Did anybody post this??\It looks pretty good to me!
RBC dated Nov. 13th
COMPANY UPDATE | COMMENT
NOVEMBER 13, 2008
Oilexco Inc. (LSE: OIL; TSX: OIL)
Bolt-on acquisition target becoming distressed seller
Outperform
Above Average Risk
Price: 220.00
Shares O/S (MM): 230.2
Dividend: 0.00
NAVPS: 545.00
Float (MM): 230.2
Price Target: 440.00
Implied All-In Return: 100%
Market Cap (MM): 506
Yield: 0.0%
P/NAVPS: 0.0x
Strategic Ownership: Management and directors (1.6%), Institution #1 (8.5%), Institution
#2 (7.0%)
Market Cap in GBP
Falling oil price and credit crunch squeeze Oilexco
Poor Q3/08 results: Expectations had been reined back due a six-week
maintenance shut-down on the Balmoral FPSO, but Q3/08 production of
11,950b/d was down on our forecast, and sales were even lower, at 8,620b/d.
Consequently revenues slumped to $95m (from $149m in Q3/07). Net income of
$59m was inflated by a $120m gain on derivatives due to the oil price fall; but
stripping out this non-cash item, cash flow from operations was just $44m
($0.20/share). The company ended the period with net debt of $533m and gearing
of 80%.
Financing: Oilexco has negotiated an $105m (£70m) extension of its $150m
(£100m) pre-development facility from the current repayment date of 31 January
2009 to 30 November 30, 2009. Given the requirement to pay back $45m (£30m)
in January, the company needs to free-up additional cash – that looks a challenge
for management; at the end of September Oilexco had cash-in-hand of $29m, and
given the weak oil price we expect the company to run a cash deficit in Q4/08.
Commitments: Oilexco's commitments total $1.7bn, of which $595m fall due
within the next 12 months. Some of the commitments, such as the Shelley FPSO
contract are firm; however, management could seek to sublet the two drilling rigs
(the Sedco 712 and the Ocean Guardian) that it has under long-term contract, and
defer exploration spending.
Deals: We do not believe that management can fast-track any asset divestments,
as buyers of smaller assets/small stakes are struggling to access finance.
Outlook: The falling oil price and the possibility of project deferments are
putting downward pressure on our updated 545p/share ($10.93) PV12.5%
valuation; but we believe that Oilexco would make a neat bolt-on acquisition for
one of the larger independents. Moreover, we believe a deal would be concluded
at a level closer to our NAV, than the current share price.
Management is
scheduled to present to analysts in London on Tuesday 18 November; this would
be an excellent opportunity for Oilexco to showcase its portfolio. Whilst we
expect the stock to fall on the back of today's disappointing update, we continue
to envisage a bid for the company in the medium term.
Valuation
On a sum-of-the-parts basis we value Oilexco at 545p/share (C$10.89).This comprises a core NAV of 125p/share and risked upside of
420p/share.
Core valuation: of 125p/share comprises Oilexco's equity stakes in producing fields and fields under development plus financial
commitments including year-end 2007 net debt of US$377m.
Risked upside: Our 420p/share valuation is based upon our assessment ofOilexco's exploration prospects, unappraised discoveries and
long-term development candidates. Using the available data, weconstruct valuations of the various projects, which we then "risk" to
reflect the relevant technical and commercial risks, including forexample, a wells probability of success and the uncertainty associated
with the timing of any developments.
Confidence in the oil sector has been shaken and a total unwinding ofthe current discount is unlikely in 2009, in our view. Therefore we
are pitching our 12-month target price at a discount to NAV of 20%,which is in line with the average achieved following the sector's
1998/99 crash. With the caveat that, in the event of a corporate dealwe would expect a price close to our NAV. Our 440p/share price
target is 20% below our Oilexco NAV.
Price Target Impediment
In our view, the primary risks facing Oilexco are:
Finance: Oilexco needs to access additional cash and the funding constraint may delay future projects.
Disclosure: Compared to its peers, Oilexco's disclosure is poor andconsiderable uncertainty surrounds the potential of its undeveloped
fields, most notably Huntington.
Commodity price fluctuations: During periods of limited stock-specificnews the stock will likely move with the benchmark (Brent)
oil price. A US$10/bbl decrease in our long-term planning assumptionswould lead to a 20% drop in our NAV (conversely, a US$10/bbl
increase would augment our NAV by 20%).