Report below. They have a target of $2.48 in 12 months, sounds a bit low.
foxlowe.
Investment View
HDR has an extensive exploration portfolio, with offshore Mauritania showing the most promise at this stage. The Chinguetti oil discovery contains about 120M barrels, and will be developed in early 2006. This looks like being followed by the oil and gas discovery at Tiof, which appears to be larger, currently estimated to be 3-400M barrels. The exploration success in Mauritania has continued at Teve't, but exploration can also disappoint at times, as evidenced at Dorade and Capitaine.
HDR's Mauritanian acreage has yielded significant oil discoveries at Chinguetti, Tiof, and most recently at Teve't. The company's strong position in this new oil province is exciting, and the key attraction. However, there is still considerable uncertainty attached to the valuation and investors can expect further share price volatility. We currently recommend a BUY as the stock carries no exploration premium for the ongoing potential, which looks good.
Current Issues
Earnings Outlook With HDR being primarily an exploration/development company, the group is unlikely to generate meaningful profits for some years. In valuing the stock we are assuming some 120M barrels at the Chinguetti oil field offshore Mauritania, being developed in 2005/6, with production over 8-10 years. Tiof is tentatively estimated at 300M barrels, starting in 2008. Risks Sovereign risk is a key issue facing the company in Mauritania, a relatively poor and undeveloped West African country where Chinguetti will be the country's first, and most important natural resource project ever. A couple of coup attempts have been made in recent years, so the situation is far from stable. Exploration failure and funding remain other risks going forward. Wildcat exploration remains very high risk, high reward. Primary Share Price Catalyst The share price is highly dependent on exploration drilling activity. Drilling at Tiof had a big impact on the share price, and the dry holes at Dorade-1 and Capitaine-1 caused a similar, but negative share price reaction. Merou-1 is the next firm well in the program and more exploration targets may follow, as well as appraisal drilling of Tiof. Last Result Comment HDR reported a profit of $91.1M for FY04, which included a gain of $105M on the sale of the Agip assets acquired during the period. Excluding asset sales, the company reported a loss of $2.3M, largely driven by write-offs of $10.1M. The balance sheet remains strongly cash positive at 30 June, although heavy capex and some tax payment will bring this down in the next 12 months.
HDR Price at posting:
0.0¢ Sentiment: LT Buy Disclosure: Held
