Buy British Energy
argues Evil Knievil of www.t1ps.com

British Energy has paid for many a lunch over the past couple of years. I have been shorting it aggressively Convinced that it was going bust I regarded it as the quickest way of making money since Cherie Blair and her ghastly husband turned freeloading into an art form. But, while the liar-in-chief and the wicked witch continue will continue to carry on sponging forever, other things have changed and I am now aggressively long of British Energy to the tune of five million shares. I admit my timing was not perfect - I am only running at break-even at this stage but I am expecting to trouser it in a big way over the next six months. In putting together this bull case I am most indebted to the publication Utilities Week - a must read in every household and whose words I have cribbed liberally.

The Bail Out

British Energy runs nuclear power stations. As such it has high fixed costs and always has a potential liability for decommissioning its plants when they come to the end of their useful lives. Its problems started when a slump in electricity prices meant that it was not covering those fixed costs which exposed the fact that its borrowings were unsupportable. It was this that allowed me to profit so greatly on the short tack.

Then the Government stepped in with a "rescue" plan. Surprisingly for a body which shows an ability to waste taxpayers' cash of unmatched proportions this did not involve a huge bail out. Instead it involves the Government, bond-holders, BNFL, other creditors and an array of vastly overpaid parasites (i.e. advisors on a success only fee) reconstructing the business such that equity holders will be diluted to obliteration. This motley crew are determined that their proposed reconstruction goes ahead and the board seems happy to play ball but any such proposal must be agreed by shareholders and I think that the times they are a changin'.

If the reconstruction proceeds, existing shareholders will be diluted to 2.5% of the equity plus warrants to buy a further 5%. Since 65% of free cash flow will be diverted to the Nuclear Liabilities Fund (i.e. decommissioning), this 7.5% becomes an economic interest of just 2.6%. This is clearly not an attractive proposition and if it goes through the shares, at 7.65p may be overvalued. However, I think that even on the current reconstruction terms, 15p-25p will prove to be the eventual outturn.

In the interim results, announced in December, and again with the latest quarterlies British Energy warned shareholders that if they did not support the proposed reconstruction by approving either a scheme of arrangement or the disposal of the company, the shares would be de-listed and the reconstruction completed anyway. But if it can be shown that the company is a going concern without the reconstruction, Turkey's won't vote for Christmas and shareholders (who have to approve any deal) will block it.

The Upside from a No Vote

The disposal of British Energy's 50% interest in Amergen, netted 160 million pounds. This repaid the 94 million owed to the Government so removing its ability to force insolvency by calling in its loan. It leaves three groups of creditors to be satisfied from the remaining 66 million pounds, the 20 million pounds of other cash, any cash flow from trading since 12th December and any cash that can be released from the 359 million pounds tied up in trading collateral.

Group one are the bondholders, owed 408 million. The 2003 bonds have matured, but British Energy can probably pay the 110 million pounds owed to the holders from its cash. The 2006 and 2016 bonds may be in default even though their interest continues to be paid. They are very generously treated in the proposed reconstruction, as a result of which the bonds are trading well above par. They may have the right to put British Energy into receivership if the reconstruction is voted down, but it would not be in their interest to do so. In a liquidation, they would receive very little, whereas, if British Energy continues to trade, they will continue to receive interest and can be repaid in full on redemption.

The second group of creditors are the Banks who lent 475 million pounds to finance the purchase of the 2000 MW coal-fired Eggborough power station. They are being offered 150 million pounds in new bonds and 14% of the new shares being issued, worth some 150 million pounds at 5p each. The value of Eggborough has risen significantly in the last year. It is half the size of the Drax power station, and, like Drax, is being fitted with a Flue Gas Desulphurisation plant, due for completion this year. In December, Drax's creditors rejected an offer by International Power to buy up to 36% of its equity and 15% of its debt. Since then, the value of Drax's debt in the secondary market has continued to rise, and Drax is now valued in the market at about 1.25 billion pounds . This suggests that Eggborough is worth closer to 600 million pounds than the 300 million pounds it is valued at in the secondary debt market. If the reconstruction fails, the Eggborough banks will be significantly better off whether or not the power station is sold.

The third group of creditors are the three parties claiming 316 million pounds in relation to onerous trading contracts. Two of the contracts, accounting for half the total, were terminated in 2003, making their claims payable. The third contract, with Teeside Power, may be renegotiable. The sharp rise in electricity prices makes this contract to buy high-priced electricity no longer a financial liability, but 158 million pounds must still be found to satisfy the other two.



