environment during the quarter, but nevertheless said sales were tracking expectations.  It also reaffirmed its full year forecast for flat sales and a 10% fall in net profit.

This came as a relief to the market, which had feared a worse result given the recent global economic turbulence.

The sales result came on the back of a tough FY11, in which net profit fell 3.6% to $162.7 million. Sales were also down for the year amid challenging retail conditions.

A final dividend of 11.5 cents was declared, bringing the full year dividend to 22.5 cents. Maintaining this dividend in FY12 would result in a robust yield ~9%, but even if the group cuts its dividend by 10% (20.25 cents), it would still deliver a healthy yield of ~8%.

Just how valuable?

Despite MYR’s weak 1Q12, we expect an improvement in sales heading into Christmas as consumers take advantage of the recent rate cut.

Unless Europe’s debt crisis intensifies, the rate cut may also prompt consumers to release pent up demand in 2012, which we see as underpinning a sales recovery for MYR.

Heading into FY13, we see a rebound in both earnings and sales for MYR as the Australian economy gathers steam due to the mining boom.

Myer is currently trading at a deep discount to its rivals, given the poor earnings expectation for FY12.  The group’s current P/E of just 8.9x represents a ~30% discount to its industry average.

However we believe the discount is too deep given the company’s relatively stronger leverage to improving consumer sentiment.

Adjusting the discount to 15%, and using a blended EPS spread over FY12, FY13 and FY14, our fundamental-based price target for MYR is $2.77, which represents good value around current levels.

Outlook

Aussie retailers have been out of favour for a while due to cyclical issues (tough economy) and more serious structural problems (strong AUD and online competition).

Whilst we are cautious on retailers as whole due to those structural issues, there is finally some value in the sector given the potential for an improvement in trading conditions.

The RBA’s recent rate cut could prompt consumers to release pent-up demand, which we believe will benefit retailers with strong operational leverage such as MYR.

Although the group’s first quarter sales were weak, we see a pickup in momentum heading into 2012.

Adjusting MYR’s deep discount to its peers, we have a price target of $2.77, which offers decent value at the current share price, particularly when factoring the healthy dividend yield.

If MYR keeps picking up momentum it will be a stock to watch right into the new year.

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Azimuth Resources (ASX:AZH) is a junior gold and uranium explorer, with projects based in Guyana and South America.

The group holds approximately 8000km² of gold tenements in Guyana, and its main asset is the West Omai gold project, which it is currently exploring.

AZH’s other interests are the East Omai gold project, the Amakura uranium project, and the Pandanus West uranium project in Australia.

The company is an exciting prospect that has produced encouraging drilling results at West Omai. There is growing hope that the group’s maiden resource discovery will be significant enough to help underpin the start of production.

Go Guyana

The West Omai project is AZH’s flagship project, and which may contain the discovery of significant gold resources.

West Omai is part of the same corridor that hosts the Omai gold mine, which is the biggest gold mine in South America, having so far produced 3.7 million ounces of gold.

Azimuth Resources is expected to release a maiden resource estimate from the project sometime this quarter.

Given West Omai’s proximity to the Omai gold mine and the encouraging drilling results thus far, a significant resource discovery could be on the cards.

Gold shoots higher

Being an explorer, AZH is tightly leveraged to gold prices.

Although gold was sold-off heavily in September, the precious metal has bounced back strongly in recent weeks amid global economic uncertainty.

The spot price of gold is back above US$1750 an ounce after crashing to just above US$1500 in late September.

Europe’s debt crisis and the potential for another round of bond purchases by the Fed is likely to lure more nervous investors back into gold, which is likely to support prices further.

Such an outcome would be very beneficial for AZH.

Balanced out

AZH completed a $19.4 million capital raising on 31 October, giving it the balance sheet strength to pursue its Guyana exploration program well into 2012.

The raising has come at an ideal time for AZH, which has smartly taken advantage of its strong share price to shore up its finances.

The group also announced plans in April 2011 to list on the Toronto Stock Exchange.

The listing is expected to boost AZH’s global profile, which will come in handy when the group looks at future capital raisings.

Outlook

AZH an exciting prospect that has produced encouraging drilling results at its West Omai project.

