NXS 1.67% $1.22 next science limited

hartleys report 23 october

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    NEXUS ENERGY LTD
    First Production Achieved
    Nexus Energy Limited (¡§Nexus¡¨, ¡§NXS¡¨, ¡§Company¡¨) has announced first gas at
    its 100% owned Longtom Gas Project, located in the Gippsland Basin, offshore
    Victoria. Commissioning is currently underway and we expect gas sales in the
    first year to average around 70% of the contracted rate of 68 terajoules per day.
    The project should generate A$65m in after tax cash flow per annum for its first
    few years of production whilst it utilises deductible expenditure and tax losses to
    offset secondary and corporate tax payable. We estimate the net present value
    of the project (pre-debt) at A$506m. The Company currently has debt of
    ~A$300m, including A$35m payable to AED Oil Ltd as part of an
    unconsummated transaction to purchase part of the Longtom asset.
    Nexus has flagged that it is still planning to divest 20-50% of Longtom, and we
    believe that it will be able to achieve a competitive price now that the project is
    in production. This will assist the Company to meet its debt repayment
    requirements as well as fund the purchase of long lead items required for its
    Crux Liquids Project.
    Crux Retains Value, Hurdles Can be Overcome
    We estimate that Nexus¡¦ 85% owned Crux Liquids Project is worth A$1.4b on a
    100% basis. The Company is currently negotiating partial sale of the asset to
    defray risk and assist with the funding of US$650m of upfront capital required
    for development. Potential hurdles for the project include:
    „h The project is a liquids stripping operation, which requires production of the
    gas and liquids together, separation of the liquids for sale and then reinjection
    of the gas. The injection rates proposed by the Company have
    been achieved at other projects; however, never from a floating production
    vessel. We believe that this adds only incrementally to the operational risk of
    the project and do not see this as a major hurdle as it is largely an
    application of existing technology in a slightly more challenging environment.
    „h Nexus pre-sold the gas rights for Crux to Shell whereby the permit will be
    ceded to Shell at the end of 2020. If Nexus does not commence
    development of the liquids project prior to this, then it will retain the rights to
    the liquids in the case of any development by Shell. This adds a level of
    complexity to the structure of any deal; however, we believe that, at the
    rates proposed, the Company should be able to extract the majority of the
    liquids over a 7 year time-period.
    Value Potential 150cps
    Nexus has recently raised $74m in an underwritten rights issue and had cash of
    $55m as at the end of June. In combination with the undrawn $46m in project
    debt for Longtom, this should more than cover all outgoings prior to a final
    investment decision on Crux. We have assumed that the proceeds from a 30%
    sale of Longtom and a 35% sale of Crux will cover any expenditure
    commitments for the medium term. Under these assumptions, we value Nexus
    at 150cps; however, have discounted this heavily in our 6 month price target to
    53cps to account for risk associated with the farmout of Crux and poor investor
    sentiment. We will look to upgrade our price target as Nexus achieves
    additional milestones over the next few months, especially any progress related
    to a Crux transaction.
 
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