Cooper Energy Limited (COE) Valuation update

Transcription

1 The 3D seismic Cooper Energy Limited (COE) Valuation update 17 April 2012 Nicholas Wirubov Three Key Points Recommendation BUY Strong financial position with $68 mn in cash, no debt and Australian oil production providing solid operating cash flow. Current share price is equivalent to the value of the Company s cash and NPV of Australian 2P reserves and recent discoveries. Due to perceived sovereign risk, Australian investors are ignoring the underlying value of Tunisian assets, including an oil discovery with P50 contingent resources of 111 mn bbls with an unrisked value of $1.12 per COE share. Extensive western flank exploration program in the Cooper Basin has the potential to maintain the 2P replacement ratio at an average of greater than 100% per annum for some time to come. Previous Recommendation BUY Current Share Price $ Month Price Target $0.90 Price Target Methodology Risk weighted DCF DCF Valuation $1.10 Market capitalisation $190.3 m Liquidity Daily Value $0.30 m Board of Directors Price Chart Laurie Shervington David Maxwell Jeffrey Schneider Ian Gregory Chairman Managing Director Non exec. Director Company Secretary Source: Yahoo Finance See: Important Information Octa Phillip is engaged by Cooper Energy to carry out capital markets work. For Disclosures, refer to the back page under Important Information.

2 Cooper Energy ( COE) Table of Contents Company Background... 2 Tunisia... 3 Bargou Exploration Licence (COE: 30%, after completion of farm out obligations)... 3 Resources Summary... 4 Hammamet West Development Concept... 5 Summary of Tunisian PSC Terms... 5 All Contractor income and petroleum tax liabilities are paid out of ETAP s share of Profit Oil Hammamet West Valuation assumptions... 6 Asset Valuation... 6 Hammamet West... 6 Valuation Upside... 7 Valuation Sensitivity... 7 Financial Position... 8 Recommendation... 9 Appendix Introduction to Dragon Oil Plc Recommendation Criteria Page 1

3 Company Background Cooper Energy (ASX Code: COE) is an Australian based company exploring for and producing oil in Australia and Indonesia. The main focus of activity is the South Australian section of the Cooper Basin where its net oil production is approximately 1,700 barrels per day from a number of conventional oil fields in PEL 92 and one in PEL 93. In the Otway Basin, COE holds an interest in PEL 495 that is prospective for both conventional and unconventional oil and gas. In recent presentations, management was clear in its objective in adding gas production opportunities to its Cooper Basin and Otway Basin portfolio of assets. Internationally, COE holds interests in three offshore permits in the Gulf of Hammamet in Tunisia. The Bargou Exploration Permit contains the Hammamet West oil field that was discovered in 1967 and appraised in 1990 when the Hammamet West - 2 well intersected a 192m oil column and recovered oil in two DSTs. COE retains a 30% interest in the license and will be carried through the majority of the costs of drilling the Hammamet West -3 appraisal well in Figure 1: Bargou, Hammamet and Nabeul Exploration Licences, Tunisia Source: Cooper Energy Limited In a our initiation report released in February 2012, we conducted a detailed DCF valuation of the Cooper Basin assets resulting in the conclusion that the cash backing of COE ($0.23) and the DCF valuation of the 2P reserves ($0.36) less administration ($0.08) for a net asset value of $0.51 was greater than the then trading price of the company of $0.46. At the time, we did not have all the data to allow us to construct a DCF valuation model for the Hammamet West oil field and included a risked valuation for the asset based on a third party valuation metric. Since then, we have completed our own valuation model resulting in an updated valuation for the Company, which is the subject of this update. Page 2

