BMO: Outperform rating and £0.80 target price for IAEAccording to BMO Capital Markets:
Ithaca Energy
(IAE-LSE; IAE-TSX)
Stock Rating:
Outperform
February 26, 2015
Stella Delays; Tempting to Make a Tactical Retreat but Shares Oversold
Price (24-Feb) ₤0.67
Target Price ₤0.80↓
Event
Ithaca yesterday announced a further significant delay to the start-up of production from the Greater Stella Area, which has been pushed back to Q2/16 (from Q3/15). Some delay was probably expected by the market but this appears to be a worst-case outcome. Construction work on the critical path FPF-1 is 75% complete, however, the project has fallen behind schedule and it is clearthat there is little appetite to accelerate the timetable given the current depressedoil price and the risk of running into the winter weather window. Incrementalnet costs to Ithaca are relatively low at ~$10 million, and the company’s peak net debt is broadly unchanged at ~$850 million (from total facilities of $1,010million).
Impact & Analysis
A deferral of Stella (with an assumed knock-on impact on satellite developments) reduces our NAV by 10p; however, there is a partial offset to this from our expectation of a higher oil price next year, which we estimate adds3p to our NAV, resulting in a net reduction to our NAV of 7p (or 9%).
Valuation & Recommendation
A 9% adverse impact to our valuation is not insignificant but, in our view, the bigger concern is the fact that the company’s key catalyst has been deferred (potentially) into 2016, and with it Ithaca’s ability to take advantage of near-term opportunities in the North Sea. We understand investors who choose to look for better near-term value elsewhere at the moment, but we think the market’s reaction to the announcement looks extreme and we expect the shares to recover some lost ground once the market fully digests the impact and acknowledges the potential partial offset of a higher oil price in 2016. Our revised core NAV stands at 73p/sh. We reduce our target price to 80p/sh but maintain our Outperform rating.