Australia | Oct 25 2006
By Chris Shaw
High oil prices don’t guarantee strong earnings for companies in the oil sector, a fact demonstrated by a below expectations quarterly report from Roc Oil (ROC).
The company achieved revenues in the quarter of $64.4m, which while an improvement from the $16.8m achieved in the June quarter were well below the $93.3m forecast of JP Morgan and the $88.8m forecast of GSJB Were.
JP Morgan notes the shortfall was a combination of lower than expected production at the newly acquired Zhao Dong project in China, as well as lower than expected production and sales volumes at the Chinguetti project, though as Merrill Lynch notes production actually grew by 230% from the previous quarter.
The lower than expected result has prompted downgrades across the market, JP Morgan cutting its estimate for the current year to $11.6m from $33.3m previously. Other brokers have followed suit, Merrill Lynch now forecasting a profit of $16m this year, down 53% from its previous estimate, while UBS expects a profit of $7m having halved its earnings per share estimate to a result of 3c.
According to Thomson One Analytics, the median earnings per share forecast is 7c for 2006 and 45c in 2007, while the median profit forecast is a result of $111.3m. In contrast JP Morgan is forecasting a result of $124.8m, down from $131.5m previously, while GS JB Were’s forecast is for $78.8m.
Despite the lower earnings outlook broker ratings have been maintained, primarily to reflect the upside from the company’s upcoming exploration program in Angola. The drilling is scheduled to begin around March next year, JP Morgan estimating success could add as much as $1.30 per share to its valuation on the company.
Merrill Lynch also points out there is potential for reserve increases at both Cliff Head and Zhao Dong by the end of the year, while it suggests the release of a development plan for the Wei discovery in China would also be positively received by the market.
The broker has kept its Neutral rating though as in its view there are better ways to gain exposure to drilling success in Angola, while its expectations for the oil price mean it favours companies with both oil and gas exposure, something the company is still in the process of developing.
Following yesterday’s production report the company is rated as Neutral six times in the FN Arena database compared to One Buy and one Accumulate rating, with an average price target of $3.88, down from $3.91 prior to the report. This compares to the median price target according to Thomson One of $3.95.
Shares in Roc are stronger this morning, as at 11.05am the stock was up 6c at $3.56.