molopo flying under the radar, page-5

The following (minus any tables) is the latest from Credit Suisse:

Molopo Australia
INCREASE TARGET PRICE - upgraded our target price to $1.70/share

FY results

MPO announced on 27 August its FY10 results with a headline NPAT of $2.6mn coming in slightly ahead of Credit Suisse forecast ($1.8mn). We have increased our target price to $1.70/share.

While the result was reasonably positive at the bottom line, it was buoyed by oneoff items, namely proceeds from asset sales amounting to $14mn in the year.

Catalysts for the stock moving forward will continue to be drilling activity, particularly on Canadian oil, with the resultant increases in production rates towards target volumes. In the longer term, drilling activities should lead to increased reserves and commercial definition in a number of its assets.

We have had made minor adjustments to our production and costing assumptions, which along with rolling forward our valuation, has slightly changed our earnings estimates over the forecast period.

As a result of our changes to our forecast earnings, we have slightly upgraded our target price to $1.70/share (from $1.65/share), which is underpinned by our 1.69/share valuation.

Our rating remains OUTPERFORM.

FY10 results

MPO announced its FY10 results with a headline NPAT of $2.6mn coming in slightly ahead of Credit Suisse forecast ($1.8mn).

Details
Headline NPAT of $2.6mn;
Revenue from oil and gas sales of $6.1mn;
Net cash balance of $65.7mn (including a $15mn term deposit);
EPS of $0.01/share; and
No dividend declared.

While the result was reasonably positive at the bottom line, it was buoyed by one-off items, namely proceeds from asset sales amounting to $14mn in the year.

Although MPO still has a thematic as a long-term gas story, the short- to medium-term interest is its Canadian oil play, which continues to build.

Catalysts for the stock moving forward will continue to be drilling activity, particularly on Canadian oil, with the resultant increases in production rates towards target volumes. In the longer term, drilling activities should lead to increased reserves and commercial definition
in a number of its assets.

Reserves

We have written previously that Molopo.s growth is becoming increasingly linked to its Canadian portfolio, particularly the acceleration of the work programme on the
Bakken/Spearfish oil plays. On 10 August, Molopo announced a significant reserves upgrade on its Canadian oil plays.

Operations

Canada

Spearfish
MPO is looking to spend 2011 drilling extensively in the Spearfish project with the back-end of the 2011 programme to be determined once results from its initial 25 well portfolio are reviewed (expected in October). The company noted that it expects costs to decrease from >$20/b to c.$10/b over the next several years noting that the economics of the project are looking robust at or around current oil price levels.
We have slightly adjusted our modelled assumptions to reflect these comments.

Bakken
Results remain encouraging (oil found in five of six wells drilled thus far) and 2011 will see MPO continuing to assess results over what is a very large acreage (42,420 acres).

New South Wales and China
Concluded sales of assets during the period.

Queensland CSG
Although the main focus for the company has been pursuing its high-margin oil play, we note there has been significant movement on other parts of the portfolio.
The company has executed a purchase in relation to the ATP564P and 602P JV securing an additional equity stake and operatorship. As a result, MPO has increased its equity
positions in these permits to 67.12% (ATP564P) and 62.88% (ATP602P), respectively, from 50% for a total cost of A$7mn.

Indicatively, this gives the company additional leverage and control of work programmes.

Although the company maintains an .asset development. attitude to its Queensland CSG holdings we see their relevance as becoming less important, initially from the ramp-up of Canadian oil and later from the development of the company.s shale gas plays.

South African gas
Molopo (through its subsidiary company) has signed a GSA with Novo Energy (Pty) for the supply of gas on an .as available. basis for approximately 0.6mmcfd from the Virginia gas field. The contract term is for ten years. First gas is expected in March 2011. Ultimately,
Novo has the right to purchase additional gas up to 8.2TJpd.

A small but perhaps significant first step in the establishment of a South African business, although we see it at this time in the same context as Queensland CSG . small and likely to remain small when weighed against the upside opportunities potentially to emerge from the Canadian assets.

Earnings changes
We have had made minor adjustments to our production and costing assumptions, which along with rolling forward our valuation, have slightly changed our earnings estimates over the forecast period. We note that while the numbers are significant in percentage terms, they are not significant changes in real dollar terms.

We have increased our expected NPAT for FY11F by 18% from $14.5mn to $17mn. There is a flow-on effect to FY12F earnings of 4%.

Valuation and target price
As a result of our changes to our forecast earnings, we have slightly upgraded our target price to $1.70/share (from $1.65/share) which is underpinned by our $1.69/share valuation.
Our rating remains OUTPERFORM.