"Result: • ROC's adjusted interim profit (US$6.6m) was slightly below our expectations, with the reported underlying result (US$19.6m) boosted by one-off non-cash items (deferred tax reversals). Key Take-outs: • Interim Profit slightly below expectations: 1H CY09 Adjusted NPAT US$6.6m vs GSJBW US$9.3m. Variance largely due to higher costs than we expected (production, administrative, finance). • Net Debt Eliminated: Net debt was US$100m at 30 June, however post raisings of US$107m (equity + BMG sell-down) we expect ROC's net debt to be eliminated. This likely places ROC in a position where it can fund growth projects (eg. Beibu Gulf, BMG Phase 2) however neither have been approved for development. • No news on Beibu Gulf or BMG Phase 2: There was no major update (Beibu Gulf ODP being worked & Chinese government approvals would need to follow, while we presume BMG Phase 2 development studies are likely continuing, potentially with gas marketing activity). We are keen to see recently raised equity deployed into value adding projects and not used just to restructure the balance sheet which we felt was not required at the time of the raising. Continuing to sell assets at/above NPV would have also been a less costly/dilutive way of refinancing the company. Therefore management has not proven yet to us that the equity raising was in the interest of shareholder returns. • WA-351-P farm-out would make sense: ROC indicated it had been approached by companies seeking to farm-in to WA-351P. With the scramble for Carnarvon acreage (given numerous LNG project plans)this block likely has material value and in our view ROC should farmdown for free carry in drilling if possible.
Earnings and Valuation Impact: • We have increased our CY09 EPS by ~12% which largely reflects a review of our 2H CY09 forecasts (mainly lower DD&A following significant impairments at end-CY08). Changes in the later years reflect increased field opex, deferral of PRRT on Cliff Head, and lower DD&A rates. Our valuation has reduced by 3.5% to $1.07/share.
Investment View: • Maintain BUY, ROC remains our preferred mid cap oil play at this point in time given its significant trading discount to our valuation, and strong oil price leverage. Our conviction fell marginally after the announcement of the equity issue as we would have preferred further asset sales. Management needs to deliver at least one of Beibu Gulf or BMG Phase 2 to prove the decision was to the benefit of shareholders."
ROC Price at posting:
65.5¢ Sentiment: Buy Disclosure: Held
