Of Oil And Coal

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            [1] => ((AWE))
            [2] => ((MCC))
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This story features ROCKETBOOTS LIMITED.
For more info SHARE ANALYSIS: ROC

By Greg Peel

There are some sad realities accompanying the global commodity boom as far as Australian resource companies are concerned. The first is that many a year’s budget had been drawn up with an Aussie around US78c, so US93c is putting a big hole in revenues. The second is local costs are skyrocketing out of control, a fact yet to become apparent to dumbfounded analysts, and the third is that it matters not how much “stuff” you can dig out of the ground if you can’t get it over to port and out to China in reasonable time.

And another reality, more applicable to resource shareholders, is that if you build overblown exploration success into a share price you’re setting yourself up for disappointment.

That was the case yesterday for shareholders in ROC Oil ((ROC)). A great deal of Roc’s recent share price run – from a diluted low around $3.00 when the company made a big rights issue, up to $3.80 before yesterday – has been to do with a skyrocketing USD crude price. But added into the mix was a certain euphoria of expectation over Roc’s drilling program in offshore Angola.

The Angolan region is simply bursting with oil. Men in tattered hats fire on small animals only to find the stuff bubbling to the surface. US oil giant Chevron has long run a bountiful offshore drilling operation, just nearby Roc’s plot. But when the results of two test wells came in this quarter, they were dust. Roc has three more test wells in the region to go, and it may be that the gusher is yet to be struck and James Dean is yet to do a dance under its flow. But for those thinking Angola was the big call option to oil riches, this has been something of a setback.

And it hasn’t helped that the other great black gold hope – Zhao Dong in China – has posted a rather disappointing quarterly production result. Thank God the local White Cliff well produced what was expected of it.

Brokers have mostly put on a brave face over Roc this morning, pointing out there’s three more promising test sites. Only Citi has moved to downgrade its rating, from Buy to Hold, leaving the stock with a 3/5/0 B/H/S ratio. There were some big earnings downgrades however, although these are not quite so devastating when you weren’t actually expected to make a profit this year in the first place.

The average target has only slipped from $3.79 to $3.70, although a shocked Citi took its price all the way down from $4.10 to $3.40. High marker Merrills (Buy) only shifted back from $4.25 to $4.10. The market, however, dumped the stock back from over $3.80 to $3.30 yesterday. Note that the average target had already been exceeded even before the Angolan test results were due. Maybe investors will be a little bit more cautious this time around.

Australian Worldwide Exploration ((AWE)) has also suffered exploration disappointment, this time over in New Zealand. And it’s cost them a lot. Fortunately for AWE however, the ramped-up Tui well is spraying out all black all over the place. Macquarie’s analysts were beside themselves, suggesting Tui had “played a blinder”.

(I’ll do the rugby jokes if you don’t mind).

While production met expectations, JP Morgan was a bit put out that AWE had held back some inventory from Tui for the fourth quarter, meaning revenues were down. This meant earnings forecasts were lowered, and JPM suggests the stock is well overpriced. GSJB Were analysts share that view, making up the two Sells in a B/H/S ratio of 4/3/2. JP Morgan is the low target marker with $2.60, while a gushing UBS (Buy) has set a price of $4.01. The average is $3.30.

The market wasn’t quite sure what to do with the result yesterday, but last night’s US$95 oil has clearly helped to push the shares up by 4% today.

Coal is another commodity for which analysts have been expecting significant price rises, and Macarthur Coal ((MCC)) was a company in which some brokers had high hopes. Analysts have been scrambling to raise their price targets in line with the market, and yesterday’s production report gave them another opportunity to catch up. The average jumped from $7.24 to $8.22. The stock is trading around $8.50 today, but that’s only after a 6% fall.

The fall relates to Macarthur’s disappointing revenues. Analysts have been forced to drop 2007 earnings forecasts by 20-50%, as the company just cannot sell the coal it possibly could (which just goes to show how far behind the curve analyst target prices were). Macarthur has coal coming out of its ears – in the ground, in stockpiles, in a Miller’s storage facility, under the rug – but until there are more rail cars and a greater allocation of time at the woefully underinvested port then that, unfortunately, is Macarthur’s lot.

Macarthur coal is melting in the dark.

The stock lost two of its three Buy ratings this morning as reality set in, leaving a B/H/S ratio of 1/5/1, with Citi being the most pessimistic. GSJB Were retains its Buy, insisting that Macarthur is still the best coal exposure in the market. The analysts do now acknowledge, however, that the stock has become a “momentum” play.

And so that’s the way it is in the Australian resource sector. Not every day’s a jubilee.

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