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Ithaca Energy (IAE CN/LN)1,6: Discontinuing coverage | Sterling Resources (SLG CN)1: Discontinuing coverage | Africa Oil (AOI CN/SS); BUY, C$2.80 & Tullow Oil (TLW LN); HOLD, £2.40: Emekuya-1 Oil Discovery in Kenya
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Ithaca Energy (IAE): First oil from Stella (HOLD)
Ithaca Energy
First oil at Stella is delayed by about a month, reducing the contribution of Stella to FY17 production by the same period. While this has an impact on FY17e free cash flow, this is negligible to our valuation. More importantly, FY17 opex are estimated at only US$18/boe, below our estimates of US$20/boe. There are opportunities to reduce opex further. Harrier is expected to reach first oil in 2018, one year earlier than we expected and at a cost of US$40 mm lower than we anticipated. The overall development cost is less than US$6.0/boe. Ithaca holds numerous discoveries around Stella that would be developed with a similar cost structure to Harrier.
Ithaca Energy (IAE LN/CN)6; BUY, £1.30: First oil at Stella delayed by one month on minor electrical problems | Europa Oil & Gas (EOG LN) (not covered): Sale of interest in Wressle in the UK | Exillon Energy (EXI LN) (not covered): October Production in Russia | SDX Energy (SDX CN/LN)1 : Buy, £0.50; 3Q16 Results in Egypt | Sound oil (SOU LN) (not covered): Ne issue of Equity larger than anticipated | Weekly Crude Oil Cut
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Ithaca reported a solid 3Q16 quarterly result with operating cash flow ahead of our numbers on low costs. YTD opex is running at only US$23/boe vs FY16 guidance of US$25/boe. First oil at Stella is expected at the end of November 2016 with a material contribution to 4Q16 production. This will allow the firm to establish average production in 2017 at 2.5x the level of 2016. The remaining activities to first oil at Stella are associated with topsides and are therefore independent of weather. FDP at Vorlich could take place in 2017. The development of the Harrier field also features high on the priority list with first oil potentially from 2019. We have increased our ReNAV for Ithaca from £1.05 to £1.31 per share as we factor lower opex in our models for the producing fields. We have also rolled forward our DCF by one year (starting from early 2018) which incorporates higher tax losses.
Ithaca Energy (IAE LN/CN)6 ; Buy, £1.10: 3Q16 Operating Update - Production over 3Q16 was 9,900 boe/d (GMP FEe: 9,575 boe/d) with overall production for the first 9 months of 2016 standing at 9,550 boe/d (GMP FEe: 9,440 boe/d). FY16 Production excluding Stella will now be slightly ahead of the Company guidance of 9,000 boe/d. Net Debt at the end of the quarter was US$598 mm, down from US$606 mm at the end of 2Q16. First Oil at Stella remains scheduled for November 2016, in line with previous guidance. Market Reaction: slightly positive on good production. We continue liking Ithaca shares that provide a combination of leveraged exposure to oil price, value, growth and a balance sheet quickly strengthening.
Overall, the Company continues to be in very good shape. Overall Free Cash Flow over 1H16 was about US$60 mm. This has been applied to reduce debt by US$45 mm. The FPF-1 is hours away from reaching location and the weather forecast looks good. Priority continues to be to reduce net debt, however the Company has started also considering acquisitions outside of the Stella area as it looks at future growth. Importantly Ithaca is not exposed to any material early infrastructure decommissioning risks (this is not new but is an important part of the investment thesis). We estimate that today's announcement adds about 4p per share to our current ReNAV of £0.93 per share.
Market Reaction: Neutral.
Market Reaction: positive. Ithaca continues to build on its strategy to grow its resources base in the Stella area at minimal costs (and no near term decommissioning liabilities!). We understand that the fluid at Austen is compatible with Stella. Doubling the size of Vorlich would add 7-8p/sh to our Core NAV and 3.6 mmboe 2P reserves net to Ithaca. With the recent share price drop, an improving balance sheet and Stella start-up two months away, Ithaca is our preferred North Sea story.
