News from Tullow Oil that they have completed the purchase of the stakes Heritage Oil held in two shared licence areas in Uganda has been well received by the market.  This is part of a two-stage plan to develop the potential of the acreage in the licences held by Tullow.  This news was quickly followed by a positive announcement on the results from the Ngiri-2 appraisal well, 1.7km north or the original discovery, where oil was also found.  Further test drilling is underway to assess the full potential of the find.

We expect announcements on stage 2 of Tullow’s development of its Ugandan operations in the next few months.  This should see stakes in their licences sold to China’s CNOOC and to Total of France.  We believe that with the on-going discoveries and these industry experts on board, the potential output is materially over and above market forecasts.

Ghana has also provided good news fro Tullow with the results from the Owo-1 well, which found high quality light oil and the company believe the discovery could be as big as the Jubilee field, which has been a key driver of Tullow’s the share price in recent years.

I have a large position in Tullow in the F&C UK Equity Fund in advance of what I believe will be on-going positive newsflow over the coming months from their operations in Uganda, Ghana, West Africa and South America.

This further underpins our approach to the oil sector where for some considerable time we have avoided ‘big’ oil in favour of the growth potential of the exploration and production companies further down the market cap scale.

We have for some time being saying that the better quality companies have been very successful in strengthening their balance sheets since the worst of the credit crunch and deep recession.

In the last few weeks we have seen this balance sheet strength being put to work through a series of takeovers.  Today (21 July) saw the announcement of a £2.5 billion deal whereby household products group Reckitt Benckiser is set to acquire SSL, the maker of Durex and Scholl footcare products.  The F&C UK Equity Fund is a clear beneficiary of this move as SSL has been a long-term core holding.

This follows fast on the heels of the bidding war which saw power systems group Chloride agreeing to be acquired by Emerson Electric for £997m. Elsewhere the discussions between International Power and France’s GDF Suez seem to be back on, while BP has struck a £4.6 billion deal with Apache of the US for the sale of gas assets.

What this seems to demonstrate is a degree of confidence in the global economic outlook amongst companies across a range of industries but also a recognition that organic growth is hard to achieve. It also underpins our view that many companies remain attractively valued and we expect the increased level of M&A activity to continue.

Oil exploration and production company Bowleven has announced the results of appraisal drilling off the coast of Cameroon. The results from its appraisal well I-3 indicate a better than expected outcome as they found light oil in addition to the expected gas condensate. More information on this is expected in the next month or so after a series of flow tests. These results serve to underpin the current share price but we believe their is further significant upside potential from elsewhere within the Cameroon operations with news also coming from appraisal well I-F and the ‘Wildcat’ Sapele-1 oil exploration well in the near future.

Bowleven remains a strong proposition in both the F&C UK Opportunities and F&C UK Equity Funds.

These results also underpin our long held preference for the growth potential of the E&P stocks over the majors in the oil sector.

The appointment of new CEO Guy Berruyer at Sage was a key part of the investment thesis behind its inclusion in the UK Opportunities portfolio. Though an inside appointment he does have a good deal of previous experience at other companies. We believe that the change, which becomes effective on 1 October, will see a focus on margin improvement and will mean better growth prospects.

…in fact it is quite normal for this point in the investment cycle.

What this does mean is that from here any earnings upgrades will be a reflection of the quality of earnings and is likely to be limited to those companies which have control over their capital investment programmes.  As a result, stock-picking will become increasingly important.

The response of both sterling and gilts, post-budget, has been positive, which means that a number of the more domestically focused mid-cap companies may offer some opportunities. It is a matter of knowing where to look. For example, the low ticket items of Restaurant Group mean it is less likely to be affected by a slowing UK consumer than some of the big retailers.

Recent activity across the F&C UK Equity and F&C UK Opportunities Funds has focused on the quality of earnings.  For example, the UK Opportunities Fund recent closed out a trading position in African Barrick Gold. The proceeds were used to establish a position in pharmaceuticals group AstraZeneca, which has just won a court case in the US extending the patented life of its cholesterol drug Crestor, its third best seller, for a further three years.

Both Funds are now overweight pharmaceuticals with the UK Equity Fund holding GlaxoSmithKline and long-term favourite Shire, while the Opportunities Fund also owns AstraZeneca.

In addition to the quality earnings argument, these companies also provide an element of exposure to the consumer across the emerging economies, which look set to remain the main drivers of global growth.