4 Tunisia Extensive acreage holdings in Tunisia provides significant upside value COE s Tunisian assets form part of the Company s core exploration and appraisal focus. The Company currently holds interests in three exploration licences in the Gulf of Hammamet, offshore north eastern Tunisia. The Gulf of Hammamet hosts an active petroleum system with a number of discovered and producing onshore and offshore oil and gas fields. The target formations in the blocks include sandstones of the Birsa and Fortuna formations as well as limestones of the Ain Grab, Bou Dabbous and Abiod formations. In some areas reservoirs may occur as multiple stacked targets in structural traps. The Hammamet (COE: 35%) and the Nabeul (COE: 85%) exploration licenses were described in our February report. The 3D seismic acquired in the Hammamet license has been processed and the data has been received by COE. The recently acquired 3D seismic in the Nabeul license is still being processed. No further on-the-ground activity is being planned in either license at present. In this report, we will confine our attention to the Bargou exploration license where the JV is preparing to drill the Hammamet West 3 appraisal well towards the end of CY Bargou Exploration Licence (COE: 30%, after completion of farm out obligations) Bargou license area is in close proximity to existing producing oil o fields and hydrocarbon discoveries The Bargou exploration licence, covering an area of 4,616 km 2, was awarded to COE in 2008, following its conversion from a prospecting permit. The majority of the licence is located immediately offshore from the Tunisian coast with a small section located onshore. The licence contains a proven hydrocarbon system with a number of onshore and offshore producing oil and gas fields adjacent to the licence and a number of others under development. Of direct interest to the JV is the Hammamet West oil discovery, first drilled in 1967 when a seven metre oil column was intersected in the Birsa Sandstone in the Hammamet West 1 well. Figure 2: Proximity of oil and gas discoveries to COE s licenses Source: Cooper Energy Limited An appraisal well, Hammamet West 2, drilled in km to the south west of the Hammamet West 1 well targeted the deeper Abiod Formation. Oil was intersected and DSTs were run with DST 1 and DST 2 recovering 33 API and 27 API oil that together with recently interpreted petrophysical data indicated that a 192 m oil column had been intersected by the Page 3

5 Dragon Oil brings significant technical expertise to the JV s appraisal drilling of Hammamet West well. The Hammamet West discovery lies just twelve km north of ENI s producing Maamoura oil and gas field that was first discovered in 1988 with the early wells flowing 2,880 bopd and 5,000 bopd of 38 API oil on production tests. The field was brought on stream in 2010, and is producing from a number of formations, including the Abiod formation. In 2009/10 COE acquired 205 km 2 of high resolution 3D seismic data. Interpretation of the data was used to update the mapping for the field and to confirm the distribution and orientation of fractures within the limestone of the Abiod Formation. This information will be used in selecting the location and finalising the well design for the Hammamet West 3 appraisal well as observations from nearby producing fields indicate that high production rates can be achieved in the event that the well encounters an extensive fracture system. In 2010, COE farmed out a 15% interest in the Bargou Licence to Jacka Resources (ASX Code: JKA). Part of the farm in commitment was met with Jacka contributing to the drilling of the unsuccessful onshore Menzel Horr well. The balance of the commitment will be met when the Hammamet West 3 well is drilled. To further reduce its drilling liability and bring additional technical expertise into the JV, COE farmed out a further 55% of the licence to Dragon Oil. Provided the total well cost for the well is under US$26.6 mn, COE will be fully carried through the Jacka and Dragon farm outs. If the well cost exceeds this amount, COE will pay half the pro rata share for its 30% interest in the permit as the Jacka farm out is uncapped and will carry COE s remaining 15% interest. Dragon Oil is a large independent oil and gas exploration and production company that is listed on the London and Irish stock exchanges and has a market capitalisation in excess of $4 billion. It has substantial reserves of hydrocarbons, including 639 million barrels of oil and 1.6 trillion cubic feet of gas. It brings significant fractured limestone experience through its operation of two oil and gas fields in the Cheleken Contract Area in the Caspian Sea, offshore Turkmenistan where production reached 71,000 bopd by the end of For a more detailed description of Dragon Oil refer to Appendix 1. Resources Summary Substantial contingent oil resource identified in Hammamet West through previous drilling Even though oil has been encountered in the Birsa Sandstone and Abiod Limestone formations in the Hammamet West discovery, insufficient data has been obtained for the determination of hydrocarbon reserves. The Hammamet West 2 well intersected a 192 m oil column based on the lowest known depth of proven oil from a drill stem test at 3,090 m subsea. Mapping of the reservoir based on the latest 3D seismic indicates that the structural spill point of the reservoir can be placed at 3,190 m subsea, leading to one source of uncertainty in determining the oil in place. Table 1: Hammamet West gross oil in place volume and COE s contingent resource Oil in Place (mn bbls) P90 Senergy 100 Cooper Energy Resource (mn bbls) 1 P50 Birsa Sandstone Abiod Limestone P90 Total COE Note 1: Assumes COE s 30% post farm out interest in Bargou Licence Source: Cooper Energy Limited The other main source of uncertainty is the fracture porosity, a key parameter that determines the amount of oil that can be contained in and recovered from the reservoir. COE and an independent group Senergy have separately assessed the volume of oil originally in place. In presenting the volume of oil determined by COE, we have selected the Company s base case, assuming fracture porosity of 0.3% (P90) of gross rock volume and oil down to 3,090 m subsea for the Abiod Limestone. In addition to assessing the in place volume of oil, COE also determined the contingent resource for the Hammamet West discovery. These results are summarised in Table 1, above. Page 4

