Australia | May 21 2013
-2P reserve upgrade at Ande Ande Lumut
-Enhances sell-down potential
-AWE seen a strong growth contender
By Eva Brocklehurst
Australian-based oil producer and explorer, AWE ((AWE)), has welcomed a reserve upgrade at the Ande Ande Lumut (AAL) oil field, offshore Indonesia. This field is wholly owned by AWE and the company has previously announced a sale process whereby up to 50% of the asset may be sold down. The outcome is expected at the end of the September quarter. The upgrade to reserves is timely, as brokers believe it will enhance the attractiveness of the asset in the sale process.
The independent assessment has resulted in gross 2P – proved and probable – oil reserves increasing to 101 million barrels from the previous estimate of 76mmbbl. The net entitlement oil reserves estimate has increased to 50mmbbl from 43mmbbl. The smaller increase in net entitlement highlights the low profit share for the asset. AWE originally acquired the field for US$139 million in 2011.
UBS models a 25% contractor profit share in valuing AAL. What surprised UBS was the company's realised oil price expectations – at, or around, the Brent price. The oil in AAL is quite heavy and the broker had expected it would sell for a discount to Brent. UBS assumes a sell down for AAL will net US$100m for a 50% interest, but could be as much as US$140m if higher oil price assumptions are used. Macquarie estimates AWE could realise up to US$110m. Macquarie's oil price forecasts help. The broker values a development of the primary K-sands at US$5.3/barrel of oil equivalent and this compares favourably to the US$1.8/boe value in the original acquisition price.
Citi rates AWE as a Buy and thinks the market is underestimating the value of AAL. A sell-down by the end of September will confirm it has been a value-adding acquisition. The broker values AAL at 59c a share to AWE and thinks the Sugarloaf asset is also undervalued, attributing 55c a share to that asset, net to AWE. While cautious on shale gas in Australia and concerned about attributing too much value prematurely, Citi believes AWE is still a strong growth contender because of a recovery in the Bass Strait gas production, continued growth at Sugarloaf and at AAL. Citi believe that AAL will add 25% to AWE production in FY16.
Adding to the AAL momentum is Yolla field, which has shown a positive performance to date with production ramping up to 57 terajoules/day from 42TJ/d. This, in BA-Merrill Lynch's view, is a key asset for AWE and contributes 30% of the broker's valuation of the stock and 25% of estimated earnings in FY13. Merrills has thought the value of AWE's base business was being discounted by the market because of prior poor performance from Yolla. This is now expected to dissipate. Macquarie also thinks, with hindsight, that the acquisition of AAL, and Adelphi Energy in 2010, were cheap buys for AWE. In the light of the expanded reserves the price of AAL acquisition equates to just US$1.02/barrel.
As with all oil development there are copious risks. UBS finds the key risk at AAL relates to the reservoir and how oil and water production rates change over time. Only three vertical wells have been drilled into the field to date and there is a a good chance that the reservoir is not even throughout, meaning there could be a lot more water earlier in the field life than is currently modelled. The broker concedes that AWE is mitigating this risk somewhat by the large number of development wells that are planned (up to 43) and the high level of water handling being built into the facility. This should allow the field to maintain 25,000 bopd production rates, even as the water cut increases materially.
The FNArena database contains five Buy ratings and one Hold (Deutsche Bank). Where the brokers mostly diverge is on the methodologies that they use to derive value, and hence the price objectives. This has produced a target price range on the database of $1.40 (Deutsche Bank) to $2.50 (Macquarie). Macquarie has reached a valuation that reflects the larger resource base at AAL and produces a 7% rise to net asset value (NAV). The broker's target price represents a 15% discount to the new risked NAV. Macquarie assumes a potential buyer for the sell down of AAL adopts a similar oil price and discounts the substantial progress made regarding sub-surface optimisation, with a 60% risk weighting for the K-sands in AAL.
Towards the other end of the scale (Deutsche Bank has not updated as yet), BA-Merrill Lynch has a target price of $1.55 with a 15% discount to valuation derived from discounted cash flow. The broker's target is based on a US$100/bbl price for Brent (realised 2016) and domestic gas prices of $4.00 per gigajoule. UBS, which upgraded the stock to Buy from Hold on this news, has valued the stock on the assumption $100m is received for the 50% stake and this is paid in cash in the first half of 2014. The broker's sum of the parts valuation increases to $1.70 a share and a 10% discount is applied to account for uncertainty surrounding AAL's development and the BassGas development phasing.
All up, the consensus target price of $1.86 suggests 48.5% upside to the last share price. AWE obtains production and revenues from the Tui project, offshore New Zealand, plus Australian oil and gas assets in Bass Strait and Perth Basin, In FY12 AWE’s total production was 4.7million barrels of oil equivalent, split between oil (36%), gas (55%) and gas liquids (9%).
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