sum of the parts

I thought I'd initiate a new thread discussing the fundamental value of LNC's businesses as they stand now. I'm interested to hear other members' views here.

1 - US oil businesses

Ring fenced with its own debt, the balance sheet shows net equity of $165 million. Any views for posters experienced in oil assets out there regarding this valuation?

2 - Coal assets

I calculate the NPV of the Adani Royalty to be $425 million with a hugely conservative 15% discount rate and $668 million with a more appropriate 10% discount rate.

Let's assume $425 for Adani with other coal assets (Teresa, etc) not being worth more than debt attributed to them.


3 - UCG

Let's assume it's not worth more than the debt attributed to it.

4 - SAPEX

Let's assume it's not worth more than the debt attributed to it.

This is very conservative valuation that only sees value in the cash producing US oil fields and the financial instrument which is the Adani royalty. This brings us to $165 + $425 = $590 million which isn't too far below the current market cap $818 million.

This theoretically means that the market currently values upside potential at $228 million ($818 - $590).

I see the upside value as being:

1 - UCG

Hopefully Exxaro goes into commercialisation this quarter. There is also QLD government policy and commercialisation potential cooking in several other countries.

This is the main reason I am in LNC and I really look forward to the main milestone of a commercial deal being formalised on this front.

2 - SAPEX

If Barclays get a serious partner here then the all the hype will convert into real $ for LNC. Hopefully this will happen in the next quarter

3 - Coal divestments

Teresa almost sold to the Chinese in 2008. Since then it has been further developed as an asset and hopefully we'll see divestments here before year end. Remember, LNC have pulled off a landmark coal divestment before.

4 - US oil assets improvements

Alaska is on hold until next northern winter but there is still hope for value there. Salt dome exploration is going on. Wyoming enhanced oil recovery could be interesting. And we hope for ongoing increased BOPD from the Gulf Coast oil fields.

Any success in any one of the abovementioned businesses would result in a significant boost to the share price.

Given the current market price I view LNC as being fair priced for an oil producer holding an attractive financial instrument (the Adani royalty), with a $218 million option for profits resulting from success with any of the MANY deals that they are working on.

I personally value these opportunities at more than $218 million which is why I firmly believe that LNC is a buy at its current price.

Any views?