6 Simple development concept should result in a rapid commercialisation of the project Hammamet West Development Concept The current development concept for the Hammamet West discovery envisages a similar development to that used by ENI in the development of the Maamoura oil and gas field, comprising an unmanned wellhead platform with sufficient slots for around twelve production wells, water separation and pumping facilities. Produced oil and gas will be piped to an onshore oil processing facility where the oil and gas will be separated with the oil prepared for export via an offshore CALM buoy. Some of the separated gas will be returned to the platform and used for gas lift to enhance the recovery of oil with the balance sold in the domestic market. Figure 3: Hammamet West development concept Source: Cooper Energy Limited Summary of Tunisian PSC Terms The production of oil and gas in Tunisia is based on the terms contained in the production sharing contracts ( PSCs ) negotiated with Entreprise Tunisienne d Activités Pétrolières ( ETAP ), Tunisia s national oil company. Basic PSC terms include: No requirement to provide equity in the project to ETAP at the development phase. No domestic market obligations for oil. All Contractor income and petroleum tax liabilities are paid by ETAP. Page 5

7 Hammamet West Valuation assumptions Table 2: Hammamet West valuation assumptions Valuation Parameter Unit P50 P90 Valuation Parameter Recoverable oil Mn bbls Recoverable oil Initial rate Bopd 45,000 30,000 Initial rate Decline % per annum 15% 18% Decline Project life years Project life Development Wells 12 8 Development Wells Development CAPEX US$ mn Development CAPEX OPEX US$/annum OPEX Maintenance per annum % CAPEX 1% 1% Maintenance per annum Oil price US$/bbl Oil price FX A$ 1,00 = US$ FX A$ 1,00 = Source: estimates In carrying out our DCF valuation of the Hammamet West oil field we assumed the P50 and P90 contingent recoverable resources cases as summarised above: Asset Valuation Hammamet West Table 3: COE asset valuation Value of the Hammamet West oil discovery is not being recognised by Australian investors i Asset Method Value $ mn $/share Existing 2P reserves DCF Cash at 31 December 2011 Reported amount Administration to end Cooper DCF (23.1) (0.08) Existing Production and Cash Oil discoveries and work overs DCF Hammamet West P50 resource 1 DCF risked 50% Hammamet West P90 resource 1 DCF risked 75% Future administration DCF (9.2) (0.03) Base Case Valuation to to Note 1: Either the P50 or P90 valuation case to be used Source: estimates In our initiation report on COE we used a valuation metric of US$5 per barrel for the contractors share of discovered but undeveloped oil as published by PetroCeltic in December The obvious downside of such an approach is that it is very general in nature. The current analysis avoids this problem by undertaking an economic analysis of a possible field development concept. While all possible care was taken to ensure that the valuation assumptions were reasonable, the fact remains that while the presence of oil has been proven at Hammamet West, inability Page 6