The group is expected to release a maiden resource estimate from the project sometime this quarter, and there is hope the estimate will be significant enough to help underpin the start of production.

AZH’s fortunes are closely linked to the price of gold, and with the precious metal on track for continued gains, we believe this will translate into continued strength for AZH’s share price.

This is one of the hot stocks of the year, rising from 25 cent in June to currently be trading beyond 50 cents.

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WorleyParsons (ASX:WOR) provides professional engineering and management services to the energy, resource and complex process industries.

WOR offers a broad range of services, from feasibility studies to design and project services, and is exposed to a number of sectors.

The group is a leader in its industry and has established long-term relationships with a number of companies, including some blue chip stocks.

Despite facing obstacles in FY11, WOR was able to grow its profit and revenue, with the Hydrocarbons business driving the result.

Moreover, WOR is ideally placed for the future, as the lure of higher energy prices is likely to drive demand for its services from the bigger oil companies.

FY11 results highlight underlying strength

On 24 August, WOR reported a 25% lift in FY11 net profit to $364.2 million. On an underlying basis, profit was up 2.5% to $298.5 million, matching previous guidance.

A final dividend of 50 cents was declared, bringing the full year dividend to 86 cents per share.

It was a solid result considering WOR faced a number of headwinds such as the strengthening AUD, Middle East instability and natural disasters.

The result didn’t really reflect the strength of the underlying business. Revenue grew 19% on-year to $5.9 billion, driving by a strong performance in the Hydrocarbons business.

The group was also in financially strong shape, with a gearing ratio of just 22% and operating cash flow growth of 5.1% in FY11. Moreover it had more than 50% in untapped debt facilities.

Taken together, this tells us WOR has significant firepower to expand its business –organically and/or through M&A activity.

The group forecast good underlying profit growth in FY12, continuing the momentum displayed in the 2H11. The guidance was reaffirmed at WOR’s AGM last week.

Hyper about Hydrocarbons

The majority of WOR’s earnings are in the Hydrocarbons division. Hydrocarbons are organic compounds, found mostly in crude oil.

WOR’s leverage to the energy market is a key attraction, particularly as demand for oil and gas is expected to strength in coming years due to emerging market growth.

The recent market turbulence has raised questions about faltering energy demand in the developed economies, which has been a factor behind WorleyParson’s recent share price weakness.

However we believe these fears are overblown given the oil supply/demand imbalance (dwindling oil supplies vs. growing energy demand) is only expected to worsen in coming years.

The lure of energy price appreciation at a time of growing demand is likely to see the big energy companies continue their ramp up of capex spending, putting WOR in an ideal position to accelerate its contract win rate.

LNG is the future

The big oil companies have also recognized that the world is moving towards more unconventional sources of energy such as LNG.

There are number of massive projects being undertaken throughout Australia, and WOR has had a hand in some of the key ones such as Pluto and more recently, Wheatstone.

WOR won a $235 million contract from Chevron for the construction of management services at the Wheatstone Project.

WOR’s experience in developing LNG projects, coupled with the established relationships it has with its blue-chip clients, makes it ideally placed to benefit from this increased focus on alternative energy.

Outlook

As the global growth engine continues to shift from developed economies to the developing regions, there will be increased demand for commodities.

As mining companies look to meet this demand, there is going to be a significant increase in capex activities over the coming years.

This will strengthen the market for WOR’s services, providing it with plenty of growth opportunities, especially in the hydrocarbons space.

WOR is in sound financial position and is expected to continue the positive earnings momentum into FY12.

The long-term relationships WOR has fostered with its blue-chip clients is likely to yield considerable benefits for the company, particularly as miners look to capitalize on rising commodity prices as well as the world’s shift to alternative energy sources.

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Mineral Deposits (ASX:MDL) is an exploration and development company, focussing primarily on the Grande Cote Minerals Sands Project in Senegal.

Grande Cote is a world class ore body that extends more than 100 kilometres and boasts high quality zircon and ilmenite.

Growing demand for mineral sands means production from Grande Cote is likely to occur in a period of rising prices, boding well for future profitability.

The market has acknowledged this, and as a result MDL has been one of the hot stocks in recent times.

Although capex costs at the project are expected to be significant, MDL’s cash balance and JV with Eramet puts it in a good position to meet funding requirements.

