mbowerAre you a down ramper or a broker who wants to accumulate...

mbower

Are you a down ramper or a broker who wants to accumulate shares for your clients at the lowest price as possible. For sure ROC will not fell for bankruptcy (additionally AZA production and cash will be added to ROC).


Huntley's Recommendation: Roc Oil Company Limited

Recommendation: Buy

ROC has interests in five producing fields including Chinguetti in Mauritania, Cliff Head in WA, Zhao Dong in China and Blane and Enoch in the North Sea. Reported bottom line earnings are clipped by substantial exploration write-offs under successful efforts accounting. Exploration at the high risk/high reward Cabinda South Block, onshore Angola is a more recent focus. ROC is suitable for investors seeking oil exploration upside in frontier provinces. Sovereign risk needs consideration. Contributions from a number of smaller, shorter-lived fields and/or minority equity stakes complicate. Net debt of over $115m sees debt/equity at 65%. On current projections, ROC could be net cash positive within a year.

Event02-Sep-2008
We convert ROC's 1H08 earnings from US dollars to Australian dollars based on period average exchange rates. On that basis, the adjusted net loss of $17.3 improves marginally on the pcp loss of $19.6m. Our forecast was for a 1H08 loss of $9.8m. Higher than expected tax was the key difference. The headline net loss worsened from $8.8m to $130.1m including an unrealised $128.9m derivative expense on marking to market unfavourable oil hedges. ROC has 2.6mmbls hedged at US$70.10/bbl (just over 10% of our expected output hedged for the next 3 years). This was partially offset by a $12.9m post tax reversal of a prior year impairment charge for Zhao Dong and a $3.2m gain for deferred petroleum resources rent tax. All are non cash. At the important EBITDAX level - earnings before interest, tax, depreciation, amortisation and exploration, profit rose 61% to $133.8m, a tad less than anticipated.

Business Impact: Overall the result was near enough to expectations and our valuation and earnings forecasts are not meaningfully altered. Our Buy recommendation is retained. ROC presses ahead with its takeover offers for Anzon Energy Limited (AEL) and AEL's 52% owned ASX listed subsidiary, Anzon Energy Australia (AZA). The share price is showing signs of bottoming so perhaps the bid, though unpopular, is gaining acceptance. Some production issues which hindered recent performance will resolve in the near term, potentially supporting a price recovery. We remind subscribers that ROC has high business and price risk attributes. Risk averse investors should stick with the likes of Woodside.

Forecast Impact: --

Recommendation Impact: Unchanged.

Event Analysis
We have discussed the Anzon deals in prior reports and won't labour here. The AEL scheme will be considered on September 3. The closing date for the AZA offer, dependant on AEL being voted through, is October 6. Approval would see ROC’s 2P reserves more than double to 47mmboe and production jump from 11,000boepd to 14,500boepd. Output could possibly reach over 20,000boepd by early next decade if Basker Manter Gummy gas is developed in addition to the oil. Our numbers assume the takeover succeeds. Dilutionary to valuation, this was the most conservative assumption to make. That said, geopolitical risk is lessened overall and the portfolio strengthened via diversification. 1H08 revenue increased 65% to $170m. Sales volumes rose 31% to 1.76mmboe and average prices climbed 26% to A$96.7/boe. Net operating cash flow prior to exploration expenditure rose 63% to $95.4m. Including $81m of cash exploration spend, the figure was a more sombre $14.2m.


NJ