OEL 4.08% 4.7¢ otto energy limited

Financial Analysis - "Current Value"

  1. 6,674 Posts.
    lightbulb Created with Sketch. 696
    New thread just to separate out financials from drilling.

    Firstly, kudos to all our contributors for being active investor and challenging mgmt to provide the extra color to address concerns that we voice here about our company's performance and direction.

    I'll being at the end and work back to the beginning. And just on a point of definition - "Value Investing" seeks out stocks whose stocks trade (i.e. MARKET VALUE) at less than the BOOK VALUE of equity on balance sheet. On this basis OEL is NOT a "value stock" as MV = ~2.5 BV (when is the last time you paid $2.50 for something worth $1 ... think about it ... if your company was a trader in goods and bought "chairs" with all the equity it raised ($100) and that cost was $100 then the BV of equity in the company is $100 as total assets (chairs) is $100. You believe the company that they will sell the chairs for $200 and by the end of the year they did and the company now only has cash asset and BV of equity is $200 (value of cash on hand)). Now we continue that analogy by weighing our investing options. Maybe I can get a risk free investment return of 10% .... turn my $100 into $110 worry free. I accept that selling shairs might be risky so I demand a return of say 20% to adjust for that. So $120 is my expected return. And if that is what I got then arguably I have been compensated for the lack of sleep for the risk taken. So what we want to find is a stock that pays off HIGHER than the expected return ... an "abnormal expected return" shall we say which in the chair example is that extra $75. This is essence of the Residual Earnings model I'm using to figure out the value OEL.

    "Current Value" = 12.65cps ... interpret this to be present value of OEL's shareholder equity when the estimated future earnings are added to the current balance sheet (present shareholder equity is ~2.15 cps). So you could say at present the market is giving credit to OEL by pay 5.6cps for a company whose BV is just 2.4cps. The implication is the market values our Assets for more than what their book value is. I agree. The market will want to see OEL deliver the expected return and see our asset value increase. Whether we maintain the high premium of 2.5X book value is highly doubtful.

    Just remember my bias is towards finding "stocks with alpha" (general definition being stocks that return in excess of the expected return from their benchmark) from company financial statement analysis & fundamentals. No guarantee of success but the alternative is passive index investing - but the market so to speak.

    The present "end point" (12.65cps) assumes ONLY
    1. SM-71
    2. Lightning 1st well, with revenue from full uninterrupted production commencing July 1, 2019
    3. Lightning 2 additional wells to be drilled in H1 CY20 and commencing production July 1, 2020
    No other producing fields modeled.


    My discussions with MA centered around the balance sheet and our producing fields SM-71 and Lightning ... they generate the earnings that support my Residual Earnings model ... so earnings need to be reasonably reliable. I also make the assumption that the company is not going to shrink ... that what was produced gets at least replaced and that we have growth projects (otherwise our continuing value will diminish to zero).

    After those discussions and I made changes to decline curve on SM-71 on the expectation that we'll see a lower decline over the next 12-24 months. The biggest changes though were made to my Lightning model. Earlier iterations only recognized 2 revenue streams - condensate and gas. Lightning produces field condensate (which can simply be considered as light oil in this instance) trucked and sold at about WTI + ~$4. The second stream is gas ... but it is a rich gas that goes into the pipeline and we a compensated at a premium on the HHV ... while I don't have the actual composition I made an estimate based on rich gas from other fields to get a calorific content and then converted to BTU ... net net I'm estimating ~1,260 BTU (versus 1,000 MBTU for standard HH gas which priced $2.65 on May 27) which I then uplift to $2.65 x 1.26 = ~$3.50/Mcf.

    Looking forward at Lightning, additional wells expect to be AFE of $10M - $12M which at our WI of 37.5% means we pay $3.75M - $4.5M each ... and Matt's expectation is capital to be paid back in 15 mths.

    This makes the NRI scenario for a Lightning well look like:
    https://hotcopper.com.au/data/attachments/1576/1576653-3ecd63708f9e8ff73265f153977b3cad.jpg
    The middle yellow box is OEL Revenue from forecasted production over 5 years with prices fixed at $60/$3.50. The yellow boxes at the edges are priced at the edges and LHS has production 25% lower and RHS is 25% higher.

    The cumulative Revenue (not field Operating Cash Flow as production expenses not taken off) Curve looks like
    https://hotcopper.com.au/data/attachments/1576/1576650-cb2160e0c7dc16a5022bafa1d4939e43.jpg
    which as you can see is about what Matt was saying with a payoff in approx 15 months. This is a "short cycle" capital return and an excellent result. The commentary from Matt was along the lines of these wells are low LOE and with Hilcorp JV we're also getting 85% of WTI on rich gas. My estimate using the middle scenario of field OCF for first 12 months, assuming continuous operations, is about $4.18M against ~$4.51M of Revenue.

    The (Gas) production curve over 5 years looks like
    https://hotcopper.com.au/data/attachments/1576/1576823-d5135722f58f71f33725584b67b99949.jpg
    using the Baer Franklin wells as the benchmark and fitting an exponential smoothing curve to the data to estimate the decline and then apply this to an IP for Lightning of 10Mmcfpd and CGR of 35/Mmcf.

    One hopes this is reasonable and since it sort of fits into the expectations of mgmt ... that's what I 'm going with for now. The residual earnings model assumes 2 more wells ($9M of Capex) in H1 FY20 with production commencing on Jul 1, 2020

    I do try to keep it conservative. The beauty of the model (if I get the earnings reasonably correct) is there isn't to much that can be hidden. Because I focus on continuing operations only (and in theory that means no value given to a hedge book) I look to smooth the commodity price over the year ... hedging helps this. Don't need to concern myslef with any DD&A because effectively its "successful efforts" ... any capital spent is taken off the balance sheet and any asset "proven" comes onto the balance sheet and both are reflected in the shareholder equity value.

    Reasonably confident there is significant share price appreciation to be had with OEL. As a "checkpoint", I have FY20 earnings as almost US$29M or ~AUD$42. Using a simple metric of valuing company at 3.5 to 4.5 times their EBITDA to determine the Enterprise Value (and because we have no debt that would equal our Market Value) that puts an EV for OEL at between AUD$147 - AUD$189.

    Probably should have just written that and dispensed with everything else!

    Bulleit changes everything when that comes in (as in the continuing value of the company).










 
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