RJ report from yesterday- good read International Oil & Gas
Share Price Appreciation Prompts Downgrade
Event
Porto’s stock has gained 65% in the past couple of days (compared to a 3%
drop for the TSX Venture Composite), following an operational update Monday
morning on the drilling of the Alcobaça-1 Pre-salt exploration well, which is
expected to reach total depth within the next two weeks.
Recommendation
We recently expressed our view that speculative activity would likely pick up
ahead of results from the Alcobaça-1 well. With that in mind, and based on the
limited amount of new information provided on Monday, we have little
conviction that the sharp increase in Porto’s share price is underpinned by a
fundamental change in the company’s underlying value, or that the risked
value we assign to the prospect in question is substantively understated. As
such, we believe that the risk-reward balance of an equity investment at
current levels is weighted to the downside. We are hence moving to an
Underperform rating on Porto, with an unchanged target price of $0.15.
Analysis
Under a blue-sky scenario, Alcobaça-1 could undoubtedly be transformational
for Porto, with independently certified gross prospective resources in the order
of 588 Bcf, or 294 Bcf net to Porto’s 50% interest (recall that the well is being
drilled under a joint venture with Galp). And indeed, from our perspective,
Monday’s update contained a couple of modestly encouraging preliminary
observations; namely, i) a thicker-than-expected salt section (which may
increase the likelihood of an effective seal for the targeted pre-salt four-way
closure), and ii) elevated gas reading once the well drilled out of the salt.
However, the risks that remain are considerable, including the geological risks
inherent to frontier exploration (in a country, we might add, with very limited
past exploration success); the regulatory risks impacting the probability of a
commercial discovery; and a significant financing risk. Even though Porto is
being carried on 50% of the Alcobaça-1 well (estimated at $7 mln gross), we
anticipate Porto will require external funding after the end of calendar 2012.
Valuation
Our target price is based on our F2012E Risked NAV of $0.16/share (Exhibit 1).
Our NAV assigns $0.04/share for Alcobaça-1; this derived value closely matches
the transactional price implied in the farm-in agreement signed with Galp.
Cash 1Q 2Q 3Q 4Q Full Revenues Risked
Flow/Share Nov Feb May Aug Year (mln) NAV
2011A US$(0.01) US$(0.01) US$(0.01) US$(0.01) US$(0.03) US$0
Old 2012E 0.00A (0.01)A (0.01) (0.01) (0.03) 0 0.16
New 2012E 0.00A (0.01)A (0.01) (0.01) (0.03) 0 0.16
Old 2013E (0.01) (0.01) (0.01) (0.01) (0.02) 0
New 2013E (0.01) (0.01) (0.01) (0.01) (0.02) 0
Source: Raymond James Ltd., Thomson One
Rating & Target
Old: Market Perform 3 New: Underperform 4
Target Price (6-12 mos): C$0.15
Current Price ( Oct-10-12 ) US$0.24
Total Return to Target -38%
52-Week Range US$0.36 - US$0.06
Market Data
Market Capitalization (mln) C$48
Current Net Debt (mln) -C$9
Enterprise Value (mln) C$39
Shares Outstanding (mln, f.d.) 261.0
10 Day Avg Daily Volume (000s) 252
Dividend/Yield C$0.00/0.0%
Key Financial Metrics
2011A 2012E 2013E
P/CFPS
nm nm nm
P/NAV
145%
Brent Oil (US$/bbl)
US$99.96 US$111.62 US$106.75
HHub (US$/mmbtu)
US$4.14 US$2.90 US$3.29
Exchange Rate (US$/C$)
1.02 0.99 1.02
Production: Oil (bbl/d)
nm 0 0
Production: Natural Gas (mmcf/d)
nm 0 0
Production: Total (boe/d)
nm nm nm
Debt/Cash Flow
nm nm nm
2P