|
|
|
|
|
 MARKET REPORTS |
|
Stock pick
Stock of the week – Cue Energy Resources
May 12, 2008
Tim Morris, wise-owl.com analyst
Company: Cue Energy Resources
Code: CUE
Recommendation: Spec Buy
Market Cap: $170m
Cue Energy Resources (CUE) is an emerging oil and gas producer with a focus on Australia, New Zealand, and South East Asia. Cue intends to grow its value in excess of $500m by developing a range of exploration and near term production assets.
Cue Energy Resources aims to drive share holder value by developing its established and geographically diversified hydrocarbon inventory towards production. After years of exploration and appraisal, its total proven and probable (2P) oil reserves now stand at 3.49million barrels, while 2P gas reserves stand at 365 billion cubic feet (bcf).
Cue already receives revenues from its minority share in the SE Gobe oil field in PNG. However, the company’s growth prospects hinge on the development of its other oil and gas assets, particularly the Oyong in Indonesia and the Maari Oil Field in New Zealand. Oil production at Oyong has already commenced, while first oil is expected at Maari in Q308. On going development of projects and the onset of additional revenues are expected to be key share price drivers during the year ahead.
The commencement of first oil production from the Oyong field in Indonesia in September last year timed well with the oil price surging to record highs. Cue’s share of revenues from the field during the quarter to December 31 was $7.4m. Cue has a 15% share in the project, which is a joint venture with Santos. The field is estimated to house 6-10m barrels of recoverable oil, however this is due to be re-evaluated using field oil production data. Production has stabilised at around 8,000 barrels of oil per day (bopd). The next phase of development at Oyong will involve extraction of its gas reserves which stand at 80-103bcf. First production at a rate of 60m cubic feet per day is targeted for Q309.
Boosting the potential for gas production at Oyong was a nearby discovery known as Wortel. Wortel’s close proximity to Oyong allows the possibility of developing Wortel gas through Oyong facilities, with Wortel gas potentially coming on stream at the same time as Oyong gas. The targeted recoverable gas of 30-150bcf puts the field’s potential in the same ballpark as Oyong. Two wells have been drilled at Wortel to date. The first encountered a 141 metre gas column, while the second failed to encounter significant hydrocarbons. A third well is due to be drilled in the second half of the year.
Cue’s other key development is its 5% interest in the Maari oil field in NZ, which is due to commence production in Q308 with full production by early 2009. Cue’s share of estimated production is 1,750bopd. Maari accounts for almost 3/4’s of Cue’s overall oil reserves, and the bulk of oil production moving forward. To fund the bulk of its share of development costs, Cue has taken out a $20m project loan facility.
In addition to Maari, the Wortel and Oyong gas fields will attract much of the market’s focus over the year ahead. However, from a longer term perspective, we are encouraged by the fact that Cue’s estimated gas reserves at Wortel and Oyong form only 6.6% of the company’s overall estimated gas portfolio. Its larger gas projects are located in PNG and the Timor Sea off North Western Australia, but there is no drilling planned at these projects in the near term.
In the last 6 month period to December 31 revenues increased 117% to 12.57m as production commenced at Oyong, Indonesia. This allowed the company to return to profitability after posting a loss for the full year 2006-07. That $27m loss followed the write down of its interest in the ‘Jeruk’ oil field in Indonesia after recoverable oil volumes were found to be lower than expected – a testament to the inherent riskiness of the oil and gas sector. However the most recent half year profit was $5m, and assuming that no other set backs are encountered the company appears on track to meet its budgeted sales revenue of $15.4m in 2008, and its 48.8m forecast for 2009.
We anticipate that these forecasts could be exceeded should oil prices remain near current levels. At last count Cue had around $9.1m cash on hand, and had taken out a $20m project loan to finance development of the Maari oil field in NZ.
Given the company’s relatively large market cap, production setbacks or lower than expected flow rates are key risks facing the stock, along with oil and gas prices. However the company’s very large undeveloped gas reserves should provide valuation support over the longer term.
Assuming that production forecasts are met and oil prices remain above $100/bl, we anticipate that the company could be generating revenues in excess of $100m within the next 2 years. It is not uncommon for ASX listed oil and gas companies to trade on at least 2-3 times revenues, which suggests there is significant room for valuation upside. Therefore we rate the stock a high risk ‘spec buy’.
Cue has forecast strong production growth in the years ahead. Source: Cue Energy Resources.
Tim Morris is an analyst at wise-owl.com, one of Australia's leading independent stockmarket research houses. Click here for your complimentary report.
Please note that CompareShares.com.au simply publishes analyst reports on this page. The publication of these reports does not in any way constitute a recommendation on the part of CompareShares.com.au. You should seek professional advice before making any investment decisions.
More articles from this edition of CompareShares:
Stock Tips: Broker Recommendations May 12th – 6 to BUY, 6 to SELL and 6 to HOLD
Stock Picking: Top down versus bottom up analysis
Investor profile: A veteran trader warns against complex systems
Market reports: Top Ten CFD stocks for the week
Stock pick: Stock of the week – Cue Energy Resources
Finance: Profits show big banks weathering storm
Companies: Westpac approaches St George over merger
Companies: China forms company to make jumbo jets
Economy: Ripper plays down WA minerals boom
 Email to a friend
 Print this article
|
|