Market Reaction: neutral. Production is slightly ahead of our numbers and Net Debt is lower than we expected. The sail away date of the FPF-1 vessel now looks to be a few weeks behind the previous indications (late June/early July) with probably knock-on effect to the end of September first oil. With improving financials and Stella start-up in about three months, this is a story we continue liking.
Ithaca has announced that it has secured access to the Norpipe export pipeline and will be transferring its production using this route instead of tankers during 2017. This approach will reduce its cost base further, making it one of the lowest-cost producers active in the UK North Sea.
Market reaction: positive. We view the pipeline export solution for Stella as being very good news. This has historically been a source of concern for us given the risk of downtime associated to weather. Exporting through a pipeline would boost uptime and will reduce opex/boe by US$1.5/boe. In addition, this will likely result in an increase of recoverable reserves (lower cost implies longer economical life of the field). The change over from tankers to pipeline in 2017 is expected to result in minimal down time. Production for 2017 is now also likely to be at the upper end of the range of 20-25 mboe/d. We estimate the payback to be about 18-24 months. We recognize that the shares are not as inexpensive as they used to be but we continue liking the combination of growth, leverage to oil price, improving balance sheet and hidden value in the asset portfolio.
Neutral, as no particular new information was provided during the 1Q16 presentation. However, the Company continues to be very focussed on execution and in control of its destiny.
Market reaction: slightly positive. While the borrowing base under the RBL has been reduced from US$515 mm to US$430 mm, the Company continues maintaining healthy headroom of US$100 mm (US$125 mm previously). Net Debt also continues to drop to US$630 mm (US$665 mm at the end of December) in line with previous indications of US$635 mm. This implies US$35 mm Free Cash Flow in 1Q16. In a rising oil price environment, Ithaca is one of our preferred international E&P names.
Market Reaction: Neutral. Everything is on track with no material new disclosures during the trip.
2015 was an extremely difficult year for the oil sector, and Ithaca weathered that storm better than many of its peers. With Stella finally set to come onstream in Q3 this year, Ithaca will be bringing onstream a high-margin barrel project, which significantly enhances the company’s production base and financial outlook as it moves into 2017.
FirstEnergy International Universe: Commodity Price Update
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Overall, we believe that the Company continues to be a stand out performer among the leveraged North Sea Producers. The Company's Net Debt continues to drop faster than we anticipated. The key projects are on track and we believe that the Company is benefiting from both financial flexibility and depth of portfolio that could surprise positively. Visibility on the upside associated to Ythan or an oil export solution at Stella is expected sometime in 2016. The oil export solution could be a big event in our view. Production and reserves upside opportunities at Pierce and Cook in 2017 could positively surprise and are relatively low cost. Vorlich could also be very material.
The Petroleum Revenue Tax (PRT) is being scrapped completely and the Supplementary Charge on oil and gas is being cut in half to 10%. While this is positive for the fundamental value of assets, this has a muted impact on the equity value of companies given the very large tax losses they carry. The winners are Premier Oil and Ithaca Energy that will benefit from U$2.5-8.0 mm cash tax reduction per year. Our ReNAV for Ithaca and Premier Oil are up respectively £0.05 (+10%) and £0.09 (+7%) per share to £0.57 and £1.31. However none of these adjustments fundamentally change the urgent need to reduce the very high level of net debt.
We have updated our Capex programme assumption for 2016 and revised downwards our production forecast for 2016 and onwards. Overall our 2016 production forecast is down 30% to about 13,900 boe/d, while 2017 is broadly unchanged.
Market Reaction: Slightly negative on sentiment, given delays at Stella and low production guidance. On a NPV basis, the delay at Stella is offset by a likely US$10-24 mm reduction in the incentive payment to Petrofac. The acquisition of Vorlich is good news in our view, as it maximises the value of the Stella infrastructure. Assuming a US$10/bbl tariff would suggest an unrisked, undiscounted Cash Flow of US$40-50 mm to Ithaca. With 11.5 mboe/d hedged at US$60/boe in 2016, even with lower production, we forecast the Company will generate about US$50 mm Free Cash Flow on the Brent Forward Curve. With an improving balance sheet, Ithaca remains one of the best leverage plays on Oil in our International Universe.
