Numis Securities initates coverage at 200p
Brenda – potential value unrecognised
The value of Oilexco is, simplistically, the value of its Brenda project. Our analysis indicates that the share price is reflecting less than half the recoverable reserves that management believes will be produced. This appears unduly pessimistic. Our valuation of Oilexco points to a share price target of 200p and we initiate coverage with a BUY recommendation.
Oilexco has minor producing assets in North America and interests in five North Sea blocks. However, the value of the shares, in practice, is the value of the Brenda field in the central North Sea, which Oilexco owns 100% and which it discovered in January 2004. The extensive appraisal of Brenda is now almost complete and management states that a development plan should be approved early next year leading to first production early in 2006.
Brenda contains good quality oil and is located in a proven hydrocarbon region close to existing (under-utilised) infrastructure. Management plans to develop the field as a simple tie-back to an existing production facility and it should, therefore, be low cost.
The key issues for valuation are the quantity of recoverable reserves and the oil price.
The appraisal process has not been surprise-free and there will be some uncertainty over reserves until production history has been recorded. Management believes that recoverable reserves are between 70 and 150 million barrels (mmb).
The field is of a size and in a location which should make it of interest to a number of medium-sized E&P companies, particularly in a North Sea asset market which is short of sellers. Many recent North Sea asset transactions appear to have been priced off the Brent futures strip and used a cost of capital of less than 8%. Oilexco's management has the opportunity to crystallise value on the basis of these assumptions by either disposing of Brenda completely or selling a significant interest to a partner.
Our analysis shows that the current share price is discounting reserves of under 30 mmb, or less than half the bottom end of the management range. This appears unduly pessimistic. On the basis of 50 mmb oil reserves (still less than management believes can be produced) and the current Brent futures strip, Brenda should be worth up to US$600m or 243p/share. There appears to be a significant valuation anomaly and,
allowing for other assets, we initiate coverage of Oilexco with a Buy recommendation and a fair value price target of 200p.
Analyst Andrew Whittock
Market Capitalisation £120m
Shares in issue 109m
Code OIL
Net assets (9/04) US$95m
Net cash (9/04) US$32m
