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Otto Energy — Update 17 December 2015

Otto Energy — Update 17 December 2015

Otto Energy

Analyst avatar placeholder

Written by

Otto Energy

Focused on 2016

Looking to 2016

Oil & gas

18 December 2015

Price

A$0.02

Market cap

A$28m

US$/A$1.36

Net cash (US$m) at 30 September 2015 (excludes $21.3m BHP receivable)

9.8

Shares in issue

1,181m

Free float

47%

Code

OEL

Primary exchange

ASX

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(11.1)

(20.0)

(53.0)

Rel (local)

(10.7)

(19.7)

(53.1)

52-week high/low

A$0.08

A$0.02

Business description

Otto is now a pure exploration player, having sold its production interests in Feb 2015 for US$108m. With an uncommercial well offshore Philippines the company is seeking to focus on the US through its new acreage on the Alaskan North Shore, as well as the Gulf of Mexico (GoM).

Next events

GoM drilling

Q116

Alaska drilling

Q416/Q117

Tanzania Drilling

H216

Analysts

Tim Heeley

+64 (0)4 8948 555

Will Forbes

+44 (0)20 3077 5749

Otto Energy is a research client of Edison Investment Research Limited

In 2015 Otto transformed from producer to pure explorer. With the drop in commodity prices, this was perfect timing. The first well under the new strategy was not successful – its fully carried Hawkeye-1 exploration well (offshore the Philippines) was declared uncommercial in October and it is seeking to exit the area. However, Otto has added to the portfolio with entry into the Alaskan North Slope, a recent deal in Louisiana and drilling in Tanzania in 2016, pointing to an exciting year ahead for shareholders. After some adjustments, our RENAV uplifts slightly to A$0.07/share, but we will revisit it in the new year following further clarity on the GoM options.

Year
end

Revenue
(US$m)

PBT*
(US$m)

DPS
(Australian c)

Net debt/(cash)
(US$m)

Capex
US$m

06/14

73.7

24.8

0.0

(7.7)

(49.6)

06/15

0.0

(6.0)

6.4

(41.2)

(9.6)

06/16e

0.0

(6.6)

0.0

(23.5)

(36.7)

06/17e

0.0

(5.1)

0.0

(11.1)

(8.5)

Note: *PBT is normalised, excluding intangible amortisation, exceptional items and share-based payments. We note Otto received $21.3m from BHP as part settlement for 2015 capex (more may come through in time), thus decreasing net outflows (from $42.7m).

2015: A year of change

Otto sold its 33% working interest in the Galoc field, completing in February 2015, for US$108m, subsequently distributing 6.4 cents per share to shareholders. Its first exploration well, Hawkeye-1 (SC55 offshore the Philippines), failed to find commercial gas accumulations and the company is now seeking to exit the area. The well was fully carried, thereby eliminating cash exposure, but it marks the end of an era in an area where Otto was highly successful. Nevertheless, the portfolio holds the opportunity for Otto to add value once again.

2016: New portfolio, new opportunities

Tanzania will see activity in 2016, with drilling in Q316 of the Kito Prospect on the Miocene Kilosa-Kilombero play, analogous with Lake Albert in Uganda. East Africa remains challenging due to the immature nature of the service industry and infrastructure in the region; however, the entry into the US is a smart move. Being adjacent to the massive fields of Prudhoe Bay and Kuparuk River is relatively unique for a small E&P company due to the potential capital investments required, but the upside is significant. Activity on the Alaskan Great Bear project is focused on 3D acquisition, and drilling should commence in around 12 months. Otto’s portfolio is further complemented with a recent farm-in to shallow water Louisiana prospects and ASX-listed Byron Energy. Drilling in the GoM is expected in Q116.

Valuation: 2016 a real opportunity

Rick Crabb, who has successfully led Otto since its inception 10 years ago, is stepping down as chairman. After some adjustments, our RENAV is now A$0.07/share (previously A$0.06). This reflects the cash position, GoM and Alaskan investment. We further note that activity in Tanzania, Louisiana and Alaska, if it successfully adds resources and reserves, will provide potential value upside. 2016 promises to be an active year for Otto in a still depressed sector.

Preparing for 2016

As highlighted in our recent notes (September, August), Otto continues to emerge from its post-production era with an expanded portfolio, entry into the Alaskan North Slope through the acquisition of Borealis Petroleum, a private Australian group for 17.5m Otto shares, and further investment of US$13.5m in the asset. In addition, there was ongoing but slow progress onshore East Africa and the recent announcement on undertaking a structured exit from the Philippines exploration acreage following the uncommercial Hawkeye well earlier in the year. Most recently, news of a series of options to farm in to shallow water and onshore licences in Louisiana/Gulf of Mexico (GoM) with ASX-listed Byron Energy cements the change in strategic direction.

