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RBC Europe Limited Al Stanton (Analyst) (+44) (0)131-222-3638; al.stanton@rbccm.com Nathan Piper (Analyst) (+44) (0)131-222-3649; nathan.piper@rbccm.com James Hosie, CFA (Analyst) (+44) (0)131-222-3695; james.hosie@rbccm.com Theresa Pfab, CA (Associate) (+44) (0) 131 222 3696; theresa.pfab@rbccm.com

INDUSTRY | COMMENTJANUARY 9, 2012

International E&P - An Early Spring CleanMacro Update: Continued Strong Oil Price Focuses Attention On Stock SpecificsTodays small changes to our macro assumptions have been overshadowed by the roll forward of our discount date, to January 2012, and a early spring cleaning we have taken the opportunity to review all our NAVs and Target Prices, including a first stab at modelling Cairn Energys earnings without Cairn India, DNO Internationals earnings (cash flow) with Rak Petroleum and Gulfsands Petroleum post EU sanctions in Syria. Discount rate assumptions: Our new sum-of-the-parts valuations are discounted from the start of 2012, which has benefited the companies with near-term developments, and we have widened the range of applicable discount rates from eight to 20% to reflect the increase breadth of our peer group. Macro Changes: We have revised our earnings and cash flows forecasts for the 2011 actuals, but our 2012+ Brent oil price forecasts are unchanged $109/bbl in 2012, $113/bbl in 2013 and $102/bbl long-term real, thereafter. Our long-term exchange rate assumptions, including dollar/sterling at $1.60/, are also unchanged. As a result of our "Spring Cleaning" we have today made a series of recommendation changes: Upgrades: Tullow Oil to Outperform (Above Average Risk) from Sector Perform - the "quality" name in the sector, with an enviable opportunity set. Downgrades: Bankers Petroleum to Sector Perform (Above Average Risk) from Outperform, without a rising oil price the market awaits the delivery of production growth. Heritage Oil to Underperform (Speculative Risk) from Sector Perform appears strategically challenged. Valiant Petroleum to Sector Perform (Speculative Risk) from Outperform lacks catalysts in a competitive North Sea-focused subgroup.

Priced as of prior trading day's market close, EST (unless otherwise noted). All values in USD unless otherwise noted. For Required Non-U.S. Analyst and Conflicts Disclosures, see page 16.

January 9, 2012

International E&P - An Early Spring Clean

Oil Price Outlook World oil prices underwent a roller-coaster ride during 2011, lifted by the Arab spring and Japanese nuclear crisis and besieged by the European sovereign debt crisis and renewed risk of a double-dip recession. In our eyes, the global oil price equation in 2012 is as much supply as it is demand driven, revolving around the pace at which Libya's oil production regains ground and the potential for firmer demand conditions to take shape. Against the backdrop of moderate demand growth and recovering Libyan production, global oil fundamentals are poised for a much needed breather following a year in which the supply/demand landscape tightened. Barring unforeseen outages, principally in Iran, OPEC-11 usable spare capacity levels should remain relatively stable in the 3.6 - 3.8 mmb/d range as OECD stocks recover. These factors have been reflected in our unchanged Brent outlook of $109/bbl in 2012 and $113/bbl in 2013. Five key points: US Dollar Stability. Amongst other factors outlined below, our Brent outlook of $109/bbl in 2012 and US$113/bbl in 2013 reflects a relatively stable US dollar on a trade weighted basis. Brent-WTI Spread. Our outlook reflects a WTI discount to Brent of $9/bbl in 2012 and $7/bbl in 2013. Over the long haul, we anticipate that WTI will trade at a $2/bbl discount to Brent. Global Oil Demand. Amid moderate global GDP growth of 3.25% in 2012, we anticipate global oil demand growth of 1.0mmb/d (to 90.0mmb/d) and a further 1.3mmb/d (to 91.3mmb/d) in 2013 as economies regain momentum. We anticipate further regression in oil demand in the industrialized economies - principally the United States and Europe, while the Middle East (0.27mmb/d of demand growth) and China (0.47mmb/d of demand growth) remain the twin engines of global oil demand growth. Global Oil Supply. Our global oil supply growth outlook of 2.5% (2.2mmb/d) in 2012 and 1.5% (1.3mmb/d) in 2013 is reflective of a partial return of Libyan oil production and an improving non-OPEC supply picture. Iranian oil production of 3.7mmb/d remains intact throughout our forecast period.Exhibit 1 - Market appears to be waiting for an oil price correction while we see good value75% Average prem/disc to NAV (LHS) Brent Oil price (RHS) 50% 125 150