FirstEnergy has revised its near-term commodity price outlook, as is typical near the end of each quarter. In the near-term, and as it pertains to the International universe, we have become more bearish with respect to our Brent oil price, but continue to be of the view that the crude oil market will come back into balance in the second half of 2016e. Our 2016e Brent oil price forecast has decreased 14% to average US$53.50/bbl, while our 2017e and longer-term forecast remains relatively unchanged. Thus, while there is a substantial decrease to our 2016e cash flow estimate, there is less of an impact on most of our net asset value estimates.
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Market Reaction: neutral, the results are in line with our expectations. This is a story we continue liking.
Market reaction: Neutral, as there was nothing fundamentally new.
Market Reaction: Slightly positive as the borrowing base of Ithaca had been an area of concern to some investors. However, with the recent US$66 mm equity issue, we anticipate that this concern has already been addressed to a large extent. We continue liking Ithaca as one of the few North Sea Companies having entered a phase of deleveraging.
As we approach 2016, Ithaca has a strategy built for US$50/bbl oil. We feel that the investment by Delek Group is an endorsement of Ithaca’s strategy and also highlights the future value of Stella and other opportunities in the Greater Stella Area and the rest of the portfolio more widely.
We reiterate our Top Pick recommendation on Ithaca Energy with a target price of £0.90/C$1.80 per share following Delek investing US$66 mm in Ithaca to hold 19.9% of the Company with two representatives at the board. This cash injection will boost the Company’s balance sheet and ease concerns around the imminent Reserves Based Lending Redetermination. The Company is looking to use the proceeds to acquire assets in the Greater Stella area. While we recognise the transaction is somewhat dilutive to fundamental value, the fact it was priced at a very large premium to yesterday’s close is a vote of confidence of the quality of Ithaca’s assets. We also wonder if Delek would not eventually buy the entire Company. We continue liking Ithaca that offers one of the best leverages to a potential bounce back to oil price while being in a better financial position relative to other comparable leveraged play to oil.
Market Reaction: Positive. The US$30 mm capex reduction represents a £0.06 per share boost to valuation (18% of current share price). The reduction of the Company's net debt supports our view that the Company has entered a phase of deleveraging the balance sheet. Our ReNAV for Ithaca is very leveraged to oil price movement and we continue viewing Ithaca shares as one of the most attractive vehicles to play an oil price bounce back.
Market Reaction: Negative as this might reduce the consensus on valuation. This is likely to have a more muted impact on our valuation given that we had built in some contingencies on Stella's capex. In addition, when these payments are due, the Stella project should be generating a material amount of cash, with therefore no impact on Ithaca's near term financial position. This issue of potential cost related to a change order had been a concern to many investors for some time and this announcement, with a relatively "modest" settlement, might be received with relief. Importantly, for Petrofac to agree to the terms gives a good indication of how confident they feel about the timing to sail-away. In any case, even with these additional costs, the shares continue to offer tremendous value.
Market Reaction: Slightly positive on strong operating cashflow, reiterated start-up date at Stella and lower forecasted peak net debt.
Market Reaction: Slightly positive. The results are in line with our expectations, which shows that Ithaca is executing on its targets. Most importantly, the start-up of Stella is on track for 2Q16. Delivering this project is central to the story. Ithaca is a name that we like, offering one of the best values in our international coverage universe.
The changes are expected to have very limited impact given that the ring fence tax rate is not expected to be impacted by the progressive 2% corporate tax reduction. There is limited visibility of the qualifying new expenditure that would benefit tax allowances.
Market Reaction: Slightly Negative on sentiment; this however does not change the solid fundamentals of the firm. These sorts of class action lawsuits are uncommon in the UK and the bar for success against the company/board will be high. We would not anticipate the potential liability to Ithaca to be material. We continue viewing Ithaca as a potential take over target.
Market Reaction: Neutral. While this is a solid set of results, there is no material new information. We continue liking the shares that offer one of the best exposures to oil price upwards movement. In addition, Ithaca is one of the few names within our international coverage universe offering value even under the Brent forward curve.
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