2015: A year of transition

2015 saw Otto move from being a production company to a pure exploration play following completion of the sale of its 33% WI in the Galoc field for US$108m in February 2015. Its first exploration well, the Hawkeye-1 well offshore the Philippines, was uncommercial, albeit ahead of schedule and below pre-drill budget. However, the costs were fully mitigated through the well-timed use of farm-outs and the company received a US$21.3m payment from BHP Billiton in October, with more to come by year end once costs are finalised for the Hawkeye-1 well.

This conservation of cash has allowed Otto to expand into new areas and it secured highly attractive acreage on the Alaskan North Slope, a prolific and underexplored area, through the acquisition of private Australian group Borealis Petroleum, which held 8% and 10.8% interests, equivalent to 58,334 net acres.

We estimate closing calendar year cash of US$34m following the BHP payments (both received and potentially receivable in Q415) and expenditure, mostly associated with the Alaskan Great Bear Project, placing Otto in a comfortable position to tackle the challenges of 2016.

2016: Accretive activity

The entry into Louisiana through a series of options that will be exercised over 2016 should see Otto gain up to a 50% working interest in a series of shallow water GoM wells to be drilled by fellow ASX-listed company Byron Energy.

Otto has announced that the first well, to be drilled in Q116, will be the South Marsh Island 6 well (SMI-6) for a contribution of US$5.3m to attain a 50% non-operated interest (40.625% net revenue interest [NRI]). If exercise, this will be followed by a similar deal worth US$3.0m to farm into the SMI-70/71 well. A later option in H216 will be to farm into the Bivouac Peak leases (onshore) for a further payment of US$6m to gain a 45% working interest (33.325% NRI)

The Hercules 264 drilling unit is already under contract and will drill a 3,000m objective in the G20 sands, and Byron states that the prospect has 2P reserves of 1.5mmboe (net to Byron’s undiluted 81.25% NRI). If exercised, this will target two sand horizons totalling 2P reserves of 5.3mmboe for Byron’s undiluted 81.25% NRI.

If both options are exercised, Otto will be paying US$8.3m to gain exposure to 3.4mmboe of 2P reserves, equivalent to US$2.4/boe. Given the low-risk nature of the reserves (Byron gives a 70% CoS), the expected short time frame to monetisation – if successful (12-18 months) – and the low-cost environment (c US$25/boe), coupled with Byron’s experience in the region (more than 140 wells drilled with a >80% success rate), this represents an excellent deal for Otto shareholders.

We will undertake a more comprehensive review of the assets early in the new year once clarity on option exercise has been achieved, but note that it will most likely result in a NAV uplift.

The other focus for Otto will be to begin exploring in Alaska with the acquisition of 450m2 of 3D to support the development of key leads for drilling in approximately 12 months’ time. Although Tanzania remains a focus for 2016, there is a deliberate shift to actively pursue further opportunity in North America given the continued commodity price weaknesses and the economies of scale offered in more established areas like North America, rather than the newer, less well serviced frontiers like onshore Eastern Africa.

Activity in Africa in 2016 will focus on the Kilosa-Kilombero and Pangani surveys, with a view to drilling the Kito prospect (Kilosa Project) in Q316, which is fully funded. The latest 2D data indicate the presence of a Neogene-aged basin, which is believed to be analogous to the Lake Albert region of Uganda, where Tullow (TLE.LSE) has had considerable success.

In addition to the exit from the Philippines, the core area of the company historically, there are to be changes at the top with Rick Crabb retiring as chairman and replaced by John Jetter, who has served as a non-exec director since 2007. Matthew Allen remains CEO and MD.

RENAV

We adjust our RENAV in light of the cash balance and expected G&A (two-year NPV10), and note that activity in Tanzania, GoM (we consider the first two wells only) and Alaska will, if successful, add to the reserves position and a review of our valuation, albeit later in 2016. After adjustments, the RENAV has increased slightly to A$0.07/share from A$0.06/share. At present, with an active funded pipeline for 2016 and a robust balance sheet, Otto is in a strong position in a depressed sector.

We note that Alaska and GoM assets, if successful, should add to the RENAV when we revisit them in the new year.

