Special Focus on Independent Oil & Gas
However, there are new supply concerns from tensions in Iran and the possible blockade of the Strait of Hormuz. The US also (uncommonly) avoided hurricane outages last year, meaning a reversal of fortunes and the combination of continued supply disruption from Libya, the aforementioned Iranian unrest and any prolonged non-OPEC supply disruptions could result in upward price pressure in the shorter term.
Whilst we have recently revised our 2012 Brent price assumption up from $90/bbl to $100/bbl we have retained a 2013+ average of $90/bbl. Our rationale is that market ratings/valuations are not discounting the forward curve. In our view M&A activity within the industry has not supported net asset valuations on a $/bbl basis generated from $100+/bbl. Uncertainty remains over the ability of companies to finance and monetise reserves, while lending banks are issuing debt on more conservative price decks.
Wide Range Of Valuations, But Broadly At Lower Levels…
Our valuations are based on a net asset valuation (NAV) methodology. This incorporates a company’s full portfolio, from producing assets and balance sheet items (Core NAV or CNAV), to appraisal/development (Total NAV or TNAV) through to exploration prospects (Risked NAV or RNAV). Our subsequent price targets are set on a price-to-risked NAV (P/RNAV) basis, which attempts to provide a realistic 12-month view based on a benchmark of current market ratings within the peer group.
Historically, trading ranges for more established E&Ps (outwith market shocks) have tended towards 0.7–1.1x on a P/RNAV basis. Despite ongoing strength in the oil price ratings largely remain close to historical trading lows, with share prices currently factoring in a more conservative range of 0.2–1.0x. The more liquid/larger constituents are now trading at an average FY’12 P/RNAV of 0.7x, with Tullow, Cairn, EnQuest and Premier on the highest ratings at 0.8–1.0x (evidencing the attraction of a strong balance sheet).
With a view to the historical outperformance of our constituent E&Ps, the current ratings would appear to represent an attractive value opportunity across the sector.
In our view, those most likely to outperform in the short to medium term will have some or all of the following characteristics: be trading at a discount to or only a modest premium to the more conservative metric of TNAV (CNAV + Appraisal/Development) versus RNAV (on a sensible price deck), have a pipeline of catalysts (appraisal, development or exploration), have or be able to secure financing (longer dated maturities on debt or net cash positions), and/or own strategic assets which make them a potential bid target. We also expect the better capitalised mid-cap players to continue to acquire assets or corporates at attractive prices.
The chart below benchmarks the current share prices against the breakdown of our NAV estimates by category (i.e. core/producing, + development, + exploration).
Current Price against NAV category
Exploration Development Core Current Price
Source: N+1 Brewin
In conclusion, with history providing a strong motivation for owning a balanced E&P portfolio and current ratings at the less aggressive end of the historical range, we see value in the sector for those with a reasonable time horizon, who are able to hold their nerve. It’s never a one way trajectory in the E&P world!
Drillers and Dealers :::
::: February 2012 Edition
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