Australia | Jul 04 2006
By Terry Hughes
Over the past two months Hardman Resources’ (HDR) share price has fallen by around 25% and yet it is one of the most highly recommended stocks in the Australian market, so what makes brokers so upbeat on the stock?
It seems that several brokers were of the view that the share price had run ahead of itself when it surpassed the $2.40 mark in early May, but then like many other stocks, the May correction hit it like a juggernaut, sending the stock down towards $1.40.
Since then the stock has seen a bit of a recovery and is currently trading at $1.81, but that is still around 25% lower than eight weeks ago.
However, it wasn’t just the May correction that caused Hardman’s rapid fall from grace. Problems in Mauritania, at the Chinguetti well in particular, more than played their part in the share price’s demise.
Basically the May correction and lower Chinguetti production expectations hit the stock like a double whammy, but the in the eyes of most brokers this has left the stock looking cheap, despite the Mauritanian issues.
Make no mistake, lower production from the 19% Hardman-owned Chinguetti field hit sentiment and earnings forecasts hard, particularly in light of the glowing research reports that had preceded start-up of production, heralding the company as now a fully fledged oil producer rather than just an explorer.
Brokers rushed to slash their earnings forecasts, with ABN Amro cutting its reported net profit forecasts by 45% in FY06 to $37.9m and by 33% in FY07 to $46.3m and JP Morgan was even more drastic, lowering its forecast by even higher percentages, lowering 2006 earnings forecasts by 43% to $40.1m and 2007 by 46% to $39.9m.
Chinguetti production had been averaging at 53,000bpd in April and 66,000bpd in March, but was down to 45,000bpd in May, with UBS forecasting this could trough below this figure before issues are rectified. UBS forecasts now assume average production of 43,000bpd for the remainder of 2006, with total 2006 production reduced by 0.4mmbbls to 2.4mmbbls.
Production forecasts were also lowered sharply at ABN, which is now forecasting production of 2.1mmboe in FY06, down 25%, of 3.1mmboe in FY07, down 13% and of 3.6mmboe in FY08, down 11%.
Then came the good news. Merrill Lynch upgraded its recommendation on the stock to Buy, due to better than expected drilling results in Uganda (50% HDR) citing the 30c value it ascribes to Uganda as basically a free option on the stock given the share price fall.
UBS also raised its recommendation, as despite its earnings and production cuts, the analysts saw the share price fall as "excessive" while Citigroup also upgraded to Outperform, but this was due to increased oil price forecasts.
Although ABN Amro still expects to see further Chinguetti production downgrades before stabilisation is achieved, possibly heading as low as 30,000bpd, the analysts see the stock as cheap at current levels. They too recently lifted their recommendation to Buy.
In its latest report on the company, Merrill Lynch sums it up rather nicely, "Hardman trades around exploration activity and not earnings forecasts," and the broker sees the stock as offering exposure to "frontier, potential high impact exploration activity."
Hardman is rated a Buy by eight of the nine brokers and equity advisers in the FN Arena database that cover the stock and a Neutral once, by JP Morgan who still sees too much uncertainty despite the view that the stock appears cheap at current levels. This puts it up there with News (NWS), Alumina (AWC) and James Hardie (JHX) as the mostly highly recommended stocks in Australia.
The average target price on the stock stands at $2.30.