AWE: Interim result 2014

Higher production and higher profits featured in AWE’s half-year results. Production of oil and gas rose 28% from the prior period to 3m barrels of oil equivalent (mmboe), lifting revenue by 21% to $175m. Reported profit rose more than 500% to $82m, but that included a $75m profit from the part sale of the Ande Ande Lamut oil field during the period. On an underlying basis, profits actually fell 18% to $11m due to lower realised prices.

These results confirmed that the stunningly profitable Tui field is rapidly depleting: operating cash flow from Tui fell 32% over the period, although this was offset from higher cash flow from other assets. AWE lifted its stake in Tui by a further 15% to 57.5% but future success will be decided by exploration later this year.  

Tui illustrates the difficulty long confronting the business: high margin oil output is being replaced by lower margin gas. That continued in this period, with oil production falling 19% while gas output rose 32%. Oil and condensate now represent about a third of total output, compared to over 40% of total output in the prior period. This is a damaging decline that must be reversed.

The start of the Ande Ande Lamut (AAL) oil field in Indonesia is aimed at doing just that. Expected to start operating in 2017, AAL will lift oil production and, although not as profitable as Tui, will restore falling operating margins.

The sale of AAL has been an outstanding success. Having bought the project for US$139m, AWE has sold half for $188m, suggesting its remaining stake is worth about 36 cents per share, although that is likely to rise as the field is developed.

We think that as a developed asset, AAL could be worth closer to 90 cents per share. The gap between that value and the price today should close if the field is developed successfully in the years ahead.

Sugar coating

The US based Sugarloaf field was the real surprise, generating a 64% increase in cash flow to $23m. The recent takeover bid for Aurora Oil & Gas, which operates nearby, suggests a value for AWE’s stake in Sugarloaf of around $300m, or about 50 cents per share – more than double our previous estimate for the asset. We would prefer to see the company sell now, especially since the field consumes plenty of cash, but management has made no such commitment.

As explained in AWE on sale on 3 Feb 14 (Speculative Buy – $1.29), we’re pleased to see the company reduce equity in BassGas. We’ve underestimated the costs associated with that project. Moderate platform modifications will drain a further $82m next year, suggesting parting with some of the asset now was sensible.

Although this result wasn’t a stellar one, we expect improvements as new projects are completed. AAL, in particular, will be vital for future success and the market’s scepticism regarding the asset is slowly receding. Our estimate of value remains between $1.50 and $2 for the stock, although, the lower end of that range appears conservative if Sugarloaf can be sold at prices matching recent transactions. The share price is up 16% since 3 Feb and we’re sticking with SPECULATIVE BUY. 

Note: Our model Growth Portfolio owns shares in AWE.