8 to test the wells properly means that at present, no commercial flow of oil has been obtained and the risk remains that the discovery could be non commercial. To take account of this possibility, we have applied a further risk factor to our DCF valuation. In the case of the P50 resource the risk factor applied was 50% and for the P90 resource the risk factor applied was 75%. The value of the remaining assets and liabilities, including the Cooper Basin, cash and general administration expenses remain unchanged from our initiation report released in February Valuation Upside We continue to believe that our valuation range of $1.10 to $1.17 is still conservative as it does not consider the upside potential of the Cooper Basin or COE s other interests in the Otway Basin or Tunisia as discussed in our report of February In addition, we do not ascribe any value to COE s exploration assets in Poland or Indonesia that have been marked for sale and the value for which has been written down to $5.9 mn. Valuation Sensitivity In any DCF valuation of a proposed resources development, the final value is dependent on the assumptions that are made. As Hammamet West is still in the appraisal stage all the input parameters could have a material influence on the final value. As such, our sensitivity analysis looked at over runs in capital and operating expenditure and a delay in project start up as well as the more usual oil price and exchange rate sensitivity with the results summarised in Table 4, below. While changes in oil price and exchange rates as well as any project delays have a significant effect on the value of the project to COE, the project is almost insensitive to increases in capital and operating expenditure. This is due to the structure of the PSCs where all costs are recovered preferentially before profit sharing with ETAP commences. Table 4: Hammamet West unrisked valuation sensitivities Development project is not sensitive to increases in CAPEX and OPEX due to PEC terms Resource P50 P90 Resource $ mn $/share % oil 1 $ mn $/share % oil 1 Base Case Oil Price US$105.bbl Oil Price US$85.bbl FX A$1.00 = US$ , FX A$1.00 = US$ CAPEX +10% OPEX +10% Project delay 1 year Source: estimates Page 7

9 Figure 4: OPEC crude oil basket price from January 1985 to February 2012 Source: Centre for global Energy Studies As indicated in the figure above before 2003, oil price moved within a relatively narrow range around US$19/bbl. Since then, the price has exhibited a much greater oscillation around a much higher level of US$65/bbl. As a result, while the marker price of dated Brent crude, the expected reference price for oil sales from Tunisia, is around US$120/bbl, we assume a long term real oil price of US$$95/bbl for our base case assumption. Financial Position COE is in a very strong financial position. At the end of December 2011, the Company had $68.6 million in cash and operating cash flow from the Cooper Basin of approximately $30 mn per annum for the next two years, assuming no new oil discoveries Assuming no new fields are brought on stream (an unlikely event given the recent history of discoveries on the western flank) operating cash flow from the Cooper Basin will be in decline just as Hammamet West is expected to come on stream. Our analysis indicates that cash flow net to Cooper will exceed $260 mn during the first 18 months while development costs are recovered before settling down to around $50 mn in the first full year of profit sharing and declining thereafter. Page 8

10 Recommendation Maintain BUY recommendation with short term price target of $0.90 per share In February 2012 we initiated coverage on COE with a buy recommendation with a 6 month price target of $0.55 per share. Following the sale of 27.8 million shares, equivalent to 9.5% of the issued capital by two parties for $0.50 per share on 29 th February a perceived overhang of the two parcels of shares was removed. This, together with a growing realisation by investors of the underlying value of the Company as well as the growing confidence that management will be able to deliver on its promises without the distractions caused by disgruntled shareholders, has seen the share price climb above our short term price target. With the completion of our valuation work on Hammamet West, increasing our risk weighted value of the Company to between $1.10 and $1.17 per share, it is an appropriate time to re confirm our buy recommendation on the stock with a revised price target of $0.90 per share. Catalysts that will see the share price appreciate to these levels over the next twelve months include: Confirmation of the sale of exploration assets in Poland and Indonesia for a price at or above the written down value of the assets; Further exploration success from the new drilling campaign in the Cooper Basin; Confirmation that the Rincon discovery in PEL 92 in the Cooper Basin is larger than originally thought following completion of a 3D seismic survey and appraisal drilling; Obtaining a commercial oil flow from the Hammamet West 3 appraisal well; and Value adding corporate activity as foreshadowed by the Company. We confirm our rating of COE by maintaining our BUY recommendation. Page 9

