AWE Reduces Exposure To Oil Price Volatility

This story features ORIGIN ENERGY LIMITED. For more info SHARE ANALYSIS: ORG

-Net cash position by June 2016
-Perth Basin the next catalyst
-Lengo sale may be delayed
 

By Eva Brocklehurst

AWE Ltd ((AWE)) sustained strong December quarter production, supported by more well connections at Sugarloaf (Texas shale oil) and a full quarter's output from new wells at BassGas (Victoria), which helped counter a falling oil price.

The company recently announced the sale of Sugarloaf for US$190m, with the production contribution from this asset expected to cease at the end of the March quarter.

With more visibility on the net debt balance, Credit Suisse understands the timing of the Sugarloaf sale should remove a headwind from the balance sheet and, ideally, reduce the downside exposure to the oil price. The broker hopes the sale has not limited the upside for AWE, when the oil price finally does rally.

Despite relatively flat earnings from the field, net debt roses $41m to $197m. Credit Suisse assumes this is largely in relation to working capital movements and the timing of sales and that it should subsequently reverse, although the broker notes a similar spread occurred last year in the June quarter and did not reverse in the September quarter. Credit Suisse retains a Neutral rating.

The timing of the debt increase relates to a lifting from the Tui field, which UBS expects should flow through in the March quarter. A net cash position of $60m is expected at the end of March, once proceeds from Sugarloaf's sale are received. This will reduce AWE's exposure to oil, given most of the production is associated with gas contracts, that have no oil linkage, or from the Tui field (NZ), where hedging is in place.

Production was ahead by 7.0% compared with the September quarter, and 7.4% ahead of UBS forecasts. The broker considers the next catalyst is the outcome of the sale process for joint venture partner Origin Energy's ((ORG)) 50% stake in the Perth Basin assets.

UBS carries $88m in valuation for the Waitsia field and AWE's existing Perth Basin assets. The broker's valuation of AWE increases on the sales proceeds for Sugarloaf, partly offset by reduced Indonesian asset values (Ande Ande Lumut), due to concerns regarding the progress being made in a low oil price environment.

BassGas produced at an average rate of 56 TJ/d and benefited from the two new wells which were brought online in the September quarter. Tui production also held up better than UBS expected, with field output declining only 12% quarter on quarter.

Capital expenditure in the December quarter was a low $17.9m, UBS observes, and should be much higher in the second half, from planned drilling at Ande Ande Lumut and investment in Waitsia stage 1A.

The company remains confident of achieving a significant price improvement for its gas over the $4-5 per gigajoule that is currently in place. UBS envisages potential for AWE to announce asset impairments of up to $300m, depending on the company’s view on future oil prices.

Earlier, at its AGM, AWE signalled Sugarloaf, Cliff Head (oil, WA) and Lengo (gas, Indonesia) were all up for sale. With due diligence on Cliff Head due to conclude this month and the Sugarloaf announcement this leaves just Lengo.

Macquarie suspects that, with partner Kris Energy completing the FEED (front end engineering design) and negotiations around gas sales progressing, AWE may wait until the final investment decision is due before looking to monetise the asset. On an un-risked basis the broker values AWE's 42.5% stake in Lengo at 20c a share.

Otherwise, the balance sheet is considered healthy with the elimination of Sugarloaf expenditure and Macquarie retains an Outperform rating. Macquarie also considers it possible the Ande Ande Lumut G-sands wells may be delayed, and this should mean capex falls to the lower end of the $155-185m guidance range provided at the AGM.

Macquarie also expects further impairments are likely at the results, in Tui and BassGas. Citi does not believe the impairments will exceed $50m and will only be related to Tui, as most assets are insulated through fixed-price gas contracts. The broker considers the stock cheap and retains a Buy/High Risk rating.

FNArena's database contains three Buy ratings and three Hold. The consensus target is 92c, suggesting 81.8% upside to the last share price. Targets range from 60c (Deutsche Bank, Credit Suisse) to $1.33 (Citi).
 

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided.

Click to view our Glossary of Financial Terms