Australia | Mar 30 2012
– Aurora's earnings mixed
– Production expected to increase in coming years
– Recent share price gains limit value
– Ratings for Aurora adjusted
By Chris Shaw
Aurora Oil and Gas ((AUT)) reported full year net profit for 2011 of US$31 million, the result better than the loss of the previous year but mixed relative to market expectations. The profit was generated on production of one million barrels of oil equivalent and sales revenue of US$75 million.
While higher operating and corporate costs meant earnings fell short of Credit Suisse's forecast of US$39 million, causing modest changes to the estimates of both Credit Suisse and others across the market. On a positive note, UBS points out the earnings result confirmed a rapid increase in reserves, production and revenue growth during the period.
This growth should continue, as UBS noted average annual production from the Eagle Ford project is likely to increase from 2,858 barrels of oil equivalent realised in 2011 to around 11,100 barrels of oil per day pre-royalties in 2012.
What should drive this growth in UBS's view is partner Marathon's drilling schedule of 158 wells in the Sugarkane field. This is an increase from the 89 well drilled or underway last year. Credit Suisse notes Aurora has funding in place for an accelerated drilling program as last year a US$300 million revolving debt facility and US$200 million in a corporate note issue were completed.
With well and infrastructure capex estimates to cost US$276 million, Credit Suisse notes there is funding for possible acquisitions should such opportunities become available.
A field trip by JP Morgan has left the broker with the view there should be reduced risk associated with an enhanced Eagle Ford share recovery scenario. As well, the broker has included some risk value for the Austin Chalk horizon, which if all goes to plan should contribute to Aurora's earnings from 2014.
This sees JP Morgan lift its price target on Aurora to $4.05 from $3.10, while others in the market have similarly lifted price targets. UBS has increased its target to $4.10 from $3.84, while Credit Suisse has increased its target to $4.20 from $3.75.
The consensus price target for Aurora according to the FNArena database has increased to $3.76 from $3.43. Targets range from Credit Suisse at $4.20 to BA Merrill Lynch at $3.07, though the latter is yet to update its model to reflect the full year result.
Along with changes to price targets have come changes to broker ratings. Credit Suisse has downgraded to a Neutral rating from Outperform previously given a 32% rally in Aurora's share price over the past two months, while UBS has made a similar downgrade also on valuation grounds.
Going the other way is JP Morgan, which has upgraded Aurora to a Neutral rating from Underweight previously. This increase in rating is a valuation call given the increase in price target post the result and reflects the view the risk of enhanced Eagle Ford shale recoveries has reduced, but JP Morgan continues to see better value elsewhere.
Preferred over Aurora is AWE Limited ((AWE)), which JP Morgan notes also has exposure to Aurora's Sugarkane asset but the added attraction of free exposure to the shale and tight gas potential of the Perth Basin.
The issue for Citi is there remains a lot of work to be done before more value can be ascribed to Aurora's future projects, especially given the complexity of developing shale fields. This implies the share price has run ahead of justifiable levels, meaning no change to Citi's Sell rating. Overall, the database shows Aurora is rated as Neutral three times and Sell twice.
Shares in Aurora today are weaker and as at 11.30am the stock was down 7c at $3.81. This compares to a range over the past year of $2.11 to $3.95. The current share price implies downside of 1.5%, highlighting the valuation issues pointed to by brokers in setting their rankings for the stock.
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