Small Caps | Jan 25 2019
Significant catalysts exist for Cooper Energy as it completes the development of the Sole gas project in Victoria.
-A number of major de-risking opportunities exist over the second half of FY19
-Importantly, the Sole project remains on budget
-Macquarie expects the Cooper Basin asset will be sold in 2019
By Eva Brocklehurst
The share price of Cooper Energy ((COE)) has significantly outperformed its peers, and brokers attribute this to increased interest ahead of the upcoming delivery of the Sole gas project in Gippsland, Victoria.
Morgans highlights market pricing, and the earnings uplift that will be soon delivered at Sole. The broker envisages large-scale upside is still on offer in the stock, given the added prospectivity in the Otway Basin (South Australia) and future advancement of Manta (Gippsland).
Full year production guidance of 1.4mmboe has been maintained. Production volumes in the December quarter missed Macquarie's expectations but are expected to recover, given the reversal of downtime at Iona and the reinstatement of the Netherby-1 well in April.
Macquarie believes the company is on track to beat forecasts, while offering a number of major de-risking opportunities over the second half of FY19. These include Sole, the drilling of Elanora and Annie wells and, further ahead, accessing petroleum rent tax credits from Manta through consolidation with Sole.
The company has 119 PJ of uncontracted 2P gas. New gas contracts are expected to be signed and Canaccord Genuity expects prices to average $9-11/GJ. The broker lowers second half FY19 oil price forecasts, and long-term forecasts, to US$65/bbl. As a result of lower forecast prices, operating earnings estimates (EBITDAX) are reduced for FY19 to $41m. The broker has a Buy rating for Cooper Energy with a $0.64 target.
If the company can achieve positive outcomes across these catalysts, Macquarie envisages upside towards $0.75 a share while the downside is protected through the CPI-linked cash flow from the start up of Sole. Macquarie retains an Outperform rating and $0.55 target.
The Sole development is being quickly de-risked. The project is 86% complete and remaining works are being conducted under fixed-price contracts. Sole is on track for first gas in July. Remaining work includes repairing damaged pipe, integrity confirmation, and final connection work on the offshore elements prior to gas flow.
The main risk, brokers concede, is this final development phase. Morgans maintains an Add rating and $0.59 target and points out, importantly, the project remains on budget.
In light of the progress being made, financiers have agreed to revisit the company's borrowing base and mandatory equity requirements. This has resulted in the release of $23m in equity funds for general corporate purposes, along with an $18m increase in the facility.
Hence, Cooper Energy is well-placed to fund the next wave of growth projects. The first of these will be exploration drilling in the offshore Otway, with wells at Annie and Elanora to be drilled in the June quarter.
Bringing Minerva-4, the final well for the Otway field, on line along with upgraded water handling capacity has helped bring forward the expected depletion date. This is important, Macquarie asserts, as it supports the company's plans for the Otway.
Planned maintenance at Casino Henry during the December quarter had a larger impact on production compared with broker estimates. Morgans assumes the Minerva field is depleted by mid year, which would allow Casino Henry to pump gas to the Minerva plant in FY20. This should help boost Casino Henry margins, while still leaving capacity to add gas from future discoveries.
A success case at Annie-1 could also mean a development well as soon as 12 months later, Morgans assesses, given the proximity to existing pipelines at Minerva. Meanwhile, the larger Elanora-1 target is likely to attract follow-up drilling.
Macquarie agrees there is significant upside if the company can prove up the gross prospective resources at both Annie and Elanora. The company has attributed 56% and 44% success rates, respectively, to these projects.
Cooper Energy, originally an oil producer in the Cooper Basin, has been transitioning over the last six years to become a significant east-coast domestic gas producer. The final step towards this objective was the purchase of the Gippsland Basin interests, which include the Sole and Manta fields and surrounding leases.
Sole has since become the company's flagship operation. The company holds various interests in the Otway Basin, which has existing production from Casino Henry and Minerva in addition to the the other prospects outlined.
The Parsons field in the Cooper Basin continues to decline following the tie-in over the five-well infill appraisal program in late 2017. Macquarie continues to believe the company will sell-off the Cooper Basin asset in 2019 and this could yield $40m in cash payments, less potential abandonment liabilities.
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