Let There Be ROC

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

 – ROC delivers solid interim result
 – Development rather than earnings remains the focus
 – Scope for some slippage at Beibu Gulf development 
 – Brokers continue to see value, Buy ratings retained

By Chris Shaw

Interim earnings for ROC Oil ((ROC)) were impacted by a higher effective tax rate but reported profit of US$28.6 million was broadly in line with market expectations. The clean result was well received by JP Morgan, who took the view management operated in a suitably disciplined manner during the period.

With full year earnings guidance maintained, changes to earnings forecasts across the market have largely been limited to items such as depreciation and debt assumptions and capex expectations for the Beibu Gulf development in China.

Rather than earnings, the focus for Roc at present remains work on projects through Asia. This includes the Beibu Gilf, the Balai Cluster fields in Malaysia and the Zhanghai block in China. As BA Merrill Lynch notes, these projects should boost Roc's production by around 15% in 2013.

Production at Beibu Gulf is expected to commence either late this year or early in 2013 and ramp-up over six months. NDRC approval is still to be granted and Macquarie notes interim result commentary gave the first hints of some slippage in timing for the project.

For Macquarie, the greatest risk in terms of timing at Beibu is development risk, as four exploration and appraisal wells are planned before any development wells. This suggests any exploration success and subsequent testing could consume further rig time, so pushing out the timing for first production. 

On the plus side for Roc, Macquarie suggests the balance sheet is in good shape leading into a period of growing capex. Development at Beibu is likely to require around US$40 million in the coming half year, while capital requirements at Balai Cluster will be limited until the end of the March quarter next year. Roc currently has around US$36 million in net cash on the balance sheet.

BA Merrill Lynch estimates Roc should generate around $100 million in operating cash flow this year, which the company is fully funded for developments at present. At the same time the stock has a market capitalisation of just over $230 million, which implies an enterprise value to debt adjusted cash flow multiple of just two times. This implies value in BA-ML's view.

BA-ML also sees potential for Roc to benefit through the sale of its non-core UK assets, Blane and Enoch. Management has acknowledged these assets would be worth more to a company exploring in the UK, leading BA-ML to suggest any sale would add to Roc's flexibility to move on other opportunities that may present themselves.

With potential for positive catalysts from ongoing development work, brokers covering Roc remain positive on the stock. The FNArena database shows a perfect five-from-five set of Buy ratings, RBS Australia is yet to update.

Price targets for Roc range from JP Morgan at $0.43 to BA-ML at $0.67, the consensus target according to the database standing at $0.54. 

Shares in Roc today are higher in a weaker overall market and as at 11.40am the stock was up 0.5c at $0.325. This compares to a range over the past year of $0.25 to $0.455, the current share price implying upside of around 70% relative to the consensus price target in FNArena's database. 

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