patersons downgrade azz to "hold"

Antares Energy Limited (AZZ) - HOLD
Sale of Yellow Rose and Blue Bonnet Projects
Sale of Blue Bonnet and Yellow Rose to Chesapeake for US$200m. AZZ has announced the sale of the Yellow Rose and Blue Bonnet project areas to Chesapeake for a total of US$200m in cash, equating to US$156.2m ($0.52/sh at parity) for AZZs net interest. The sale of 23,180 acres for US$200m equates to $8,628/acre, which was below our expectations of ~US$10,000/acre. Closing of the transaction is expected to occur on or before the 15th of December 2010, with no conditions detailed.
Value of sales proceeds dependent on tax treatment. In parallel, AZZ is reportedly at an advanced stage of evaluation into the acquisition of new ventures, targeting resource plays and lower risk producing assets with development upside. The company has announced its intention to qualify for section 1031 of the Internal Revenue Code which would ensure that should the sales proceeds be re-directed into another project within 180 days, then the gain on the Eagle Ford sale would not be recognised allowing for the full $0.52/sh in value. However, given the uncertainties, our base case assumes corporate tax is applied, minus an estimated US$35m in tax losses, resulting in net proceeds of US$120m ($0.40/sh).
Realisation of Petrohawk JV assignment area value is critical. AZZs interest in the Petrohawk assignment area provides free funding through the drilling of up to 110 wells at an 80-acre spacing across 8,900 acres in the condensate rich window of the shale. While the terms of the agreement are not known, AZZ is believed to maintain a 50% interest in each well following cost recovery. Hence the agreement is believed to be highly lucrative, however, the CA obscures the value and news-flow. Our current valuation of US$61m ($0.20/sh) is based on an assumed 50% interest, risked at 30%.
We have revised our recommendation to a HOLD with a price target of $0.53/sh given the outcome of sale. Our valuation is based on an after-tax basis (as above), plus our risked valuation for the Petrohawk JV area. We highlight an upside case of $0.63/sh should AZZ avoid tax on the proceeds and the significant upside to be realised from the ongoing drilling of the term assignment area.