These two healthy E&P companies have released H1 results within the last few weeks with FAROE posting news this morning which makes for good reading.
The two companies are well run, have great assets (majority in North Sea) and share a great deal of similarities including share prices. At a glance they look very evenly matched. But lets take a closer look and match blow for blow, top trump style:
Here we go…
FAROE MKT CAP: £240m ITHACA MKT CAP: £280m
Shares in issue: 367m Shares in issue: 412m
Current Production: 9kboped Current Production: 9.4kboped
Post acquisition production Post Stella start up production
y/e 2016: 16k-18kboped annualised y/e 2016: 16kboped
Net Cash in bank: £61m Net Cash £0m
No Debt Net Debt of £463m
Reserves 2p: 80mmboe Reserves 2p: 55mmboe
Sizable 2c/ 120mmboe+ Limited 2c
Huge 3c / 1bln boe+ Limited 3c
Finance Costs: £1.5m Finance Costs: £20m
Tax Credits: £100m Tax Credits: £1.6bln
Exploration cost rebate 78% No Exploration cost rebate
GAS hedging in place til 2016 GAS hedging in place till mid 2017
No oil hedge in place til 2016 Oil Hedging in place till mid 2017
1 Year SP Range 82p to 42p 1 Year SP Range 76p to 16p
Current Share price 66.25p Current Share price 64.25p
Production 2017 est: 16kboped Production 2017 est: 20k to 25kboped
OPEX $25pb OPEX $23pb to $25pb
CAPEX Unclear circa £20m ’17 CAPEX Unclear circa £25m ’17
Both companies are free from heavy development projects although Ithaca still has some way to go before they bring Stella fully online. Also new $20m pipeline expenditure requires noting.
Blow for blow each one is closely matched on production. But the huge difference between the two is the DEBT piles. FAROE have $23m debt which reduces to ZERO when taking NET cash position of £60m. Ithaca has a hefty debt pile of over £460m.
If you strip out FAROE’s cash balance from market cap, you are left with £180m. This compares to Ithaca’s market cap of £280m.
In 2017, Ithaca are likely to average production between 20k and 25k. Faroe look likely to average between 16k and 18k. Ithaca’s hedge through to mid 2017 at $60pb is worthy of note although any correction to PoO between now and mid 2017 could bring FAROE inline pretty quickly in terms of PoO exposure/risk. More importantly, ITHACA’s flagship Stella development is not hedged and thus any increase in PoO could see IAE lock in hedges at anything near $55pb. FAROE is virtually fully hedged on Gas prices for 2016.
On a reserve basis FAROE are more advanced. On a 2c basis FAROE are considerably more advanced. On a 3c basis, FAROE are a country mile ahead of Ithaca. This is largely due to FAROE’s business model which has for the last few years been exploration focused. The advantage is that any sizable exploration in Norway returns almost 75% of all exploration costs back to FAROE on a cash basis. It’s an incentive that is hard to refuse hence why FAROE have such a large pool of development opportunities which Ithaca cannot compete with and will likely have to pay full 100% (less farm outs) on any future exploration projects. Ithaca do have a series of GSA assets which they can bring into play and benefit from the FPF-1 hub facility. The latter is also an owned asset and will provide Ithaca with cost savings in the future.
However, in summary FAROE looks hugely undervalued. The recent DONG asset acquisition has transformed their asset / production base. Whilst the equity placing at 70p was clearly dilutive to some shareholders, the shares in issue compared to Ithaca is still greatly lower.
FAROE are targeting around 40k to 50kboepd within 5 years. They have the resources to develop, whereas, ITHACA’s asset base beyond Stella looks limited. The £100m difference in MKT CAP (less FAROE net cash) is unusual considering Ithaca’s debt of £460m vs FAROE’s debt of zero. Yes, Ithaca could produce 8kboepd more than FAROE but this plateau’s and drops soon after. Their ability to pay down the £460m debt is highly dependent on future PoO going into H2 2017. Hence some risk should be attributed to these unknowns.
On a blow for blow basis, FAROE looks the top trump card. To compare with ITHACA’s sp, FAROE should be closer to 85p a share compared to IAE’s sp of 65p.
Both have near term catalysts to watch out for. ITHACA’s long awaited and delayed Stella project is cited to produce first oil in November 2016. FAROE have a small interest in an exploration well already underway and a slightly more material interest in the Barents sea prospect called Dazzler which is expected to spud in late 2016 or early 2017. Any success with the latter and that could be very meaningful for FAROE. That said, after the PIL and Brasse discoveries, the company doesn’t really need more success… it already has ample 2c prospects to develop.
The above exercise is for illustrative purposes only and investors should research each individual company in detail. RISK remains across both companies as does the uncertainty over PoO.
Both companies are part of thesharehub top ten picks for 2016.