Expect production to double from FY07 levels to 9.0mmboe
Recommendation Buy
Investment Overview AWE joined the ranks of serious oil and gas companies in 2006 with production at Casino, Cliff Head and BassGas. Production from the fourth centre, Tui in NZ, began in July 2007. A key value creation strategy is to develop discoveries adjacent to installed infrastructure - like Henry and Trefoil near Casino and BassGas. Expect production to double from FY07 levels to 9.0mmboe beginning FY08 before a rapid decline. Reserve life of 14 years based on FY07 production is well ahead of the 7-8 year average for ASX listed peers. A suitable energy exposure for investors comfortable with medium risk. Strong management, low sovereign risk, a conservative balance sheet and exploration upside appeal. AWE has launched a friendly takeover bid for ARC Energy. The futures curve is over US$125/bbl out to December 2013 • The oil spot price has increased well above our previous long term number. The futures curve is over US$125/bbl out to December 2013. Forecasting accurately is extraordinarily difficult with energy pricing surprising even industry heavyweights, but we do aim to get the trend right. • We increase our long term oil price forecast 43% from US$70/bbl to US$100/bbl. Conventional oil supply is unlikely to keep pace with global demand. Moderating oil intensity of use in the first world, particularly the US, is outstripped by growing demand from the BRIC economies with emphasis on China. • OPEC spare capacity has shrunk to 2mmbopd from over 15mmbopd in the 1980s. Meaningful new discoveries in a global context are elusive. The growing tendency to nationalise production, including in Russia and Venezuela, deters investment and exacerbates the shortfall. • As well, consumption is growing in the domestic oil producer economies Recommendation We increase our AWE valuation 12% from $4.05ps to $4.55ps incorporating new long term oil, gas and A$/US$ exchange rate assumptions. FY08 and FY09 earnings forecasts rise 7% and 38% to 91cps and 77cps respectively. The valuation upgrade in conjunction with share price retreat sees our recommendation is upgraded from Hold to Buy.
AWE Price at posting:
0.0¢ Sentiment: None Disclosure: Not Held