Magnificent Mineral Sands

The mineral sands industry is expected to boom in coming years due to a widening supply deficit.

Global zircon supply is forecast to shrink over the next decade, which will coincide with soaring demand from high growth countries such as China.

Zircon demand is driven predominantly by its use in ceramics. With China modernising its economy, the demand for ceramics, such as tiles, is expected to surge.

This is likely to drive significant zircon price growth, which will benefit MDL as it begins production in 2013.

The supply deficit will take time to narrow given the more than seven years required to bring projects from exploration to commissioning.

Titanium is anticipated to follow a similar path to zircon, in that demand is likely to be fuelled from its use in paint, plastics and paper – key ingredients for China’s growing economy.

Tizir is born

On 28 July the group formed a 50/50 JV with French-based miner, Eramet, known as Tizir Limited.

Under the JV, Mineral Deposits will contribute its 90% interest in Grande Cote (Senegal’s government owns the other 10%), with Eramet contributing its Tyssedal titanium and iron plant in Norway, along with $30 million in cash.

The JV was crucial for MDL as it secures off-take for the majority of Grande Cote’s ilmenite. The ilmenite will be used in the production of titanium feedstock at the Tyssedal plant.

The agreement also secures additional titanium supply for Tyssedal, giving it the capacity to meet growing demand from pigment producers.

Therefore it appears the JV is a win/win for both companies.

Grande Cote is grand

The Grande Cote project is strategically placed in Senegal, located not too far from the Dakar coast. This reduces the time it will take to transport the minerals from the mine separation plant to the port for shipment.

The lack of significant vegetation and overburden also allows for an efficient processing of the mined ore.

Thus when production begins MDL will be operating towards the lower end of its cost curve, giving it a significant competitive advantage.

Grande Cote has the potential to be a Tier 1 asset, with an operating mine life of 25+ years, and expected annual production of 85,000 tonnes of zircon and 575,000 tonnes of ilmenite.

These output estimates will amount to approximately 7% of global supply, putting MDL on track to become one of the world’s bigger producers.

Cash is king

MDL is in sound financial shape, having secured US$136.2 million in a capital raising in June. The raising brought the group’s cash balance at the end of June to US$173.3 million.

Moreover, the company has no external borrowings.

Although Grande Cote requires approximately US$516 million in capex requirements, Mineral Deposits’ array of financing options, including the contribution from Eramet, will help ensure sufficient funding for the project.

Outlook

Mineral sands producers stand to reap significant benefits from China’s voracious demand for resources.

The supply deficit is expected to linger for a while yet, putting MDL in line to achieve major price increases at the same time it begins production.

Grande Cote appears to be a long-life, low-cost asset for MDL, thus giving it a competitive advantage in the mineral sands industry.

Importantly, the company is in sound shape with cash in the bank, no external debt, and a JV with Eramet that has secured off-take for its ilmenite.

Therefore the future appears bright for MDL, and it will be one of the stocks to watch in coming months.

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Mesoblast (ASX:MSB) is a world leader in the development, manufacture and commercialisation of biologic products in the broad field of regenerative medicine.

MSB has the worldwide exclusive rights to a series of patents and technologies developed over more than 10 years relating to the identification, extraction, culture and uses of adult Mesenchymal Precursor Cells (MPCs).

MSB’s stock has been one of the hot stocks since the start of the year on market excitement over the therapeutic power of MPCs.

A unique business

The commercialisation of MPCs allows adult stem cells to be extracted from the bone marrow of donors, grown into therapeutic quantities and administered to non-related patients.

MSB’s lead products will target cardiovascular conditions, diabetes, inflammatory conditions of lungs and joints, eye diseases, bone marrow cancers, bone fractures, cartilage degeneration and musculoskeletal conditions.

The company aims to generate a series of high margin, off-the-shelf adult stem cell products that are obtained from a single donor, commercially expanded and frozen, and subsequently used in potentially thousands of unrelated, or allogeneic, recipients at the time and place of need.

Bone marrow approval

Mesoblast recently received approval from US authorities to begin an advanced trial of a treatment that could boost the number of bone marrow transplants for patients who cannot find a matched donor.

Following the approval, MSB has commenced the Phase III trial for bone marrow regeneration in patients with blood cancers.

