Category: Financial Markets

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Following strong first-half results, the Oil Search dividend has been reinstated.

Investment thesis

  • Positive trends in the sale of Alaskan equity interests.
  • Following the recent capital raising, the balance sheet is in good shape. More deleveraging will be beneficial as well.
  • Globally appealing assets with a favourable cost structure.
  • Although expensive, downside hedges to lower oil prices are a good thing in the event of a black swan event.
  • Possible M&A activity.
  • Rising oil and gas prices

Key Risks

The following are the key challenges to the investment thesis:

  • Global oil and gas markets are experiencing a supply and demand imbalance.
  • Lowering of oil and LNG prices.
  • Disruptions in production.
  • Execution risk associated with LNG expansion.
  • Adverse policy changes in PNG (the government is a major backer of the project).

Highlights of key FY21 results

  • Revenue of $667.7 million was up +7% as the oil and LNG markets recovered from the initial effects of Covid-19 (average oil and condensate realisation of $64.66 was up 80% over the pcp). Total production was 13.5 million metric tonnes, a -8 percent decrease from 14.5 million metric tonnes. 
  • EBITDAX of $488.8 million increased by 8%.
  • Core EBIT of $278.8 million increased by 88 percent. OSH is on track to achieve a 40% reduction in underlying operated opex by 2023. Free cash flow increased significantly to $284.3 million (up from $12.8 million in 1H20). 
  • OSH made a revenue of $139.0 million, a huge improvement over the -$266.2 million reported in 1H20. Given the LNG price lag to Brent, management expects solid operating cashflows to continue in 2H21.
  • Net debt fell -11 percent to $2,122.2 million. Gearing was reduced from 29.9 percent to 27.2 percent in the pcp. Under financial covenants, OSH has significant headroom, according to management. 
  • The Board declared an interim dividend of US3.3 cents per share, representing a payout of 49 percent of NPAT and consistent with OSH’s dividend policy of a target payout ratio of 35 to 50 percent of core NPAT.

Company Description  

Oil Search Limited (OSH) explores for and produces gas and oil through operations in Papua New Guinea. The company’s activities are located in the Papuan Highlands which include Kutubu, Hides, and Gobe oil and gas projects.   

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Commodities Trading Ideas & Charts

Ampol in Proposed Merger With Z Energy

Annual refining capacity fell by half to 6.0 billion litres, about one third of company marketed volumes, when Kurnell closed. Kurnell refinery was shut in 2014 because of operational issues and unfavourable demand for the product mix. It was built to produce petrol, but the market has moved increasingly to diesel with advancing engine technology. Strong growth in transport fuels reflects favourable market attributes. Pandemics notwithstanding, volumes in the Australian liquid fuels market grow at close to growth rates in gross domestic product, with solid increases in diesel and jet fuel consumption offsetting a slow decline in petrol.

Ampol’s extensive network and comprehensive product offerings provide some competitive advantage. The closure of refining sees Ampol’s business rest largely on fuel distribution. In this space, it wrestles with expert competition in BP, Shell, and Mobil. Potential long-term threats include substitution of diesel for alternative fuels such as liquid natural gas, or LNG, and electricity. In the case of LNG in particular, Ampol is likely to participate in any shift via its logistics network and filling stations. Ampol maintains a market-leading 35% share of all transport fuels sold. Ampol substantially rests on its competitive supply chain now that Kurnell has been converted into an import terminal.

Financial Strength 

Ampol is proposing an NZD 3.78 per share cash offer for Z Energy via scheme of arrangement. Ampol intends to fund the acquisition in accordance with its existing capital allocation framework, including an adjusted net debt/EBITDA target of 2.0-2.5 times. It says it will use new debt facilities, proceeds from any divestments, and an equity issuance in the order of AUD 600 million. Ampol may have to sell-down some NZ assets to meet NZ competition guidelines. This could include its Gull network.Z had NZD 608 million net debt at end March 2021, net debt/EBITDA of 2.67 quite high versus Ampol’s AUD 735 million at end June 2021, but this in the context of a low growth company focused on yield. Ampol’s standalone leverage is conservative at 18.6% and annualised first half net debt/EBITDA is just 0.8.

Our fair value estimate for Ampol by 9% to AUD 31.00. The increase is in accord with the terms of a proposed merger and our prior stand-alone fair value estimates. Merger and acquisition activity continues at a frenetic pace in the Australasian fossil fuel space, coronavirus fragility and carbon concerns marking some as prey. The latest is apparently the fourth in a series of nonbinding offers from Ampol, including at NZD 3.35, NZD 3.50 and NZD 3.60 along the way. And there is logic to a merger– Ampol and Z have very similar business models. 

Z Energy’s board wouldn’t have opened the books if the chance of a deal proceeding was low. At NZD 3.78 Ampol will be getting Z Energy at a material 33% discount to our NZD 5.60 standalone fair value. This accounts for the 9% Ampol fair value uplift. On a stand-alone basis, our AUD 28.50 stand-alone fair value estimate for Ampol is unchanged. Ampol intends to fund the acquisition in accordance with its existing capital allocation framework, including an adjusted net debt/EBITDA target of 2.0-2.5 times. It says it will use new debt facilities, proceeds from any divestments, and an equity issuance in the order of AUD 600 million.

Bulls Say’s

  • Group returns on invested capital improved materially with the closure of the high-cost Kurnell refinery and the
  • modernisation of Lytton refinery. Quarantining of refinery losses and redirection of free cash flow to marketing and distribution drove the improvement.
  • Dismantled refining leaves Ampol reliant on third parties for two thirds of its fuel requirement and removes an inbuilt hedge, albeit an unprofitable one in some prior years.
  • Ampol wrestles with formidable competition in BP, Shell, and Mobil in the distribution and retail sector.