11 Appendix 1 Introduction to Dragon Oil Plc Dragon Oil plc is an independent international oil and gas exploration, development and production company with its principal producing asset is the Cheleken Contract Area, in the eastern section of the Caspian Sea, offshore Turkmenistan. The Group s headquarters are located in Dubai, United Arab Emirates. Emirates National Oil Company Limited (ENOC) L.L.C., a company ultimately owned by the Government of Dubai, owns approximately 51% of the Company s ordinary share capital. Dragon Oil is registered in Ireland with a primary listing on the Irish Stock Exchange and, since 6 April 2010, in accordance with recent changes to the UK listing Regime, has been designated as a premium listing on the London Stock Exchange. The Group is developing the oil reserves in the Cheleken Contract Area in accordance with the terms of the Production Sharing Agreement (PSA). Under the PSA, Dragon Oil Turkmenistan, as operator, was granted a production licence for the exploration and development of oil and gas resources in the Cheleken Contract Area for a term of 25 years from 1 May 2000 and an exclusive right to negotiate an extension of not less than 10 years. Dragon Oil has been operating in Turkmenistan for 12 years and has invested more than US$2 billion in expanding the oil production of the Dzheltune and Dzhygalybeg fields in the Cheleken Contract Area. To date, Dragon Oil has refurbished seven existing offshore production platforms and installed six new platforms, 80 km of infield gathering pipelines and a 40 km 30 export trunk line. Today, Dragon Oil is one of the largest foreign investors in Turkmenistan. Dragon Oil is producing from a significant number of new and old wells and has an aggressive development programme comprising drilling of new wells and an ongoing workover programme. The average daily gross field production has increased from approximately 7,000 bopd in 2000 to over 61,500 bopd of average daily gross production in 2011 with the exit rate of 71,751 bopd at the end of Dragon Oil is targeting production of 100,000 bopd by As at 31 December 2011 Dragon Oil has proved and probable oil and condensate reserves of 658 million barrels and 88 million of oil and condensate in contingent resources, 1.5 trillion cubic feet of gas reserves (corresponding to 250 million barrels of oil equivalent) and 1.4 trillion cubic feet of gas resources. Page 10

12 Research Steve Morris Head of Research & CO O Andrew Cleeland Quantitative Analyst Ken Wagner Equities Analyst Andrew Shearer Resources Analyst Lawrence Grech Senior Resources Analyst Cameron Bell Equities Analyst Nicholas Wirubov Oil and Gas Analyst Conor O Prey Senior Equities Analyst Paul Jensz Agribusiness & Energy Analyst David Barilla Equities Analyst Pieter Bruinstroop Mining Analyst Heath Andrews Senior Equities Analyst Corporate Finance & ECM James Green Head of Corporate Finance Andrew Champion Executive Director Malcolm Ezzy Executive Director Ben Gibbons Associate Malcolm McComas Senior Advisor Brooke Picken Associate Michael Beer Executive Director Craig Stranger Head of Australian ECM Michael Laletas Executive Director, Head of International ECM David Pryles Associate Paul Levitt Associate Jae Yoo Analyst Sackville Kempton Head of Corporate Services Jonathan Buckley Executive Director Sean Kennedy Associate Director Leith Wale Business Development Manager, Energy Yehuda Gottlieb Associate Institutional Sales Bruce Rolin Head of Institutional Sales Adam Muston Hedge Fund & Derivative Sales James Wilson Institutional Research Sales Chris Chia Head of Asian Institutional Sales Mark Pashley Senior Sales Trader Colin Eichenberger Institutional Research Sales Matthew White Institutional Sales Trading Craig Stephens Trader Michael Cori Head of Hedge Fund Sales Gavin Todd Institutional Research Sales Robert Wood Institutional Sales Graeme Philipson Institutional Sales Tr ading William Cleland Institutional Research Sales Capital Management Ben Hughes Principal Private Wealth Tony Smith Head of Private Wealth Allan Moffatt Private Wealth Mark Schwarz Private Wealth Amanda Fanning Private Wealth Mark O'Brien Private Wealth Andrew Sekely Private Wealth Mark Wiseman Private Wealth Ben Ikin Private Wealth Matthew Carey Private Wealth Charlie Heerey Private Wealth Michael Jeffery Private Wealth Chris Walker Private Wealth Nathanial Doust Private Wealth Craig Baillie Private Wealth Nicholas Pereza-Mathews Private Wealth Dane Parsons Private Wealth Nick Madden Private Wealth Daniel McFarlane Private Wealth Nigel Ormiston Private Wealth Daniel Rees Private Wealth Oksana Wainwright Private Wealth Darren Levy Private Wealth Owen Beattie Private Wealth David Dwyer Private Wealth Patricia Harrison Private Wealth Enzo Salvatore Private Wealth Patrick Trindade Private Wealth Graham Johnstone Private Wealth Patrick Verhoeven Private Wealth Greg Lidicky Private Wealth Paul Lambrecht Private Wealth Lenny Gross Private Wealth Peter Moussa Private Wealth Howard Elton Private Wealth Peter Semaan Private Wealth James Pearson Private Wealth Peter Addison Private Wealth Jason Norval Private Wealth Philip Rhead Private Wealth Joe Durak Private Wealth Prasanna Wickramatunge Private Wealth John Aldersley Private Wealth Ryan Hoffman Private Wealth John Miles Private Wealth Samuel James Private Wealth John Axsentieff Private Wealth Simon Winter Private Wealth Jonathan Di Maggio Private Wealth Stuart McClure Private Wealth Josh Graham Private Wealth Sue McDonald Private Wealth Kate Hanrahan Private Wealth Tim Moffatt Private Wealth Laurie Elliss Private Wealth Tom Fairchild Private Wealth Luke Pavone Private Wealth Xiaoming Huang Private Wealth Luke Robinson Private Wealth Page 11