MSB aims to produce a product that can be used in bone marrow transplants where a perfectly matched donor cannot be found.

Hearty hopes

Another key driver for MSB will be the results of its Phase II congestive heart failure trials in November.

Clinical results have thus far been encouraging, and if the full results turn out to be positive, MSB is likely to request a Phase III trial from the US Food and Drug Administration (FDA).

We believe a positive Phase II result will help deliver a significant jolt to MSB’s share price, as it moves the group closer to receiving regulatory approval to market its product.

Moreover, given the large number of reported heart problems in the US, Phase III approval can open up a huge market for MSB.

The Lonza and short of it

On 27 September, MSB announced an alliance with Swiss-based Lonza Group for the clinical and commercial production of its MPC product.

Under the deal, Lonza will supply MSB’s product requirements, in return for MSB having exclusive access to Lonza’s Cell Therapy facilities in Singapore.

The alliance is a critical plank in Mewsoblast’s strategy to market its product, as it creates certainty in the ability of the group to manufacture its MPCs.

Another interesting aspect of the alliance was Lonza using its intellectual property to help lower MSB’s manufacturing costs.

This would be in keeping with MSB’s aims to generate higher margin products, and would also provide it with the flexibility to develop new technologies.

Looking ahead

Whilst market excitement grows surrounding the therapeutic potential of MPCs, MSB has turned heads with its unique product innovation.

With regulatory approvals continuing to roll in and a global manufacturing alliance locked in, MSB is in a good position to bring its MPC technology to market.

The bone marrow product could be the company’s first revenue generating biologic therapy in the US and Europe.

MSB has huge revenue potential and exclusive rights to a series of patents and technologies relating to MPCs.

Furthermore, a successful outcome for MSB’s Phase II congestive heart failure trial could make MSB one of the stocks to watch in coming weeks.

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Northern Star Resources (ASX:NST) explores and develops mineral resources in the highly prospective Kimberley region.

NST is an emerging gold producer and explorer with a market capitalisation of around $180 million.

Its main project is the Paulsens gold mine which it purchased for $40 million.

The miner expects to release a resource upgrade later this month and a new mine plan for Paulsens this year.

NST recently acquired the 668,000 ounce (oz) Ashburton Gold Project which is close to the Paulsens mine.

Precious metal speed hump

We saw gold and silver futures slide recently as investors reacted to hikes in margin requirements for the contracts.

The CME Group raised margin requirements for both initial and existing positions in gold, copper and silver.

Margins are money investors must put up to be able to trade and hold futures contracts.

Gold lost more than US$100/oz on the announcement, printing a low of around US$1533/oz.

However, gold prices have since recovered from that low and are currently hanging at around US$1665/oz.

The fact of the matter is, the underlying fundamentals behind the gold price rally over the past year are still intact and we are likely to see gold continue to rise.

Ashburton acquisition

NST agreed to purchase the Ashburton Gold Project from Sipa Resources which will be paid for via a royalty on future production.

The deal includes 668,000oz resource and the Mt Olympus Gold Mine, which has previously produced 340,000oz.

This puts NST in a prime position to increase production rates, project life and create shareholder wealth through exploration.

Ashburton is a strategic asset for Northern Star Resources as it provides an immediate resource boost to the miner’s resource base.

High grade drilling results from Ashburton announced last week show NST is on track to grow production to 200,000ozpa.

Results

NST recently posted FY11 profit before tax of $20 million. This profit came after deducting $22 million for the acquisition of Paulsens gold mine and $24 million in depreciation and amortisation expenditure.

The result was aided by record production at Paulsens of 87,069oz at $588/oz cash cost.

NST has $30 million in cash on hand as at 27 September 2011 and is on track to exceed calendar 2011 forecast of $40 million surplus cash, 75,000oz production.

A resource upgrade is set for early 2012 with increases in mine life, production and cashflow expected.

The miner repaid the $40 million acquisition of Paulsens in just seven months.

Being unhedged, NST has maximum exposure to the strong gold prices and as a result it was one of the hot stocks over the course of 2011.

With strong cashflow and a robust balance sheet, NST is in a good position to grow.

Outlook

Gold is set to recover after recently suffering a setback from the CME’s decision to raise margin requirements.