Company Profile 

Ampol (nee Caltex) is the largest and only Australian-listed petroleum refiner and distributor, with operations in all states and territories. It was a major international brand of Chevron’s until that 50% owner sold out in 2015. Caltex transitioned to Ampol branding due to Chevron terminating its licence to use the Caltex brand in Australia. Ampol has operated for more than 100 years. It owns and operates a refinery at Lytton in Brisbane, but closed Sydney’s Kurnell refinery to focus on the more profitable distribution/retail segment.

(Source: Morningstar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Commodities Trading Ideas & Charts

Vipers updated Fair Value Estimate increased to $21

and the announced Swallowtail acquisition, the fair value estimate of the company increased to $21 per unit while maintaining its narrow moat rating. With second-quarter results, Viper boosted its 2021 production guidance by 2% at the midpoint to just over 26,000 barrels of oil equivalent per day, mainly due to higher activity levels from third-party private operators versus public operators such as Diamondback.

After essentially halting acreage acquisitions in May 2020, Viper has returned to the M&A market with a large transaction. The deal is a $500 million cash and stock (55% stock, 45% cash) purchase of 2,302 net royalty acres in the Midland basin from Swallowtail Royalties, a private mineral rights firm where its acreage deals are financed by Blackstone funds. The price on a per acre basis is at over $200,000 per acre, roughly 80% higher than historical pricing and 40% higher than its last significant deal activity in May 2020.

Despite the high per-acre price, Viper has advantages, as 65% of the acres are operated by Diamondback with a net royalty rate of 3.6%. The value of the deal is demonstrated by the fact that Viper was able to offer a clear long-term growth trajectory for its Diamondback acres, substantially reducing uncertainty around future cash flows, but it wasn’t able to do the same for its non-Diamondback acres.

Company’s Future Outlook

The deal is expected to be completed by the early fourth quarter, and expected post-deal leverage will be about 2 times, which is considered reasonable. The Diamondback development plan is essentially minimal production today to 1,000 barrels of oil per day (bo/d) in 2022 to over 5000 bo/d by 2024. It is expected that this path to generate a solid amount of value for Viper.

Company Profile
Viper Energy Partners was formed by Diamondback Energy in 2014 to own mineral royalty interests in the Permian Basin. It is publicly traded Delaware limited partnership formed by Diamondback to own and acquire mineral and royalty interests in oil and natural gas properties primarily in the Permian Basin. Since May 10, 2018, the company has been treated as a corporation for U.S. federal income tax purposes. At the end of 2020, Viper owns 24350 net royalty acres that produced 26551 boe/d. Proved reserves are mostly oil, and at the end of 2019 stand at 99392 mboe.

(Source: Morningstar)

General Advice Warning
Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

Categories
Commodities Trading Ideas & Charts

Newcrest Mining’s Strong Financial Performance For FY21

Investment Thesis 

• The present share price is trading at a more than 10% discount to our equal weighted (DCF, PE-Multiple, EV / EBITDA) valuation of NCM.

• Among gold mining peers in Australia, NCM has one of the lowest cost bases.

• NCM has one of the lowest cost bases among gold mining peers in Australia. The sustained cost outs will lower the All-in Sustaining Cash Cost (AISC), subject to currency fluctuations (AUD).

• Commodity prices (gold and copper) surprise on the upside, owing to geopolitical worries.

• Leveraged to global monetary policy decisions and the USD, which we view appreciating against other currencies, notably the Australian dollar. 

• NCM has organic development options at Lihir, Cadia, and Golpu.

• NCM offers expansion opportunities at Havieron and Red Chris.

• Strong assets with a lengthy reserve life.

• A solid management team with significant mining expertise.

Key Risks

• Further weakening global macroeconomic conditions.

• A decrease in the group’s output profile.

• Reduced free cash flow means the company will fail its dividend projections.

• A worsening in the global supply and demand equilibrium.

• A decline in gold and copper prices.

• Production difficulties, execution risk, delay, or unscheduled mine shutdown.

• Negative fluctuations in the AUD/USD.

FY21 results summary

Actual earnings of $1,164 million climbed +55 percent year on year, owing to higher realised gold (up +17 percent year on year) and copper (up +42 percent year on year) prices, favourable fair value adjustments recognised on copper derivatives, and other factors, NCM’s investment in the Fruta del Norte finance facilities, and record copper production from Cadia, partially offset by lower gold sales volumes due to lower production (down -3.6 percent year on year), increased income tax expense as a result of the Company’s improved profitability, the unfavourable impact on operating costs (including depreciation) from the strengthening of the AUD against the USD, additional costs associated with COVID-19 measures ($70 million), higher treatment, refining, and transshipment costs and higher Price linked costs such as royalties. Record FCF of $1,104m was mainly due to to pcp, which was characterised by a net cash outflow of $1,291m relating to M&A growth investments, compared to a $21m outflow in the current period (FCF before M&A activity was $455m, +68% higher than pcp, with higher operating cash flows only partially offset by increased investment in major capital projects at Cadia, Increased production stripping activity at Lihir and Red Chris, as well as higher sustaining capital at all ongoing operations).

Company Description 

Newcrest Mining Limited (NCM)engages in the exploration, mine development, mine operation, and the sale of gold and gold/copper concentrates. It is also involved in the exploration of silver deposits. The company primarily owns and operates mines and projects located in Cadia and Telfer in Australia; Lihir based in Papua New Guinea; Gosowong based in Indonesia; Bonikro based in Cote dIvoire in West Africa.

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.