el & c baillieu

Well EL & C Baillieu couldnt have been further from the mark with their MEL valuation of 35c (worst case scenario) - 1.31c made in October 2012 (which i regret to say fooled me in to participating in the SPP). I wouldn't give a squirt of piss for their investment advice going forward.

I do, however, note Baillieu changed their MEL tune in mid feb and now report the following (which I note MEL has not posted on their website):

RECOMMENDATIONS

Rating


BUY ?

Risk


Speculative

Price Target


$0.26

Share Price


$0.11



Metgasco (MEL) share price has suffered a heavy sell off, falling 27% to $0.11ps on an apparent backflip from the NSW State Government regarding the coal seam gas (CSG) sector.

No-go zones & extra bureaucracy. While light on detail, the policy changes outline: 1) the introduction of CSG exclusion zones (2km) around residential areas and industrial hubs across NSW; 2) the establishment of a new Office of CSG Regulation (under the State Department of Trade & Investment); and 3) the promotion of the Environmental Protection Authority (EPA) to level of chief regulator of the industry.

Impact yet to be determined. Ultimately the changes could see MEL’s prospective tenements reduced to exclude ‘no-go’ zones and the layers of bureaucracy governing CSG deepen. However, the specific value impact on MEL is impossible to measure given the number of unknowns regarding the new policies.

Risk profile of sector increased. MEL has requested an urgent meeting with the State Government seeking immediate clarification. As a result of the elevated uncertainty and serious risks (which MEL and the sector can not mitigate), we have raised our risk rating on MEL and the NSW CSG sector from “High” to “Speculative”.

Downside scenario values existing licence only. We measure a downside scenario for MEL and derive our worst case base value on the fact that the new policy measures only relate to applications for NEW licences. This scenario would see MEL conduct some local gas sales and would support the Richmond Valley Power Station – giving us a low-case valuation for MEL of A$59m or $0.13ps (broken down as $0.07ps production licence + $0.06ps net cash + nil value for reserves/exploration licences).

Looking oversold. MEL maintains a strong balance sheet with a net cash position of $28m (vs market cap of $47m) and has a slow spend rate for 2013/14. We note that while the share price has come under intense selling pressure, it trades at a discount to our downside valuation indicating the stock has perhaps become oversold for those with risk appetite.

Realistic outcome would see smaller impact. We believe the downside scenario ($0.13cps) to be unrealistic and an over-estimation of the impact of the policy changes. Our base case ($0.26ps) assumes that MEL will continue to develop its large CSG reserves as planned, albeit delayed thanks to the current political climate.

Reduced price target. We have increased the discount to our risk-weighted valuation to 70% from 40% and decreasing our 12-month price target to $0.26ps – versus our 100%-weighted valuation of $0.85cps.

INVESTMENT SUMMARY Year End: 30 June 2011 (A) 2012 (A) 2013 (E) 2014 (E) Revenue $mn 0.03 0.02 0.00 3.21 EBITDA $mn -5.71 -6.01 -6.09 -3.90 EBIT $mn -5.77 -6.06 -6.21 -6.63 Adjusted Profit $mn -5.07 -5.13 -5.55 -5.69 EPS (Adjusted) ¢ -1.5 -1.2 -1.2 -1.0 Lacking catalysts & still at risk. Short-term sentiment around the sector is likely to remain depressed given the political environment concerning CSG. MEL remains at a deep discount to our reduced 12-month price target but the increased risk profile and level of uncertainty remains high.