Premium/discount to NAV

25%

100Oil price ($/bbl)

0%

75

-25%

50

-50%

25

-75% 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

0 2012

Source RBC Capital Markets estimates and Reuters

2

January 9, 2012Exhibit 2 - Sector appears to be discounting $70/bbl oil120

International E&P - An Early Spring Clean

100

80Brent ($/bbl)

60

40

20

DNO NKO OPHR HOIL LUPE SMDR CHAR AMER WZR TLW PMG ENQ FPM PMD AEN HDY PXT BNK SLG EC GPX KOS GTE JKX NPE KEA VPP SQZ PRE RIA IAE SIA

Source RBC Capital Markets estimates

Exhibit 3 - Premium/discount to NAV60% 50% 40% 30%

Premium/(Discount) to NAV

20% 10%

SMDR

OPHR

PMD

GPX

PXT

ENQ

IAE

HDY

FPM

(20%) (30%) (40%) (50%) (60%) (70%) (80%) (90%) (100%)

LUPE

HOIL

0% (10%)

ROZ

SQZ

CNE

TLW

AEN

DNO

PRE

SIA

VPP

NPE

GTE

BNK

SLG

NKO

KEA

PMG

AMER

JKX

WZR

RIA

CHAR

Source RBC Capital Markets estimates

PEH

3

January 9, 2012Exhibit 4 - Changes to Valuations and estimatesRating Changes Company Int E&P Large Cap Ecopetrol S.A. Int E&P Mid Cap Bankers Petroleum Cairn Energy DNO International EnQuest Gran Tierra Energy Heritage Oil JKX Oil & Gas Kosmos Energy Lundin Petroleum Niko Resources Ophir Energy Pacific Rubiales Energy Petrominerales Premier Oil Salamander Energy SOCO International Tullow Oil Average - Mid Cap Int E&P Small Cap Amerisur Resources Antrim Energy Chariot Oil & Gas Encore Oil Faroe Petroleum Gulfsands Petroleum Hardy Oil & Gas Ithaca Energy Kea Petroleum Nautical Petroleum Parex Resources PetroMagdalena Energy Primeline Energy Rialto Energy Rodinia Oil Corp. Serica Energy Sterling Resources Valiant Petroleum WesternZagros Average - Small Cap Int E&P Group Average 1 Niko Resources reports to a 31 March year-end. 2011 year presented is year ending 31 March 2012. Source: RBC Capital Markets Estimates & Company Reports AMER AEN CHAR EO FPM GPX HDY IAE KEA NPE PXT PMD PEH RIA ROZ SQZ SLG VPP WZR 17p C$1.16 109p 77p 156p 183p 162p C$2.17 5p 266p C$7.76 C$1.17 C$0.24 A$0.26 C$0.10 21p C$1.75 437p C$0.63 O SP SP O SP O O SP O O U SP O SP SP O SP SP O SP O O SP O O U SP O O SP S S S AA S S S S S S S S S S S 0.6x 0.7x 0.6x 0.6x 0.5x 0.5x 0.7x 0.7x 0.2x 0.3x 1.4x 0.8x 0.5x 0.5x 0.4x 260p 220p 260p C$3.50 9p 500p C$11.00 C$1.65 C$0.75 A$0.70 C$0.10 26p C$3.50 600p C$1.00 0.0% (38.9%) 0.0% 7.7% 0.0% (16.7%) 0.0% 3.1% 0.0% (46.2%) 0.0% (13.3%) 0.0% (25.0%) 11.1% (6.1%) (4.6%) 67% 