AWE: Interim results 2013

AWE’s interim result was blighted by past problems at the BassGas project which contributed to a 20% fall in output to 2.3m barrels of oil equivalent (mmboe). Higher oil and gas prices partly offset lower production resulting in an 8% decline in revenue to $145m while net profit fell 56% to just $13.2m, translating to earnings per share of 2.5 cents, 56% lower than the corresponding period.

Although production from the Tui oilfields is declining, it still generates more cashflow than any other asset. Falling output is painfully felt and hard to replace. The company will be drilling later this year to do just that but the Taranaki Basin is a technically demanding area, with young rocks leaking oil in unpredictable ways. The probability of success here is uncomfortably low.

More success has been found with US shales, where AWE’s stake in the Sugarloaf field contributed $14m in earnings before interest, tax, depreciation, amortisation and exploration (EBITDAX), up from $4m last year. Although this is a relatively small sum, the experience gained is valuable for AWE’s own activities in the Perth Basin which could be far more significant.

Production tests from shales and tight rocks in the Perth Basin have so far been better than expected. Although more testing is needed, the probability of AWE producing shale gas from the west coast has increased sharply. High gas prices in Western Australia make gas production, even from impermeable shales buried thousands of meters below the surface, an enticing prospect. We’ll continue to watch progress with interest.

AWE has a large capital expenditure commitment in the years ahead. The development of the recently acquired Ande Ande Lamut (AAL) oil field in Indonesia will consume $600m, but this is mostly in drilling costs. Upfront costs are very low. AWE plans to sell equity in the project to help fund it. Cashflows from each well will provide cash for subsequent wells so the funding task isn’t as onerous as it first appears. The hunt for an equity partner is now on and how it goes will be pivotal.

Although this was a poor result, full year production will remain about 5mmboe and cashflows will go into funding the AAL development. With some uncertainty surrounding that project, an equity sale will help shed light on how attractive it is perceived by its peers.

At about $1.60 a share, our estimate of value for the oil and gas in the ground hasn’t changed much since AWE: BassGas costs balloon (again) on 23 Jul 12 (Speculative Buy – $1.32), although a lower cash holding will reduce this sum slightly today. Considerable blue sky from AAL and Perth Basin shales is still absent from today’s price which makes the buy case compelling; investors are buying oil and gas assets at a mild discount but gaining exposure to significant upside. AWE’s share price has fallen 15% since 27 Aug 13 (Speculative Buy – $1.58) and it remains a SPECULATIVE BUY. 

Note: The Growth portfolio owns shares in AWE.