roc operational strenght demonstrated

Here Ian Huntley's review:

4Q08 production rose 38% to a record 1.3mmboe but below expectations. The increase came due to commissioning of new production facilities at Zhao Dong in China and a full quarter's contribution from the BMG oil fields following completion of the Anzon takeover. This despite a planned 14 day maintenance shut-down of the BMG FPSO. Hallelujah! The Chinguetti-20 infill well raised production 36% there. The notoriously complex field has been a constant disappointment since production began three years ago. Further infill drilling is planned for BMG in 1H09 and Chinguetti in 2010. Sales revenue declined 16% in US$ terms with the weaker oil price, but rose 12% in A$ terms to a record $122m due to currency weakness.


Brent crude averaged US$55.50 in 4Q08 but ROC achieved US$61.80/bbl thanks to oil hedges. ROC has 2.7mmbls hedged at an average of US$66.60/bbl out to 2011 – equivalent to around 15% of forecast production. Almost miraculously the hedge book is now valued at positive US$19.1m and a net derivative gain of US$44m will be included in the FY08 accounts – non cash. This will be more than offset by write-downs in carrying values due to the lower oil price, including for the Anzon takeover. Neither impacts our underlying earnings estimate.


We maintain our Buy recommendation. Underlying production remains strong and ROC says it continues to operate with good margins even at US$40/bbl oil prices. Earnings before interest, tax, depreciation, amortisation and exploration (EBITDAX) margin was 80% in 1H08, a measure we forecast will be substantially maintained in 2H08. EBITDAX has trended favourably, rising for six consecutive halves from $11.3m in 1H06 to $134m in 1H08. Our forecast for 2H08 is $168m. Further we expect the rising trend to continue to at least 2010, despite weaker oil prices, thanks to higher production and a weaker A$.


We sharply reduce our FY08 earnings forecast from 15cps to 4cps due to lower than anticipated 4Q08 volumes and pricing but mostly due to higher exploration. We assume all FY08 exploration expenditure is written off, equivalent to negative 20cps. Our FY09 EPS forecast is marginally weaker at 23cps assuming around 5.0mmboe of production, an oil price of US$45/bbl and A$/US$ of 0.62. We lower our valuation from $3.20ps to $2.95ps after cutting our Tiof valuation. Tiof sits adjacent to Chinguetti in Mauritania but requires more appraisal. Elsewhere in Mauritania, good news with the Banda appraisal well intersecting an 86m gross gas column and a 19m gross oil column. Net gas and oil pay lengths are 22m or 26% and 7m or 37% respectively.


Net debt has risen to $171.4m exacerbated by A$ weakness on US$ denominated facilities. But gearing is modest at around 17%. That is prior to flagged asset write-downs in the full year result mind you. We estimate FY08 interest cover is around 4.7 times, and it should rise strongly in FY09 with a full year of BMG oil contributions and a stronger Zhao Dong performance. In addition, ROC is cutting back on its traditionally heavy exploration and development expenditure, a conservative move in tougher times. With these cuts, it wouldn't be out of the question for ROC to pay down all US$168m of debt by 2010.


ROC continues work on identifying incremental reserve opportunities around Cliff Head. It intends production wells in China and workovers at BMG. Testing of the Coco discovery at Cabinda South in Angola and drilling of Aleta-1 in Equatorial Guinea are also slated for 3Q09. Aleta-1 has unrisked mean recoverable reserve potential of 170–500mmbo – ROC has 37.5% interest. Our Buy reflects the steep discount to valuation rather than exploration upside, particularly with expenditure subsiding and the market’s apetite for sovereign risk waning. We remind subscribers that ROC has a high business risk rating and is not for conservative investors.