PETSEC ENERGY LTD (PSA.ASX)Initiating CoverageWednesday 13...

PETSEC ENERGY LTD (PSA.ASX)
Initiating Coverage
Wednesday 13 February 2008
Oil & Gas
Rating: Buy

Paul Allard, CFA
[email protected]
+612 9993 8142
Share price: $1.08
Price target: $1.64

NPV per share: $1.69
Risk: High
Shares on issue (m): 153.6
Shares on issue (diluted) (m): 159.7
Free float: 100%
Average daily volume: 550,000
Market cap ($m): 165.9
Enterprise value ($m): 250.5
FY08e Net debt ($m): 84.5
FY08e Gearing (ND/ND+E): 25%
FY08e S’holders equity ($m): 141.5
FY08e NTA per share ($): 0.92
Forecast: 2007
Free cash flow ($m): -88.7
Return on average equity: -1%
Net interest cover: 2.5
Forecast: 2008
Free cash flow ($m): 72.8
Return on average equity: 2%
Net interest cover: 1.5

Feb-07 Jun-07 Oct-07
www.fostock.com.au
Gulf of Mexico and Beibu Gulf focused oil and gas company. Petsec is an oil and gas exploration and production company, focused on the strong operating
cashflow margin Gulf of Mexico (GOM) region and considerable upside potential of
the Beibu Gulf, China.

The GOM has a long history in the exploration and production of hydrocarbons. An extensive ready-made exploration, development and production
infrastructure allows for strong operating margins of ~70%.

PSA operates 59 offshore leases, of which 18 are producing for a 2P reserve of 64bcfe. Petsec’s strategy is to use the strong GOM gas production cashflow to enable it to continue exploring the US and the Beibu Gulf for oil and gas. The Beibu Gulf presents PSA with an area that is rich in hydrocarbons yet relatively unexplored as China only opened its doors to exploration in the past few decades.
Current Beibu Gulf 2P reserves are 20bcfe, which we forecast to be in production from 2010 to 2015.
PSA’s 2P reserves total ~84bcfe, with the GOM making up 75% and the balance in the Beibu Gulf.

The recent acquisition (November 2007) of GOM production gas assets at US$3.04/mcf in conjunction with estimated operating costs of US$1.29/mcf, present a solid operating margin to current gas prices of ~US$8.00/mcf. These assets effectively doubled PSA’s GOM reserves to 68.3bcfe and provide a strong cash flow over the next five years.
Using either NPV analysis or a peer comparison multiple, we believe PSA is undervalued.

Escalating gas production levels in the GOM and Beibu Gulf oil production assumed to come on in 2010 produce a one-year NPV of $1.90 and an EV/2P reserves multiple supports a valuation of $1.90.

We initiate coverage on PSA with a recommendation to Buy with a one year de-risked valuation of $1.64/share