rbs report

The Longtom Gas Project is in steady-state production. We believe Nexus has the
financial and management capacity to unlock the value of the proposed Crux
development. We initiate coverage with a Buy recommendation. Our SOTP-based
valuation and target price is A$0.62.

Longtom ?V cash flow from gas sales agreement, and long-term upside
The Longtom project resumed production of gas to supply the Santos gas contract in
October 2010 after the installation of a mercury-removal unit was required to meet the
specifications for the gas-sales agreement. Production for the March-2011 quarter was
4.30PJ of gas and 46,140bbl of condensate, providing revenue of about A$20m. We forecast
production will ramp up to annual levels of 25PJ per annum and +250,000bbl of condensate.
Pre-development reserves totalled 350PJ of gas and 3.9MMbbl of condensate, with a
minimum 193PJ of gas committed to Santos, with the option to sell to them up to 350PJ over
the life of the field.
Crux ?V what it??s worth depends on how it??s developed, and by whom
Nexus plans to negotiate a farm-down of its 85% interest in the Crux liquids project (Osaka
Gas 15%), as it moves to FID for the liquids-stripping development at the end of 2011. The
Crux field reserves are estimated at 70MMbbl of recoverable liquids, with Nexus evaluating a
liquids-stripping operation with gas re-injection. The rights to the gas reserves are held by
Shell and revert at end 2023. An integrated gas/condensate development to supply a floating
LNG facility to commercialise the Prelude gas field would be expected to maximise the value
and materially increase the value of the field development for all parties. The question for
Nexus management is how it can participate in this upside.
The balance sheet, development and exploration
After its capital raising and debt restructure we estimate Nexus has a cash balance of A$69m
and debt of A$241m. Bringing the Crux liquids-stripping project (NXS 85%) to FID this year
will take A$20m, according to the company. We expect Nexus will farm down its exposure
should this US$1.4bn development proceed. Nexus looks well placed to fund the A$30m drill test of the 230bcf Longtom South gas prospect (NXS 100%), where 3D seismic has defined
an amplitude variation with offset (AVO) seismic anomaly similar to that at Longtom.

The basics
Catalysts for share price performance
Management is working to eliminate downside risk both operationally and financially, and to
maximise shareholder value and upside potential. Nexus is optimising the cash flow and
profitability of the Longtom project based on current Longtom reserves, and will continue to
develop Longtom and explore other prospects in the tenements. It is also progressing to the final
investment decision (FID) for the Crux liquids-stripping project by the end of 2011. It has
appointed the engineering consultants to meet this schedule.
The balance sheet was strengthened with the Longtom debt facility reduced to A$90m after
A$70m of the A$122m raised by the April 2011 rights issue was applied to the debt. Repayments
of capital and interest are projected by the company at between A$20m and A$30m for each year
through 2015, with a final balloon payment of A$34m in 2016, representing about 50% of the
projected free cash flow from Longtom over that period. Total debt, including the Longtom facility,
is estimated by management at A$241m. We believe the cash balance is adequate to fund Nexus
through to the FID for Crux, and for the drilling of the next well at Longtom. The share price
catalysts we foresee are as follows:
?? The continued successful operation of Longtom and profitable gas sales, reported quarterly.
?? A selldown of equity in the Crux liquids-stripping operation.
?? Drilling of Longtom South to test the prospective gas resource, estimated by the company at
230bcf of gas.
?? Re-assessment of the Longtom 2P reserves in light of the apparent complexity of the field.
Any potential reserve downgrade would likely be more than offset by success at Longtom
South. An increase in the reserve base from the level committed to the Santos gas sales agreement would enable Nexus to participate in the eastern Australian gas market.
?? A positive FID for the Crux liquids-stripping development.
?? Shell deciding to integrate the Crux liquids-stripping operation into its Prelude FLNG project.
Earnings momentum
Nexus has reduced its cost overheads and we expect production revenue to grow strongly in
FY12/13, which should drive strong earnings momentum.
Valuation and target price
Our valuation is based on a sum-of-the-parts methodology. We set both our value and target price
at A$0.62ps.
How we differ from consensus
Our EPS estimates are lower than Reuters consensus initially, but project strong growth into FY13
with a large step-up in earnings when production from Crux comes on line in 2015.