Roc Oil Enhances Returns And Opportunities

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

-Immediate increase in production
-Significant upside potential
-Credibility enhanced
 

By Eva Brocklehurst

Malaysia has become very important to Roc Oil ((ROC)). The company has taken a 50% stake in three mature Malaysian oil and gas fields, adjacent to the Balai Cluster interests, and substantially stepped up its projected returns from the region. The fields are owned and operated by Malaysia's Petronas and Roc now has a production sharing contract (PSC) for 21 years.

The cost to Roc is US$25m, with a further US$80m carry, and remaining development costs to be pro rata. Phase one has commenced, with expenditure of US$250m envisaged to develop 10.6mmboe of oil and gas reserves. Brokers understand the second phase is a more risky enhanced oil recovery project that could add another 79.8 mmboe of gross resources. The assets are offshore Sarawak and only a small portion of the oil in place has been recovered. The fields have maintained output at modest levels from early this century. Petronas Carigali remains the official operator with Roc the effective operator now of the development aspects.

Morgan Stanley observes the deal is strategically consistent with Roc's stated intentions, having divested assets elsewhere and focused on Asia. Roc's existing operations in Malaysia are via a risked service contract with Petronas. Morgan Stanley observes this type of contract is not ideal, as Roc does not own the project or reserves. Instead, Roc planned to use the opportunity to demonstrate its credibility as an operator. It appears to have paid off. The broker previously considered the stock was undervalued for its production but acknowledged it lacked depth and needed new opportunities. The latest deal may supply the latter. Morgan Stanley retains an Overweight rating.

UBS believes the relationship being built with Petronas is vitally important to showcase Roc's management capability. This, in turn, should expose Roc to more opportunities. Malaysian PSC requirements are typically tough but Roc has entered into a relatively new style, progressive volume-based PSC on this deal, which rewards contractors for increasing output. Costs and profit share increase as cumulative production increases. UBS estimates the phase one development should generate around $30m in incremental earnings net to Roc in 2014 and adds 5c per share to the valuation. Phase two is estimated to potentially add as much as 17c net to Roc. The lift in revenue from this acquisition has increased the broker's 2014, 2015 and 2016 earnings forecasts by 90.6%, 91.4% and 17.8% respectively.

JP Morgan likes the fact the field is already in production and will provide reasonable returns on basic recovery with leverage to upside factors. The fields are an appropriate area for a company of Roc's size and not expected to stretch the balance sheet. The broker's early modelling suggests phase one on its own is likely to have value and the upside potential in phase two is significant. The broker's target of 62c presents 27% potential upside and JP Morgan retains an Overweight rating.

As was the case with the Balai Cluster, given the limited disclosure surrounding the contract structure, Macquarie suspects the market will place the newly-acquired assets on a discount. What's favourable, unlike Balai Cluster, is that these three fields will make an immediate and significant contribution to production and earnings for Roc in 2014. With the addition of the new fields Macquarie has ratcheted up the company's production forecasts for 2014 to 13,000 bopd, significantly higher than the prior guidance of 6,500-7,500 bopd. This compares with 7,263 bopd in 2013.

There has been some disappointments at the Balai Cluster but the Petronas capital guarantee has limited the impact on Roc and this has underpinned BA-Merrill Lynch's Buy rating. The broker believes the company's growing reputation in China and Malaysia means it is well placed for niche opportunities that are not available to rivals. The number of operators in Malaysia is limited and forming relationships is key to development opportunities. What's critical, in Merrills' opinion, is that Roc has been in Malaysia for three years and demonstrated a capacity to complete developments.

In China, Roc's flagship Zhao Dog project is producing and the new Beibu Gulf has reached its initial target of 15,000 bopd gross. Phase one of the Balai Cluster is complete and while most wells were above expectations, JP Morgan notes Roc is cautious moving to a financial investment decision based on just one field, Bentara, at this stage. Macquarie lauds the fact that the company has, within one month of producing its 2013 financial results, already delivered on four of its targeted initiatives. These include final investment decision on Bentara, acquisition of an offshore Myanmar licence, divestments, and entry into a significant oil field in Malaysia.

The buoyant news is reflected in four Buy ratings on the FNArena database. Price targets range from 61c to 75c and the consensus target is 66c, suggesting 33.5% upside to the last share price.
 

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