In the short term, British Energy would struggle to satisfy these creditors, but given time, the prospects look better. 75 million pounds was absorbed into working capital in the first half of 2003/4, which may be reversible. The Board is "exploring initiatives to reduce the demand for trading collateral," which should diminish as the forward sales run out. Halving the collateral would release 180 million pounds.

And Critically...

The strength of electricity prices means that British Energy will be highly cash-generative when it can take advantage of current prices, and only half of output for the year to 31st March 2005 has been sold forward at low prices. Implementation of the Emission Trading Scheme, due to start on January 1st, 2005, could add a further 10% to electricity prices, increasing profits and cash flow by 160 million pounds per annum. What British Energy's shareholders need is time.

Fortunately, the bureaucracy and delays of the European Union are working in our favour. The EU is not expected to reach a decision on the restructuring until the middle of 2004, delaying a shareholder vote until the Autumn. With luck, if it runs true to form the EU will take longer, postponing the vote until 2005. This gives more time for cash flow to build up and for the prospects to look more secure. It also gives larger shareholders time to prepare an alternative plan. This is necessary because British Energy is firmly committed to the restructuring. Shareholders cannot look to their Board to safeguard their interests and indeed should think about handing out P45s liberally to the top table.

While negotiating with the creditors is the short-term priority of such a plan, there are other considerations. If the reconstruction is voted down, it is quite possible that the government will force the reconstruction through by Act of Parliament, leaving shareholders with nothing. But does this sordid little Government really want to repeat its Railtrack fiasco with an election looming?

The key to this gamble - and I admit it is such - is that electricity prices are increasing which makes a big difference to cashflow. If shareholders are given time to work out an alternative plan, British Energy will still need to raise cash via a rights issue but it is not ludicrous to suggest that current investors will be left owning 65% of the company rather than 2.5%. In other words the shares would be worth 150p each and possibly rather more.

There are obvious risks. The board might steamroller shareholders into accepting a deal that is patently not in the interests of shareholders. Electricity prices might fall. Big shareholders might cave in cravenly. The EU might whizz through approval giving shareholders no time to organise. Okay, there is no risk of the EU being efficient that was my little joke. But there are risks. If I am wrong these shares could conceivably be overvalued but could even in this scenario head up towards 20p. But if I am right 150p here we come. On a risk reward basis that looks good to me.

Key Data

EPIC: BGY
NMS: 150,000
Market Cap: 47 million pounds
Market: Full
Spread: 7.6-7.7p

FF

Sue Helen might tell you on friday.

It seems the TA is giving the buy signal, see the RSI and MAC, and the 20 60 MA. I have top up. hopefully we get to 20p.

MACD and RSI moving upwards now, its has rising steadely all this time since it drop, I m very sure the move to 20p is eminent now.

SUE HELEN: come on where are u?

spiked to 13p an hour ago..

YES, MACD and RSI rising. 20 and 60MA are pointing upwards. The upper bolling has been broken and twisting upwards. To enhance the buying signals, the volumen has been rising and the volatility been increasing. Hold tight as we can reach 16p by tomorrow and 20p by monday or tuesday.

Will top up massively tomorrow, Any views.

Yes keep buying.....

Well done BGY, at some point today it touched the resistance built back early May (14.20 I think) it gains 3.08 which sets a nice start up for next week. Upper bollinger line was now twisted upwards strongly as well as the MACD and RSI, All given a short term bullish tone. Share volumen also backs this.

Maybe those who have access to specialised technical analysis tolls, can elaborate their theories.

Also if you have any news of the recontruction scheme for BGY, can elaborate as to how it may impact the price if news are to be release next week (worst cse sceneario). thanks

SIZEWELL B IS TO RETURN TO PRODUCTION NEXT WEEK. Source (Bloomberg TV)

Sue Helen, I would appreciate your input here, since you were the one who started this thread. There are a lot of people in this because they believe in you. Please honour this request. Thanking you.

Well I should know better, after twt, moni, and energis (two of those three I saw from the sidelines!) I have been tempted. Small position which no doubt I will regret...but hey you have got to buy a ticket sometimes!

Hi Xmortal, it is wrong for you to state that I am obliged to honour your request. I am duly doing so as I said I would do so on Friday evening....more or less everything one needs to know is already stated on this thread. I have already posted abundance of information here.

I would like to my stance clear first. I started this thread when the price was at 7.6-7.7 pence when the price was near it's bottom, it is the same things with most of my stock selections, bottom fishing? Now the price rose to 16.0-16.75 pence within 2 months so I took my 100% profit and sold out at the beginning of May. I never fall in love with a share, I always wait for my 100% profit to come then I sell out irrespective of the price going up again and move on. Good Investment Strategy...

