bell potter recommendation update

Debt funding makes sense
AZZ has executed a US$200m debt facility with Macquarie Bank to fund its growth projects in the Permian basin in Texas. This funding option makes a lot of sense as
raising equity funds would be highly dilutive when the share price significantly undervalues the company. The fact that a major bank is willing to support the
company’s development drilling is also a vote of confidence in the asset. We value the company’s Southern Star shale oil project at $239m or $0.87/share.
Quarterly shows strong growth from a low base
AZZ’s September quarterly delivered production of 52,246boe, a 684% increase in revenues to $2.9m. Gross production was 1,472boepd while the net was 574boepd.
The forward drilling program of 30 wells will emphasise the Southern Star project with 24 wells, while Big Star and Northern Star will only have 6 wells combined. This has
increased our earnings forecasts by 39% in FY12 and 34% in FY13. However, the slower development at Big Star and Northern Star has meant that our valuation has
decreased from $1.04 to $0.97/share risked and $1.36/share unrisked (-12%).
Positive investment view reinforced
We maintain a Spec Buy on AZZ. The share price significantly undervalues the company’s assets in the Wolfberry trend of the Permian basin. The company has built
a land portfolio of about 30,000 net acres in one of the hottest oil plays in the US. We value the Southern Star project alone at $0.87/share and is pretty much confirmed as a proven project with 32 wells drilled to date, and the next 24 wells means all the acreage will soon be held by production. Investors can now buy AZZ knowing that the
27mmboe of 2P reserves at Southern Star will be developed thanks to the debt facility just announced and this represent a low EV of $3.80/boe. The upside from Big Star
and Northern Star, which we have risked at 50% comes for free. There is also upside from enhanced economics of this shale oil play, through horizontal drilling of the most
prolific shale intervals, and through closer well spacing than currently assumed.