AMU released an announcement today - Open Briefing with Geoff Towner. Information in that briefing suggests that AMU shares are undervalued at today's price (last sale around $1.00).
Why do I reckon it is undervalued?
Production for the first half of FY06 was 214,677bbls and 419,918mmcfg - which gave a half yearly profit of $6.6 million. Geoff estimated that full year production would come in at around 500,000bbls and 1Bcfg. That means he expects second half production to be 285,323bbls (up 33%) and 583,082mmcfg (up 40%).
Based on some assumptions about average prices AMY will receive over thesecond half of FY06 - that oil prices will average about the same as the first half, but average gas prices will be about 10% lower [remember their gas hedging will probably kick in at $8.00mcfg] - I guesstimate that that AMU will report a second half profit of over $8 million. Full year profit would thus on my estimates be around $15 million. The core valuation of AMU's oil and gas business is roughly the share price X FPOs on issue, less that value of its ARW holding. Geoff reckoned that ARW today was worth about 33 cents per share [or $65m for its 31.7% holding], but this would rise strongly as ARW brings its plants on stream.
My own view is that ARW is on a real winner with their biodiesel plants,and their profitability will underwrite a major hike in their current share price. But just taking that 33 cents off the current $1.00 price suggests the market is valueing AMU's oil and gas business at 67 cents (or about $135 million). That puts it on a PE of 9. Of itself that suggests AMU is good value. My rough rule of thumb is to value solid producers like this on a PE around 12-15. To me the current price is at least 30-40% shy of fair value.
But further upside is in the known events we can reasonably expect.
First is the commissioning of the second ARW plant and the hike this is likely to give the ARW price. I would expect further news on concrete developments on the next three plants around this time too - that should also give the ARW price a boost and increase the underlying value of AMU's holding.
Second is the kicking off of the Halletsville 18 well back-to-back drill program in April. This is on ground that has yielded a success rate of 75%. I would expect the forthcoming program to deliver the same results. All that good news of additional gas production - which wont be booked in FY2006, but will progressively add to the first half of FY07's production - should excite the market as it will be a material addition to gas production and revenue. (And that gas will cost AMU damn all to produce so they make a fantastic margin from it).
Third, Geoff repeated their plans to work over 30 wells in the Kansas acquisition with a polymer treatment, which is expected to increase yields 5-fold. Just wait until the success of the first one or two of these is digested by the market. They cost about $30,000 to implement and payback is about 30 days! Not expected to kick off until April, but success will see production in FY2007 benefit enormously (and the share price too I would expect).
Fourth is the news that Iberville Parish will see a couple of drills later in the year. Iberville Parish is where the exciting South Grosse Tete deep plays are - this is where the monster 500Bcfg target is. Surely that will gee up a bit of interest in staid old AMU. [And which, if the drill is successful, could add over $4.00 per share to AMU).
And finally, when AMU and Union Gas get around to drilling the Wilcox Deep targets they expect to find in the land adjacent to Raccoon Bend, watch the market sit up and notice. Many billion cubic feet targets and with an operator with a fantastic track record of finding these beauties and drilling to production.
For these reasons I reckon AMU is a low risk stock to take a position in. Potential rewards are not be as spectacular as some of the favourites in the market at the moment (like the uranium rockets) but the downside appears minimal at current prices.
AMU Price at posting:
0.0¢ Sentiment: Buy Disclosure: Held