Exhibit 1: RENAV summary

US$/A$1.36

Country

Diluted
WI (%)

CoS
(%)

Recoverable reserves

NPV/boe
($/boe)

Net risked
value ($m)

Value per share

Number of shares: 1,182

Gross
(mmboe)

Net
(mmboe)

Risked
(A$/share)

Asset

Est net (debt)/cash – est. end CY15

100%

100%

34

0.04

SG&A (two-year NPV10)

100%

100%

(8)

(0.01)

Core NAV

 

 

 

 

 

 

27

0.03

Exploration

Kilosa-Kilombero (Kito)

Tanzania

40%

4.25%

151

60

4.5

12

0.01

Pangani

Tanzania

40%

4.25%

100

40

2.1

4

0.00

Book value Alaska

Alaska

7

0.01

Book value Louisiana

USA

8

0.01

RENAV

 

 

 

251

100

 

58

0.07

Source: Edison Investment Research

Exhibit 2: Financial summary

 

 

US$'000s

2013

2014

2015

2016e

2017e

June

 

 

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

60,181

73,693

0

0

0

Cost of Sales

(17,736)

(19,326)

0

0

0

Gross Profit

42,445

54,367

0

0

0

EBITDA

 

 

31,537

49,092

(4,008)

(5,853)

(4,392)

Operating Profit (before amort. and except.)

24,438

32,578

(4,243)

(6,545)

(5,085)

Intangible Amortisation

0

0

0

0

0

Exceptionals

(3,108)

(24,743)

(797)

0

0

Other

(366)

(272)

(852)

500

500

Operating Profit

20,964

7,563

(5,892)

(6,045)

(4,585)

Net Interest

(708)

(7,735)

(901)

(100)

0

Profit Before Tax (norm)

23,730

24,843

(5,996)

(6,645)

(5,085)

Profit Before Tax (FRS 3)

20,256

(172)

(6,793)

(6,145)

(4,585)

Tax

(10,814)

79

0

0

0

Profit After Tax (norm)

12,916

24,922

(5,996)

(6,145)

(4,585)

Profit After Tax (FRS 3)

9,442

(93)

(6,793)

(6,145)

(4,585)

Average Number of Shares Outstanding (m)

1,140.3

1,151.8

1,164.1

1,181.7

1,181.7

EPS - normalised (cents)

1.13

2.16

(0.52)

(0.52)

(0.39)

EPS - normalised and fully diluted (cents)

1.13

2.16

(0.52)

(0.52)

(0.39)

EPS - (IFRS) (cents)

 

0.8

(0.0)

(0.6)

(0.5)

(0.4)

Dividend per share (A$)

0.0

0.0

0.064

0.0

0.0

Gross Margin (%)

70.5

73.8

N/A

N/A

N/A

EBITDA Margin (%)

52.4

66.6

N/A

N/A

N/A

Operating Margin (before GW and except.) (%)

40.6

44.2

N/A

N/A

N/A

BALANCE SHEET

Fixed Assets

 

101,559

108,960

18,802

55,725

63,573

Intangible Assets

91,842

100,509

18,645

56,261

64,801

Tangible Assets

894

496

151

(541)

(1,234)

Investments

8,823

7,955

6

6

6

Current Assets

 

38,111

12,452

44,329

26,636

14,204

Stocks

2,133

2,941

2,422

2,422

2,422

Debtors

2,747

18

0

0

0

Cash

31,854

7,735

41,206

23,513

11,081

Other

1,377

1,758

701

701

701

Current Liabilities

 

(14,776)

(7,393)

(2,898)

(2,898)

(2,898)

Creditors

(9,818)

(7,393)

(2,898)

(2,898)

(2,898)

Short term borrowings

(4,958)

0

0

0

0

Long Term Liabilities

 

(33,899)

(22,845)

(68)

(68)

(68)

Long term borrowings

(9,177)

0

0

0

0

Other long term liabilities

(24,722)

(22,845)

(68)

(68)

(68)

Net Assets

 

 

90,995

91,174

60,165

79,396

74,811

CASH FLOW

Operating Cash Flow

 

29,103

42,153

20,014

(5,453)

(3,892)

Net Interest

0

0

0

0

0

Tax

0

0

0

0

0

Capex

(38,293)

(49,644)

(9,603)

(36,740)

(8,540)

Acquisitions/disposals

(1,315)

263

80,575

24,500

0

Financing

0

0

(6,832)

0

0

Dividends & FX

(12)

(52)

(50,683)

0

0

Net Cash Flow

(10,517)

(7,280)

33,471

(17,693)

(12,432)

Opening net debt/(cash)

(28,325)

(17,719)

(7,735)

(41,206)

(23,513)

HP finance leases initiated

0

0

0

0

0

Other

(89)

(2,704)

0

0

0

Closing net debt/(cash)

 

(17,719)

(7,735)

(41,206)

(23,513)

(11,081)

Source: Edison Investment Research, company accounts. Note: 2015 includes special distribution of 6.4 Australian cents per share.

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Alliance Trust — Update 16 December 2015

Alliance Trust

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