game on buy

Company: Nexus Energy (NXS $0.73) - Buy

Valuation: Base case $0.61/sh / Upside $1.23/sh

Price Target: $0.80/sh, based on an anticipated higher bid

Reason For Update: AZA bid for NXS

Quick Comment: AZA has offered 1 AZA share for every 2 NXS shares, currently valuing NXS at $0.63/sh. The bid is highly conditional and only slightly above our base case valuation of $0.61/sh. Although the two companies merged would make sense (from an acreage, cash flow and management point of view), the current market price of NXS suggests AZA will increase its bid or a third party bid will be lodged.

In our view, the bid does not reflect enough value for upside in NXS’s assets (particularly Longtom and Crux), given our upside (unrisked) valuation is $1.23/sh or reflect appropriate value for premium of control.

We envisage that for AZA’s takeover to succeed, AZA will need to lift its bid and/or certain defeating conditions.

NXS is now in play. Local and offshore companies are likely to be interested given the long life, high equity positions and scale of NXS’s assets