roc: falling like a rock, page-7

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Roc Oil
By Peter Leodaritsis


Roc Oil is a medium-sized oil and gas production and exploration company. Principal production assets are located in Britain, but discoveries in Western Australia, Mauritania and possibly China will diversify the production assets in the longer term.

Recent share price weakness has brought it down to about $1.53, creating an opportunity to buy the shares at a discount to valuation, which we

assess to be $1.96. It is also worth noting Roc's share price decline is in sharp contrast to the strong share price performance of companies like Woodside (WPL), Hardman Resources (HDR) and Australian Worldwide Exploration (AWE), all of which are in partnership with Roc in Mauritania and Cliff Head, WA, respectively.

Roc is most likely to be re-rated if a new oil or gas discovery of some scale can be made. With a busy drilling program, and the company's philosophy to target at least a few large prospects every year, Roc exposes shareholders to this upside potential. Oil discoveries made in recent years at Cliff Head and Chinguetti and Tiof in Mauritania are all moving towards development. The Beibu Gulf offshore China is subject to appraisal drilling, and an expanded drilling program in Mauritania signals growing confidence in the area's potential.

The current principal production asset is the Saltfleetby gas field in Britain, while the group has a very broad exploration portfolio including acreage in Western Australia, Mauritania, Equatorial Guinea, Senegal and China. The Cliff Head oil discovery offshore Perth should come on stream in late 2005, and Chinguetti offshore Mauritania in early 2006. These two projects are the key drivers on forecast strong earnings growth.

With a completed rights issue, cash stands at $130 million, and is supported by steady cashflow from its gas operation in Britain. This strong position will be applied to fund the Cliff Head and Chinguetti oil developments, as well as to an aggressive exploration program. The Beibu Gulf prospects offshore China may follow this, if drilling is successful.

Roc's philosophy is to be 'sensibly contrarian', meaning the group attempts to grow shareholder value by not following the crowd. Roc aims to achieve this by cost effective high potential exploration and sensible acquisition opportunities. So far, exploration has delivered success, which points to good growth in 2005-06 and beyond.


Oil and gas companies' share prices can be quite volatile, as the valuations are sensitive to factors such as changes in international oil prices and exploration successes or failures. The company's operations in countries like Mauritania and China indicate some sovereign risk issues, but being offshore lessens such risks.

We like the significant growth profile evident through the anticipated development of Cliff Head (2005), Chinguetti (2006) and probably Tiof (2008?) offshore Mauritania. This can be funded through operational cashflows and a cash position boosted by the rights issue. Roc will have 175.9 million shares and some 3.5 million options on issue through the 3:5 rights issue in 2004, priced at $1.40. This puts the company in a sound financial position. The share register has growing institutional support, and a range of international investors have been in the stock since the IPO in 1998.