21% 60% 61% 100% 88% 42% 41% 213% 175% 0% 27% 100% 37% 59% 22.9p $0.53 $0.02 $0.32 (0.7p) (3.0p) $0.68 $0.11 ($0.01) (A$0.00) (C$0.02) $0.04 (C$0.13) $5.47 ($0.02) 3.1% (30.6%) 8.3% (0.6%) NM NM 3.8% 23.7% NM NM NM 1.5% NM (0.2%) NM 1.0% 1.0% O O O O O O S S S 0.4x 0.6x 0.3x 43p C$2.00 350p (6.5%) 0.0% 9.4% 157% 72% 220% $0.01 $0.01 ($0.02) 2.3% 0.2% NM $0.04 $0.08 ($0.02) 43.3p ($0.24) $0.03 $0.99 (0.6p) (3.6p) $1.69 $0.23 $0.08 (A$0.02) (C$0.03) $0.03 C$0.15 $5.95 $0.08 0.0% (25.7%) NM 7.4% (120.7%) 0.1% (8.8%) NM NM (0.9%) (8.6%) 0.0% NM NM 0.0% (6.4%) (11.7%) 0.0% (12.5%) (12.6%) $0.11 $0.35 ($0.03) 39.4p ($0.26) $0.03 $1.36 (0.6p) (4.4p) $1.65 $0.39 $0.29 (A$0.03) (C$0.03) $0.00 C$0.67 $5.99 $0.08 0.0% 4.4% NM (4.3%) (119.5%) 0.1% 47.9% NM NM (2.5%) (6.4%) 0.0% NM NM 0.0% (0.0%) 3.1% 0.0% BNK CNE DNO ENQ GTE HOIL JKX KOS LUPE NKO OPHR PRE PMG PMO SMDR SIA TLW C$4.85 267p Nk7.80 98p C$5.02 197p 140p $13.21 Sk175.30 C$49.16 299p C$19.41 C$17.58 377p 215p 298p 1408p SP O O SP O SP AA S AA 0.7x 0.5x 0.8x 290p 450p 1700p (6.5%) (10.0%) 13.3% (3.1%) 35% 51% 21% $1.08 $0.41 $1.67 1.7% (3.5%) (0.1%) 1.0% SP SP SP SP O U SP O SP O O SP O O SP SP SP O SP SP O SP O O SP O AA AA AA AA AA S AA AA AA AA S AA AA 0.5x 0.8x 0.5x 0.6x 0.5x 1.0x 0.4x 0.8x 0.5x 0.7x 0.5x 0.4x C$7.00 320p Nk10.00 135p C$10.00 200p 350p $17.00 C$100 400p C$36.00 C$40.00 (22.2%) (17.9%) 0.0% (15.6%) (9.1%) (16.7%) 0.0% 6.3% 11.1% 0.0% 11.1% 9.1% (7.0%) 44% 20% 28% 37% 99% 2% 151% 29% 14% 103% 34% 85% 128% $0.67 $0.89 Nk0.81 $0.76 $1.28 ($0.09) $0.49 $1.18 $3.06 $6.46 ($0.04) $4.16 $7.87 2.8% 7.0% (4.8%) (0.8%) 1.4% NM 0.4% 0.5% 2.9% 0.0% NM 3.4% 1.8% $1.07 $0.01 Nk1.11 $0.82 $1.49 ($0.06) $0.54 $1.49 $3.09 $4.59 ($0.04) $6.68 $8.71 $1.37 $1.68 $2.16 (2.9%) (99.4%) (65.7%) (0.0%) (0.3%) NM (0.0%) (10.3%) 0.3% 0.2% NM 0.0% 0.0% 0.0% (4.9%) (8.0%) (12.7%) $1.52 ($0.00) Nk4.10 $0.85 $2.25 ($0.07) $0.63 $1.96 $2.85 $4.36 ($0.05) $7.61 $9.43 $1.77 $1.05 $2.50 (6.1%) (100.1%) 77.5% (0.0%) (0.1%) NM (0.1%) (0.7%) 9.1% (0.1%) NM 0.0% 0.0% 0.0% (0.0%) 1.3% EC $46.02 SP SP A 1.1x $43.00 (2.3%) (7%) $5.41 1.7% $5.88 (0.0%) $6.70 (0.0%) Ticker Price Current Prior Risk P/NAV Target Valuation Price Target Change Implied Return 2011E New Change Cash Flow per Share 2012E New Change 2013E New Change

International E&P - An Early Spring Clean

Recurring Earnings 2011E New $4.19 Change 2.1% 2012E New $4.