NST’s strong financial position leaves it well placed for further acquisitions in line with its objective of building a major mining house.

With the potential for further acquisitions and strong gold prices backing the unhedged miner, we feel NST will be one of the stocks to watch in coming months.

Recent weakness presents an excellent opportunity for fresh entries.

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Centro Retail (ASX:CER) has decided to purchase Centro Properties Group (ASX:CNP) as it looks to consolidate its assets.

The new group will be called Centro Retail Australia, and is forecast to deliver an FY12 distribution yield of approximately 5%.

CER said the consolidated entity is likely to have the size and scale to enhance long-term value and moderate gearing levels.

The takeover announcement has seen CNP rocket almost 60% so far today, making it one the top performers in the stock market.

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Coca-Cola Amatil (ASX:CCL) is an Australasian bottler for US-based The Coca Cola Company.

CCL manufactures, sells and distributes Coca-Cola products, including carbonated soft drinks, mineral waters and other non-alcoholic beverages, plus packaged fruit.

It is also considered among the market’s blue chip stocks.

Over the years, the company has successfully reduced its percentage of sugary carbonated beverages and increased its percentage of non-carbonated beverages, alcoholic beverages and food, in order to diversify its earnings stream.

It has also ventured into the manufacture and distribution of premium beer brands and the premium spirit portfolio of global distributor Maxxium through Pacific Beverages (a JV entity between CCA and SABMiller).

The company delivered a solid first half result last month helped by its strategic product positioning in key markets.

Market ace

CCL stands to benefit from SABMiller’s takeover of Foster’s Group. The move is likely to result in the Pacific Beverages joint venture being dissolved.

CCL management estimates it could book a profit of $200-$300 million on the $305-$380 million sale of Pacific Beverages to SABMiller.

From an EPS perspective, this would be equivalent to a 2%-3% accretion.

CCL will also have the opportunity to acquire some of Foster’s assets at multiples that would be EPS accretive to CCL.

As an overall entity, CCL has grown from strength to strength in recent years. The company’s diversification strategy has been key to this growth, which has included the addition of alcoholic beverages.

Drink up to earnings

CCL last month reported a 27.8% decline in 1H11 net profit to $153.6 million.  An interim dividend of 22 cents was declared.

The result was impacted by an $80.5 million charge related to the restructuring of its SPCA Ardmona division.

Underlying profit rose 5.5% to $234.1 million, with revenue growing 3.3% on-year despite the impact of the recent flooding and consumer caution.

At an AGM in June, CCL had said it was looking to target around 5% growth in underlying profit for the 1H11.

The group has been hurt by the strong Aussie dollar, natural disasters and higher resin prices.

Before currency translation effects, first half profit was expected to be around 6% – 7% higher than the prior year.

CCL was expecting to generate stronger earnings in the second half, but said trading conditions remained uncertain as consumers contended with higher living costs.

Taking into consideration the adverse factors CCL faced during the period, we feel the company delivered a solid result.

Looking ahead

CCL will continue to focus on capitalising on its growing alcoholic beverage and non-carbonated soft drinks market, which are growing owing to modern lifestyle trends.

The company has strong brand awareness, and very stable and highly predictable cashflow compared to its peers.

Coca-Cola Amatil is a defensive company which is protected against inflation as it can pass costs on to customers, who are always willing to spend money on CCL’s famous brands.

With the potential for significant earnings upside from the Foster’s takeover, we feel CCL is in a lucrative position.

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Sigma Pharmaceuticals (ASX:SIP) is a manufacturer and marketer of prescription, over-the-counter, and generic pharmaceutical products. It is also the owner of a leading full-line wholesale and distribution business to pharmacies.

Today SIP reported a 1H12 net profit of $26.7 million, which compares to a net loss of $9.2 million a year earlier.

SIP’s strong cash flow generation put a major dent in net interest expense, which was a key driver of the profit result.

EBIT jumped 55% on-year, helped by a 9% lift in underlying revenue.  The healthy sales result reflected market share gains.

An interim dividend of 1.5 cents was declared.  SIP said more would be done in the coming year to keep it ahead of industry changes.

SIP has been one of today’s best performers in the Australian share market.  It has also been one of the top stocks in recent months, having more than doubled in price since March.

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