Cue Energy A Target?

This story features CUE ENERGY RESOURCES LIMITED, and other companies. For more info SHARE ANALYSIS: CUE

-Upside to earnings likely
-Strong fit for NZ Oil & Gas
-Large shareholders likely sellers
 

By Eva Brocklehurst

Junior oil and gas producer Cue Energy ((CUE)) is an attractive target in an industry struggling with steep falls in the price of oil. Canaccord Genuity believes so and initiates coverage of the stock with a Buy rating and 14c target, based on the proved developed reserves of its three operating fields.

The broker expects earnings of US$22-25m per annum over the next four years, with upside if oil prices rise faster than forecast. The company has assets in New Zealand and Indonesia, generating consistent cash flow. Most comes from the long-life Maari oil field, offshore New Zealand, in which Cue Energy has a 5.0% stake. Cue Energy expects production growth this year to be driven by Maari, with the near doubling of NZ oil production to more than offset some decline in the Indonesian Sampang PSC projects.

Analysing the Brent futures curve out to 2018, the broker applies a long-term oil price of US$80/bbl. Sensitivity to the oil price is low because of the company's cash and gas assets. A flat US$40/bbl oil price would only reduce the broker's valuation to 9c a share. The gas component of revenue is, at the least, expected to be maintained in FY15, as production enhancements and well work-overs have been undertaken last year. Moreover, the company's Indonesian gas price agreements are set in US dollars and do not have oil price linkage, providing a solid base for cash flow.

The company's cash is earmarked for operations and an acquisition, which could be boosted by some debt financing, Canaccord Genuity observes. The broker believes current oil price weakness provides excellent opportunities to introduce another production asset into the portfolio. However there are, potentially, bigger fish circling the stock. Portfolio rationalisation among producers has led to recent ownership changes, with New Zealand Oil & Gas ((NZO)) replacing Todd Petroleum as the largest shareholder on the register. While liquidity has been thin, Canaccord Genuity observes NZ Oil's purchase of 19.99% last December, along with three other shareholders which hold around 32%, could deliver control of the company if NZ Oil were to make an offer.

Cue Energy has long been viewed as undervalued but the broker notes the presence of Todd Petroleum reduced liquidity and the takeover attraction. As a private NZ company, Todd was content to maintain a 25-30% substantial holding while its CEO, Richard Tweedie, was chairman of Cue Energy until he retired in 2013. In December, 19.99% of the 27.4% Todd stake was sold to NZ Oil & Gas, which stated at the time that it viewed the interest in the Maari field in PMP38160 as a quality asset which fitted its portfolio.

The remaining large shareholders are likely sellers too, in the broker's view. Zeta Energy, a subsidiary of ASX-listed Zeta Resources ((ZER)), holds 12.7% and has been observed as accumulating stock over the last 12 months at an average entry cost of 11c a share. Of note, Zeta Energy is also a large shareholder in NZ Oil, with 17.3%.

The broker agrees Cue Energy is a good fit for NZ Oil & Gas. Moreover, it is viewed as unlikely NZ Oil would be satisfied with an indirect interest in the Maari field. The company has a strong balance sheet which Canaccord Genuity believes could be used for a full acquisition of Cue Energy. Another reason? NZ Oil & Gas has recently expanded its activities into Indonesia, the other area where Cue Energy has a presence. Finally, the broker also suspects the 16% held by Singapore Petroleum – now owned by PetroChina – is equally available for sale at the right price. A 13c a share takeover offer would represent 55% upside to the current share price of 9c.

Cue Energy de-listed from the NZ Stock Exchange and the Port Moresby Exchange in 2014. The broker notes the listing on these exchanges was an attempt to attract investors in those markets but this never gained traction, essentially costing the company money. 
 

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