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OTTO ENERGY LTD
Foundations in Place for an Eventful 2013
Otto Energy Ltd (“Otto”, “OEL”, “Company”) has completed its first quarter
since the Galoc field recommenced production. The field has performed as
expected which positions the Company well for a new financial year that
could see up to five wells drilled.
Galoc produced 534,405 barrels of oil for the quarter
Galoc came back on line at a respectable 6,300 barrels of oil per day,
producing 534,405 (176,354 net) barrels for the quarter. Production in the
first quarter was managed well, with production rates of 6,100 barrels per
day at the end of the quarter.
Only one cargo of 325,546 (107,430 net) barrels was lifted during the
quarter, resulting in US$10.9m in revenue. This means that there was
~210,000 barrels of oil yet to be lifted (~$7m of net revenue to Otto) at 30
June 2012.
Phase 2 should be the next piece of news
Otto has started ordering long lead items for the Phase 2 development.
This, coupled with Nido Petroleum Ltd’s (NDO.asx) recent announcement
that it has secured $30m in funding for its share of the Phase 2
development, indicates that FID cannot be too far away and should be a
certainty.
Success with the Phase 2 development should see the 2C resource of 4.5
(1.5 net) million barrels of oil proved up to a reserve.
Still waiting for SC55
There is still no news on the timing of a well in SC55. In our opinion, this is
the major catalyst for Otto in the medium term. The market is bound to get
excited when BHP starts drilling a 2.1Tcf and 74 million barrels recoverable
prospect that Otto will hold a 33% interest and could be worth as much as
$600m on a success case.
Buy – In control of dependable production
Otto’s management have really proven themselves over the last 12 months
by increasing their stake in Galoc, taking on the role of operator, advancing
Phase 2 planning and getting the field into a position to provide another five
years of production.
We are disappointed that a well in SC55 has not been drilled yet and there
is still no indication of when the Cinco prospect will be drilled. However, this
is out of Otto’s hands. The only consolation is that this well should be drilled
within the next 12 months.
We recommend Otto as a Buy with a price target of 18cps. Phase 2 FID will
be a positive for the stock but we believe there won’t be a great deal of
share price appreciation until there is some clarity on the timing of a well into
SC55.
Hartleys Limited ABN 33 104 195 057 (AFSL 230052) 141 St Georges Terrace, Perth, Western Australia, 6000
Hartleys does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the
firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single
factor in making their investment decision.
0.00
0.02
0.04
0.06
0.08
0.10
0.12
0.14
0.16
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
Aug-11 Dec-11 Mar-12 Jul-12
Volume - RHS
OEL Shareprice - LHS
Sector (S&P/ASX SMALL RESOURCES) - LHS
A$ M
Otto Energy Limited
Source: IRESS
Hartleys Limited Otto Energy Ltd 24 July 2012
Page 2 of 4
SUMMARY MODEL
Otto Energy LimitedShare PriceOEL$0.084BUYKey Market InformationDirectorsCompany InformationShare Price$0.084Mr Rick Crabb (Non Exec Chairman)32 Delhi StMarket Capitalisation$95.6mMr Rufino Bomasang (Non Exec Director)West Perth, WA, 600552 Week High-Low$0.09-$0.07Mr John Jetter (Non Exec Director)Tel: (08) 6467 8800Issued Capital1138.3mMr Ian Macliver (Non Exec Director)Fax: (08) 6467 8801Issued Capital (fully diluted inc. ITM options)1165.3mMr Ian Boserio (Non Exec Director)Web: http://www.ottoenergy.com.auOptions68.0mMr Gregor McNab (Cheif Executive Officer)HedgingYearly Turnover/Volume$34.5m/328.6m sharesSubstantial