The price is still way above at what the thread was started on....so I do believe everyone should have made some money. What you have done wrong here is got too excited from buying at these levels...you just can't make statements like 20 pence by Tuesday...which you did. There is a higher risk now at these levels than they were at 7.6-7.7 pence.

What you need is understand is the price could be overvalued or undervalued as the header title suggest it is a gamble. The price could soar to 100 pence or go back down to 6 pence...
A significant re-rating could happen....or more importantly a significant dilution....which will mean shareholders will be left with about 6 pence for each share they hold on current restructing terms...they have mentioned this on many news releases...Never forget the statement that came from the company.....in all this euphoria...the m and ms are going to have a field day...be careful...don`t get caught. with shareholders to get 7.5%...this is already near the top...Until the shares have been fully diluted...this share...(not the company), still maintains a high element of risk.

It is up to the individuals to decide now based on the risk based. At 7.6-7.7 pence these were very low risk hence I started this thread as if you see with all my threads the price has never dropped below from the price they have been tipped from myself. A penny downside was the maximum. So this thread was duly started by myself. Now there is a potential 50% drop....By all means these could carry on rising to 20 pence...or even more...it's a bigger gamble from these levels and all I can say now is invest what you afford to lose at these levels. The price may rise more as the EU approval comes but then the problem is the current terms maybe implemented straight after that hence it could either way. For a significant rise to continue the terms of the restructuring will have to be re-negotiated which may not happen as the company has led us to believe...they spent millions on lawyers fees for the bail out...possibility is there the terms may change in favour of the shareholders or they may not...again it is a gamble. In addition, the company has stated they will delist the shares if the shareholders do not agree to the current restructuring terms.

HEALTH WARNING:

If you are a holder of this stock then never leave the screen...always keep an eye on the price irrespective of nothing happening with the price. A statement suggesting there is no reason for the rise has come several times before during market hours with the usual dilution statement.

I hope this has made the situation clearer for everyone. I will provide an update of my Technical Analysis on these sometime tomorrow.

Best Wishes...

Thanks Sue for your input. I already knew about the risk, What I wanted to know was your input from a Technical analysis point of view, which will be still apreciated. Soz if you feel I pushed it. Thanks

SUE,

No one who have made good profits from your research are paying you for the time you put in,so you are not obliged to anyone after all you do have a life outside of this board.Can you tell me what % stop loss you use for say a share like CDN, my feeling on BGY which i bought at 11.50p is to sell at 15-20p before the 16th june.

Technical Analysis (TA)

The volatily risk is extreme with BGY, easily the most volatile stock on the LSE. Caution : Hence my TA analysis may not prove to be spot on.

1. Support at 11.70 pence which is the floor of the trend channel
2. Relative Strength Index (RSI) is at 74 which is technicallly overbought - though RSI could easily rise to 85 with another 10% early next week before a short term reversal. With the RSI already overbought they maybe another 10% maximum rise on these for the time then being then a short term reversal. May start to rise again thereafter...or traders may decide to take profits as RSI is in the overbougt position not heavily overbought though even so...
3. Next Resistance points at 16.5 and 17.5 pence
4. A continuation of the rise depends on Automatic Traders (AT) buyers continuing to put buy trades through on the order book. Generally only AT buys moves this stock substantially. Ordinary buy trades are retail investors buying and at most times do not have an impact on the price.
5. MACD is bullish, with the blue line above the green line
6. There is a big negative signal on the charts....the price is currently above the upper bollinger band which indicates a potential reaction back down to below 13 pence...In addition, a Harami Cross has appeared on the candlesticks after friday's close which could indicate a reversal of the bullish trend...in that some weakness in the price may be forthcoming in the short term. For the short term, the price may come down with the harami cross appearing and the price being above the upper bollinger band. For the first time in the last month, the price has got way ahead of itself in that it has crossed the upper bollinger band line.

These are my views from my TA expertise, my TA may prove to be correct or wrong...

GoodLuck !!!

Sue, Thanks you very much. Have a good weekend.

As always after my own analysis I use TA tools for confirmation. In the case of the bollinger bands...I can confirm my TA is right in that there is a negative signal.

There are no buy signals on Best-Charts and 1 sell signal has appeared under Bollinger Bands.

You may see a short term reversal....

GoodLuck !!!

as always Sue Heln you help is much appreciated. Your fan xmortal here.

How TA can change in a flash:

The upper bollinger band has risen again today (which can be seen on the MoneyAM charts) hence the price has stayed stable....

evil bought another 500k

mayiguo - how do you know?

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