Usual caveats ... not my work but that of the Morgan's analysts, DYOR etc etc We all know that Morgans have a conflict of interest (eg they underwote + placed a large slab of the last CR) but still Interesting to see their thoughts.
Perhaps the opening comment "we struggle to understand what assumptions are factored into SEA's current share price.." should be changed to a less diplomatic way of telling mgmt to improve their disclosures...
We struggle to understand what assumptions are factored into SEA's current share price, which we view as at a material discount even testing a range of scenarios.
Following late 2018 oil price weakness, SEA (and a number of AU and US peers) have pulled back their first half development plans.
As outlined in its recent quarterly, SEA now expects to drill 6 wells and complete 4 wells in the 1Q.
Factoring in this activity level and adjusting the rest of our estimates for the year, we now expect SEA to bring 24-28 wells online during 2019.
Slower 1H activity and mark-to-market on our oil price forecast has seen our price target reduced to A$1.69 (from A$2.02), well above SEA's depressed share price.
New development assumptions We estimate SEA will bring 24-28 wells online during 2019. We base this assumption on a combination of: 1) Current wells already drilled/completed and approaching their 30-day initial production (IP30); 2) SEA's recent guidance of 6 wells drilled and 4 to be completed in Q1; and 3) Our estimate on what SEA can drill/complete over the remaining three quarters of 2019 assuming a 2-rig / 1-frac crew program. This is a change on the 34 wells we originally forecast, although in our view a sensible move mirroring similar scale-back in activities from SEA's AU and US-listed peers given the current oil price uncertainty. Post these changes our valuation on SEA has declined to A$1.69ps (from A$2.02).
Fully funded We view SEA as well funded using a combination of operational cash flow and current facilities. We do not anticipate any need for additional equity so long as oil prices stay above US$40/bbl for the next 12 months. Stress testing our cash flow model on SEA under a number of conservative assumptions has shown its current liquidity of US$50m (cash and undrawn debt) is an adequate buffer. We expect SEA's sensitivity to oil prices and its adequate balance sheet strength will combine to see it ideally placed to benefit from (already) recovering oil prices.
Bottleneck being removed With production having outperformed expectations SEA has hit infrastructure constraints in its Area 41 (Live Oak County). Although infrastructure operator Enterprise are already carrying out capacity expansion work that will see this bottleneck removed late Q1 / early Q2. We expect this work will align perfectly with the timing of when SEA will look to ratchet development activity back up during Q2.
Unjustifiably cheap Despite the oil price trading within <5% of where it was when SEA announced the deal to acquire the Pioneer acreage package in early 2018, and SEA having demonstrated it can deliver on the massive development profile operationally, SEA's share price is still trading 32% below where it was priced in the deal (equivalent to A$0.59ps). With SEA likely to continue outperforming its conservative type curves and oil prices set to continue their recovery, we see SEA as unjustifiably cheap compared to our A$1.69ps price target (was A$2.02ps). The key risk to our Add call is the oil price.
SEA Price at posting:
42.0¢ Sentiment: Buy Disclosure: Held
