Salamander : a well too far?

9th Sep '11 by davjo

2 comments 5155 reads

Since SMDR haven’t had much of a bounce off the recent lows, I thought they might be worth a look. First, the basics :-

2Ps at Jan 1 2011 - 66mmboe
Additions in Q1/Q2 (Bualuang) - 15mmbbls = 81mmboe
Less 2011 production 8mmboe = 73mmboe
Less asset sale (Java/Sumatra) 13mmboe = 60mmboe 63:37 oil:gas

Pro forma net debt at mid year (after accounting for asset sale* of $56m) = $208m

Shares out : 155m

SP : 212p

M/cap : £328m ($525m)

EV : $525m + $208m = $733m = $12.20/boe

Since $11/bbl is probably a fair value marker for Thai oil and $12.20 certainly flatters the gas 2Ps element, there must be a fair whack of risked upside. There is. In the drilling pipeline this year and into Q1 2012, notable targets net to SMDR are :-

South Sebuku : 5mmboe CoS 70%

Tutung-A3 : 10mmboe CoS 70%

Bualuang NW Terrace : 15mmbbls CoS 35%

Bualuang Far East : 20mmbbls CoS 35%

West Kerendan : 39mmboe CoS 45%

WK-1 / Sungai Lahei : 67mmboe CoS 18%

In addition, SMDR announced another acquistion today, farming into (100%) huge acreage adjacent to Bualuang :-
http://www.investegate.co.uk/Article.aspx?id=201109090700069198N
Commitment for 2,900 km2 of 3D this year and 6 explo wells commencing H2 2012. (SMDR make the point that expenditure here is deductible against tax payable for Bualuang production but I suspect well costs will attract supplementary tax, so the claim likely isn’t all it seems). Prospects in the 20-30mmbo range with CoS 33%

So, a lot of explo, much of it relatively high grade. What about funding? At the June 2011 AGM, they referred to New 7 year, $250 MM senior + $75 MM subordinated facility. As noted above, they also said today that Pro forma net debt at mid year was $208m. So they’ve got some headroom but what of c/flow from operations? Again in June 2011 they indicated post tax c/flow was inching ahead of capex. However, I note from that same presentation production forecast for 2013 of 30,000 boepd has slipped today to 25,000 boepd in 2014. I guess this largely reflects the assets just sold but does suggest a one year slippage which must shrink c/flow a bit.

So what to make of Salamander as an investment right now? They…

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Leekgo

11th Sep '11

Hi Davjo

If you cant be tempted by Salamander at 525milUSD I wonder what you would make of Coastal at 1,186mil after it`s recent rise?

2P of 27mmbl oil and 24mmbl gas.

Production of 15,800boe/day of which 2100boe/day is gas

with an expectation of 92.9mmbl oil `recoverable` resources to be added to 2P with a little time and 200mm prospective resources to be targeted in H2 2011

with 37milUSD cash and 80milUSD debt, and 114293504 shares fully diluted.

So if you include the recoverable resources, with an EV of 1266milUSD (approx)

1266milCAD/143.9mmboe=8.80USD/boe compared to Salamander`s 12.20USD/boe above

Comparing production, Jenning`s apparently are predicting 20400boepd for 2012. I see from Salamander`s website they produced 20300boepd in 2010. Whether CEO will be producing twice Salamander`s predicted 25000boepd by 2014 is anyone`s guess.

(all figures from Sept presentation)

http://www.coastalenergy.com/fileadmin/user_upload/pdf/presentations/September_2011.pdf

davjo

G'day Leekgo

Interesting comparison. Will be a lot more interesting in say 18 months time!

One thing to bear in mind for these companies I think is that both are spending all their cashflows on exploration trying to expand their reserves but once they call it a day and they reach the point of recovering past costs, AIUI supplementary petroleum tax kicks in on profits. I would worry what actual impact that has. It is a pretty complex tax and one should bear in mind this was introduced, in the 1990's I think when oil was in the teens, as a windfall profits tax. The thing is, whilst neither company may be paying it now, the temptation will be that it acts as an incentive to explore further than may be wise. Once the companies have run out of targets in their licence areas, will they try and repeat their success in nearby concessions as Salamander appear to have signed up to? It might work well but then again it might be a disaster. In Salamander's case, I would take exception to their latest 100% neighbouring acquisition. For me, that is not good risk management. OK, they might farm down but I'd have thought other interested parties, if there were any, would have already shown up in the process after Chevron relinquished their interest and MOECO obviously had no intention to spend any more money. At the end of the day, I question managements' strategy as to castle-building or aiming to deliver cash to shareholders. It's not clear to me what either companys' ambitions are but as things stand, I'd probably trust Coastal more than Salamander......not that anything can be read into that, as it can all change in an instant.

Just idle thoughts ;-)

Salamander : a well too far?

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Davjo

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