Shareholdersm shares%Liquidity Measure (Yearly Turnover/Issued Capital)27%1Valuation2Santo Holdings AG241.921.3Discounted Cashflow @ 10% Real$0.283Molton Holdings Ltd241.921.312 Month Price Target$0.184Acorn Capital Limited83.97.45Financial PerformanceUnitFY2011AFY2012FFY2013FFY2014F67ReservesUnit1P2PNet RevenueA$m22.134.051.484.28as at Sept 2011Total Costs/WriteoffsA$m(10.7)(31.0)(31.0)(31.9)9EBITDAA$m11.43.020.452.310Galocmmbbl1.15 1.89 Depreciation/AmortA$m(0.2)(5.7)(4.0)(18.5)EBITA$m11.2(2.7)16.433.8Totalmmboe1.15 1.89 Net InterestA$m1.51.81.92.3Pre-Tax ProfitA$m12.7(0.9)18.436.1Tax ExpenseA$m(0.2)(3.6)--Contingent Resources Unit2CNPATA$m12.5(4.5)18.436.1as at May 2011Abnormal ItemsA$m(4.2)19.2--Reported ProfitA$m8.314.718.436.1Galocmmbbl1.49 Totalmmboe1.49 Financial PositionUnitFY2011AFY2012FFY2013FFY2014FCashA$m33.227.643.045.1Production SummaryUnitFY2011AFY2012FFY2013FFY2014FOther Current AssetsA$m0.35.55.55.5*AttributableTotal Current AssetsA$m33.533.248.550.6Liquidsmmbbl0.45 0.48 0.60 0.94 Property, Plant & Equip.A$m0.747.544.370.6Gasbcf0.20 - - - ExplorationA$m12.911.314.515.3Totalmmboe0.48 0.48 0.60 0.94 Investments/otherA$m19.12.82.82.8Daily Productionboe/d1,329 1,309 1,631 2,584 Tot Non-Curr. AssetsA$m32.661.661.688.7Total AssetsA$m66.194.8110.1139.3Price AssumptionsUnitCY2011CY2012CY2013CY2014Short Term BorrowingsA$m0.00.00.00.0OilUS$/bbl104.22 102.68 103.37 99.02 OtherA$m4.414.614.414.5Exchange RateA$/US$1.04 1.00 0.95 0.92 Total Curr. LiabilitiesA$m4.414.614.414.5Long Term BorrowingsA$m----OtherA$m0.10.10.10.1HedgingUnitFY2011AFY2012FFY2013FFY2014FTotal Non-Curr. Liabil.A$m0.10.10.10.1Total Forward Sales - Oilmmbbl----Total LiabilitiesA$m4.514.714.514.6Forward Oil PriceA$/bbl----Net AssetsA$m61.680.195.6124.6CashflowUnitFY2011AFY2012FFY2013FFY2014FSensitivity AnalysisValuation ($/s)NPATEPS (¢)CFPS (¢)Operating CashflowA$m8.56.017.342.6Base Case0.28-4.5-0.40.0Income Tax PaidA$m0.0(6.0)--Interest & OtherA$m(0.0)(0.0)1.92.3Exchange Rate +10%0.2726.62.32.1Operating ActivitiesA$m8.50.019.244.9Exchange Rate -10%0.2730.32.72.3Oil Price +10%0.2727.42.42.1Property, Plant & Equip.A$m(0.8)(0.6)(3.3)(41.5)Oil Price -10%0.2725.72.32.1Exploration/DevelopmentA$m(12.2)-(3.3)(4.0)*N.B. NPAT, EPS, CFPS forecasts are for FY2012InvestmentsA$m4.4(8.9)--Investment ActivitiesA$m(4.3)(7.1)(6.6)(45.5)Draw/Repay BorrowingsA$m(0.0)---EquityA$m2.7-2.82.7Share Price Valuation (NAV)$m$/shareFinancing ActivitiesA$m3.04.05.06.0Net CashflowA$m6.9(7.0)15.32.1Galoc (NPV @ 10%)90.00.08Exploration230.30.20Ratio AnalysisUnitFY2011AFY2012FFY2013FFY2014FCash29.50.03Corporate Overheads(28.9)(0.02)Cashflow Per ShareA¢0.70.01.73.8Total Debt0.00.00Cashflow MultipleX11.22019.55.02.2Tax Losses0.00.00Earnings Per ShareA¢1.1(0.4)1.63.1Options & Other Equity8.30.01Price to Earnings RatioX7.7(21.2)5.32.7Total329.20.28Dividends Per ShareA¢----Dividend Yield%----10% real discount rate used for DCF (~13.3% nominal)Interest CoverXna1.5nanaReturn on Equity%13%18%19%29%Analyst: Peter GrayPhone: +61 8 9268 2837Sources: IRESS, Company Information, Hartleys ResearchJuly 2012Last Updated: 24/07/2012
Hartleys Limited Otto Energy Ltd 24 July 2012
Page 3 of 4
Fig. 1: Key assumptions and risks for valuation Assumption Risk of not realising assumption Downside risk to valuation if assumption is incorrect Comment
Phase 2 development at Galoc is successful
Moderate
High
Our Galoc valuation assumes that Phase 2 development is undertaken. Further, we assume that flow rates from two new wells will reflect the better historic flow rates. We have a value of $42m to Otto if Phase 2 was not undertaken, however, this value will be much lower if Phase 2 is undertaken but is subsequently unsuccessful.