13 OFFICE LOCATIONS AND DISCLOSURE Melbourne Sydney Perth Gold Coast Adelaide Level 12, 15 William St Melbourne VIC 3000 Level 9, 56 Pitt Street Sydney NSW /140 St Georges Tce Perth WA 6000 Level 9, 1 Corporate Ct Bundall QLD 4217 Level 1, 16 Vardon Ave Adelaide SA 5000 Phone: Fax: Phone: Fax: Phone: Fax: Phone: Phone: Recommendation Criteria Investment View Investment View is based on an absolute 1-year total return equal to capital appreciation plus yield. Buy Hold Sell >20% 20% 5% <5% A Speculative recommendation is when a company has limited experience from which to derive a fundamental investment view. Risk Rating Limited has a four tier Risk Rating System consisting of: Very High, High, Medium and Low. The Risk Rating is a subjective rating based on: Management Track Record, Forecasting Risk, Industry Risk and Financial Risk including cash flow analysis. Disclosure of Economic Interests The views expressed in this research report accurately reflect the personal views of Nicholas Wirubov about the subject issuer and its securities. No part of the analyst's compensation was, is or will be directly or indirectly related to any recommendation or view expressed in this report. The following person(s) do not hold an economic interest in the securities covered in this report or other securities issued by the subject issuer which may influence this report: the author of this report a member of the immediate family of the author of this report Disclaimer/Disclosure This publication has been prepared solely for the information of the particular person to whom it was supplied by Octa Phillip Securities Limited ( Octa Phillip ) AFSL This publication contains general securities advice. In preparing the advice, Octa Phillip has not taken into account the investment objectives, financial situation and particular needs of any particular person. Before making an investment decision on the basis of this advice, you need to consider, with or without the assistance of a securities adviser, whether the advice in this publication is appropriate in light of your particular investment needs, objectives and financial situation. Octa Phillip and its associates within the meaning of the Corporations Act may hold securities in the companies referred to in this publication. Octa Phillip believes that the advice and information herein is accurate and reliable, but no warranties of accuracy, reliability or completeness are given (except insofar as liability under any statute cannot be excluded). No responsibility for any errors or omissions or any negligence is accepted by Octa Phillip or any of its directors, employees or agents. This publication must not be distributed to retail investors outside of Australia. Disclosure of Corporate Involvement Since January 2011, Octa Phillip have been engaged by Cooper Energy Limited for institutional marketing services particularly Asia and potentially other overseas markets as deemed appropriate does and seeks to do business with companies covered in its research. reports are available on Bloomberg, Reuters, FactSet, Capital IQ and Page 12