Australia | Sep 16 2010
By Chris Shaw
A higher oil price makes more unconventional plays economic and Molopo ((MPO)) is looking to take advantage of this trend. The company has positioned itself with large acreage in both the Bakken and Spearfish tight oil plays in Canada, this in addition to established (coal seam gas) CSG reserves in Queensland and other gas opportunities in both South Africa and Quebec in Canada.
Macquarie has recognised value in Molopo at current levels and initiated coverage with an Outperform rating and a $1.60 price target. What Molopo offers according to the broker is attractive potential to build gas reserves and to lift production without the commercialisation constraints commonly faced by other Australian companies.
Management at Molopo has set production targets for the Spearfish and Bakken plays that Macquarie sees as both measurable and achievable, meaning investors will have regular milestones by which to assess the progress the company is making.
Progress to date has been solid, Macquarie noting Molopo has recently upgraded reserves and production is on track with previous guidance. As well, upside potential is becoming apparent as the number of prospective sections the company has in Manitoba has been doubled.
Molopo's potential production growth doesn't come without risks, Macquarie pointing out funding concerns are likely to be a major issue given existing operating cash flow is limited and full field developments costs are about equal to the company's current market capitalisation.
One possible option for Molopo would be to raise the required funds up front via an issue at a 15% discount to the current share price. If this would occur Macquarie's valuation on the stock would fall to $1.39, but as there are a number of funding options the broker remains confident a positive outcome will be achieved.
What adds to Macquarie's confidence is the potential for further capex and opex efficiencies to be achieved as development proceeds, as well as the fact the development itself is incremental in nature.
Production also poses some risks given the unconventional nature of the reserves. The structure at Spearfish will require horizontal wells that are fracture stimulated to enable the delivery of economic flow rates.
Macquarie expects earnings will start to jump higher in FY12, the broker's earnings per share (EPS) forecasts calling for results of 4.0c in FY11 and then 14.9c in FY12and 25.3c in FY13. Consensus EPS forecasts according to the FNArena database stand at 5.6c in FY11 and 15.4c in FY12.
On Macquarie's numbers, Molopo is trading at a substantial discount to its Canadian peers on both an earnings multiple and discount to net present value basis, which adds weight to the broker's view the stock is a Buy at current levels.
Credit Suisse is the other broker in the database to cover Molopo, the broker also rating the stock a Buy with a price target of $1.70. This compares to Macquarie's $1.60 target and implies upside of better than 50% from current share price levels to an average of the two price targets.
Shares in Molopo today are unchanged with a last sale price of $1.09. Over the past 12 months the stock has traded between $0.955 and $1.70.