Interest Mounts Over Roc Oil’s Future Plans

This story features ROCKETBOOTS LIMITED. For more info SHARE ANALYSIS: ROC

-Strong Beibu production to continue
-Merrills suggests North Sea sale
-Question of where to invest
-Is Myanmar worth the risk?
 

By Eva Brocklehurst

Mid cap oil producer Roc Oil ((ROC)) has several options for growth ahead but honing of the development and exploration focus may be necessary. Brokers also have suggestions for what the company can do with its robust cash flow.

BA-Merrill Lynch has a Buy rating and wants to see non-core assets sold. In particular, this means the assets in the UK North Sea. Talisman, the operator of what the broker considers is Roc's underperforming and over-taxed North Sea assets, has flagged a divestment plan. This could be the opportunity for Roc, as packaging its assets for sale with Talisman could result in a higher price. Merrills currently values these assets at US$8m, which is below recent North Sea transaction multiples of US$11/boe of 2P assets. Applying such a multiple to Roc's assets generates a US$16m valuation.

Merrills expects the company to generate substantial free cash flow in 2013/14 of around US$120m and believes it is well placed to fund the longer term organic growth projects. Hence, surplus capital from any North Sea sale could – or should? – be returned to shareholders.

Roc has two Buy ratings and two Hold ratings on the FNArena database. The consensus target is 65c, suggesting 32.1% upside to the last share price. Roc's main assets – African assets are being sold – are in China, Australia and the UK. Production comes from six core producing oilfields, two operated by Roc, with a seventh under development. Sales revenue was up 14% in the September quarter to $68m, on higher oil volumes and a 6% increase in realised oil prices. The flagship Zhao Dong project, in China, is producing solidly and the new Beibu Gulf project, in China, has reached initial targets. The Australian asset, Cliff Head, offshore Perth Basin, is in decline.

September quarter production of 0.66 mmboe was up 9% over the preceding quarter and was primarily due to a 57% increase from Beibu Gulf oil field. Beibu has reached its plateau production rate of 15,000 BOPD (gross). Production guidance of 2.4-2.7 mmboe has been maintained. The reaching of the production rate at Beibu may be a relief for investors but with all 15 wells on line UBS asks how long will it be before the decline starts – probably nine months is the answer. The final investment decision (FID) on Balai Cluster, Malaysia, is still expected by end of 2013, but timing looks tight to both UBS and JP Morgan, given the Extended Well Test (EWT) is only just about to begin. UBS looked at the forward cash flow potential from 2014-16, excluding Balai Cluster as well as Beibu Gulf phase 2 and any uncommitted or discretionary expenditure, and observes Roc will still generate an estimated $208m or 30c per share.

So, how can this cash be best put to work? UBS expects some to go into Balai Cluster development, although the actual investment profile and scale there is still unknown, but staged development means revenue could be generated before all capex is invested. There's also further exploration, although Merrills notes Roc is moving away from high-risk exploration activity in favour of lower-risk small field appraisal and development. Roc is actively seeking additional growth opportunities so UBS discounts the prospect of a capital return to shareholders any time soon. UBS sits on a Neutral rating and wants clarity on growth before moving. It's a matter of what the company decides to tackle in terms of growing production. There are three areas of potential including ongoing drilling at Zhao Dong, FID on Balai Cluster and possible FID on Beibu phase 2.

Morgan Stanley noted the steady gains to production and remains Overweight on Roc. This broker thinks the company is materially undervalued for its production, although acknowledges it lacks depth in exploration and new opportunities. Being a pure oil producer the company should benefit if oil prices stay higher for longer. Still, the balance sheet is sound and there's nil debt. Demand for capital in 2014 is seen to be contingent on the development decisions for the Balai Cluster and the Beibu-WZ12-8E field.

The company's quarterly production report contained nothing surprising to JP Morgan. The broker's assessment is more a case of stock price volatility and risk, and risk factors are applied to the various growth projects based on confidence. The base case incorporates an 80% risked valuation for the Balai Cluster proceeding through phase 2. The news that Roc still aims to reach FID by the end of this year is encouraging but JP Morgan flags the fact that EWT data will take time to be analysed and incorporated into the development plan. Phase 1 is complete and the wells were above expectations so, even if phase 2 does not proceed, the structure of the involvement means Roc is likely to recoup most of its investment to date.

Of note, Roc is preparing to bid for offshore Myanmar exploration licences in the upcoming auction and bids are due 15 November. Roc is also looking to farm into one block onshore. As long as Roc keeps to shallow water exploration and development JP Morgan is not worried by this strategy. Many oil companies have decided the opportunities presented by the opening up of Myanmar is worth the residual political risks. UBS also experts the company will be active in Myanmar exploration but emphasises the risk.

In Africa, Roc has sold its Juan de Nova, Mozambique Channel, interest, but this is conditional on government approval. In Equatorial Guinea, partner White Rose wants to withdraw from the Block H permit. JP Morgan thinks this indicates almost zero value should be attributed to Roc's residual holdings there.
 

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