AUSTRALIAN WORLDWIDE EXPLORATION LTD (AWE)
AWE is a mid-sized oil and gas exploration and production company based in
Australia. It has interests in several main projects principally in the
Perth, Bass and Otway Basins as well as interests in New Zealand and
Argentina. The key one at present is the BassGas Project (AWE's interest
is 30%) which is now producing and selling gas.
AWE has had its fair share of delays and problems, including a dispute
with Clough, the previous constructor on BassGas, and a more recent
announcement by the operator of Cliff Head-5 (Perth Basin) that there may
be a material reduction in the oil reserves due to unexpected seismic
velocity variations.
Through these issues, AWE has seen quite a bit of volatility, with a
recent low around $1.50 suggesting the market began to price a worst case
scenario. Our analysis of the stock suggests that at levels under $1.70,
AWE was being fairly cautiously valued, though we must recognize that this
is a reasonably high risk stock.
As a stock still in its infancy with regards to bringing good exploration
results into production, it has yet to deliver much in the way of profits
and has been a fairly big cash flow consumer. What excites us, however, is
the quality of management and the potential strong acceleration in
production, and thus earnings and cash flow over the coming four or five
years. Thus, while its 2005 financial year (FY05) PE ratio could be 50
times, or more, FY06 should see it realize good profits and cash flows,
suggesting a PE ratio of closer to 10-15 times and a single-digit cash
flow multiple. As the company's risk profile diminishes over time, we
suspect that so too will any discount to its peers. We do not anticipate
it will pay any dividends for the foreseeable future, so forget it if you
desire the comfort of an annual yield!
Recent strength in the oil price has seen some quick moves in many oil
exposures, including AWE, Woodside Petroleum Ltd (WPL), Santos Ltd (STO),
Tap Oil Ltd (TAP) and so on. Since the oil price can move materially
overnight, we must caution that chasing these stocks can expose you to
much more downside risk and gambling is not something we want to
encourage! But it is worth emphasizing that one area where we feel AWE has
upside over the medium to long-term is in the oil price assumptions being
used in the market to value these sorts of stocks. We are of the opinion
that these assumptions are overly cautious, and if the oil price remains
stronger for longer, then upgrades will eventuate. Oil is currently
trading around $US54/barrel, which is substantially above long-term
averages.
Our analysis suggests to us that AWE represents a good opportunity for our
subscribers at around $1.80. Unfortunately as we gathered our information
last week, the stock moved quickly off its lows and so subscribers need to
be aware that we could again see a better opportunity to buy AWE at lower
levels if this momentum reverses. Such near term moves are impossible to
predict.
We consider AWE a high risk investment but with several positive catalysts
expected over coming months to deliver us a worthwhile return. Findings at
Cliff Head could deliver further negative news, as could any problems in
resolving the dispute with the previous BassGas contractor. As with any
company undertaking quite significant exploration activity, the outcomes
can deliver either good or bad news which quickly influencing the share
price and leads to greater than average share price volatility. But it is
worth pointing out that any positive exploration results (which would not
surprise us) could be a significant catalyst for the stock.
Please allocate capital based on the fact that this is a high risk
investment. If things do not go as hoped, this stock has significant
downside risk.
INDEPENDENCE GROUP NL (IGO)
IGO is a small nickel miner based in WA. Based on that alone, it is high
risk, but when we get deeper into the financials, the risk is somewhat
displaced by the current cash flow generation, the yield, the potential
exploration success and the expected continuation of the strong mining
sector. It is these factors that have led us to the view that this stock
represents a reasonable risk/reward investment. We do wish to stress that
it is high risk, and there are several factors that could lead to a
substantial share price drop if things don't go as planned, so allocate
based on this potential risk, not just the attractive potential upside.
Allocate only capital that you are prepared to lose!
We have been looking at IGO for a while with the view until now that the
liquidity has been insufficient to allow subscribers to buy the stock, but
the volume of late has surprised us and eased our concerns enough to
recommend the stock. We therefore recommend subscribers buy IGO at up to
$1.33 and no higher. There has been some selling around so please stick to
our limits. This stock will only suit subscribers with a tolerance for
high-risk, volatile investments, so please bear this in mind when deciding
whether to buy the stock.
Members of the investment team own shares in IGO.
ORION TELECOMMUNICATIONS LTD (OTL)
OTL is a non-facility based telecommunications company, meaning that it
does not own infrastructure, but simply buys capacity from the likes of
Telstra and Optus and on-sells it to customers. We will go into more
details about the recommendation in tonight's report, but for the sake of
expediency we are going to recommend subscribers buy OTL at up to 50c.
This is a very-high risk investment and is certainly one that plenty of
subscribers should stay away from. If things go as management expects, we
feel there could be plenty of upside in the stock over the medium-term,
but the downside must always be a factor in contemplating an investment.
The risks are high, many things can go wrong and given how small this
company is, liquidity will be a real problem if things do not work out.
So, please stick to the limit, and once again we cannot overstress the
high-risk nature of this investment. Please allocate that which you are
prepared to lose as a worst-case scenario.
Members of the investment team own shares in OTL.
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