The long term oil price is approximately US$84
High
Moderate
We use a declining forecast oil price that peaks at US$107 and declines to US$93 by 2017 (AUD peaks at 1.07 and declines to 0.91). Our forecasts are based on market consensus but actual future prices could vary materially up or down from estimates used.
The market will recognise exploration value before results are known
Moderate
High
Our exploration valuation includes a risked metric based on prospect size for permits or wells held by the Company. In essence, exploration values assume that the market will recognise a portion of potential value before the results of a well are known. In most cases, we include just 10% of potential prospect value in our valuations. However, this may increase or decrease depending on the type of well being drilled and confidence in the prospect.
Conclusion
We believe the largest risk to our valuation is disappointment at Cinco.
Source: Hartleys
Page 4 of 4
HARTLEYS CORPORATE DIRECTORY
Research
Trent Barnett
Head of Research
+61 8 9268 3052 Mike Millikan Resources Analyst +61 8 9268 2805 Ben Crowley Resources Analyst +61 8 9268 3045 David Wall
Energy Analyst +61 8 9268 2826 Peter Gray Research Analyst +61 8 9268 2837 Janine Bell Research Assistant +61 8 9268 2831
Corporate Finance
Grey Egerton-Warburton
Head of Corp Fin.
+61 8 9268 2851
Richard Simpson
Director – Corp. Fin.
+61 8 9268 2824
Paul Fryer
Director – Corp. Fin.
+61 8 9268 2819
Dale Bryan
Director – Corp. Fin.
+61 8 9268 2829
Ben Wale
Snr Mgr – Corp. Fin.
+61 8 9268 3055
Ben Crossing
Snr Mgr – Corp. Fin.
+61 8 9268 3047
Stephen Kite
Snr Mgr - Corp. Fin.
+61 8 9268 3050
Scott Weir
Mgr - Corp Fin.
+61 8 9268 2821
Registered Office
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[email protected]
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Hartleys Recommendation Categories
Buy
Share price appreciation anticipated.
Accumulate
Share price appreciation anticipated but the risk/reward is not as attractive as a “Buy”. Alternatively, for the share price to rise it may be contingent on the outcome of an uncertain or distant event. Analyst will often indicate a price level at which it may become a “Buy”.
Neutral
Take no action. Upside & downside risk/reward is evenly balanced.
Reduce / Take profits
It is anticipated to be unlikely that there will be gains over the investment time horizon but there is a possibility of some price weakness over that period.
Sell
Significant price depreciation anticipated.
No Rating
No recommendation.
Speculative Buy
Share price could be volatile. While it is anticipated that, on a risk/reward basis, an investment is attractive, there is at least one identifiable risk that has a meaningful possibility of occurring, which, if it did occur, could lead to significant share price reduction. Consequently, the investment is considered high risk.
Institutional Sales
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+61 8 9268 2864
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Disclaimer/Disclosure
The author of this publication, Hartleys Limited ABN 33 104 195 057 (“Hartleys”), its Directors and their Associates from time to time may hold shares in the security/securities mentioned in this Research document and therefore may benefit from any increase in the price of those securities. Hartleys and its Advisers may earn brokerage, fees, commissions, other benefits or advantages as a result of a transaction arising from any advice mentioned in publications to clients.
Any financial product advice contained in this document is unsolicited general information only. Do not act on this advice without first consulting your investment adviser to determine whether the advice is appropriate for your investment objectives, financial situation and particular needs. Hartleys believes that any information or advice (including any financial product advice) contained in this document is accurate when issued. Hartleys however, does not warrant its accuracy or reliability. Hartleys, its officers, agents and employees exclude all liability whatsoever, in negligence or otherwise, for any loss or damage relating to this document to the full extent permitted by law