After months of
delay at Lekoil fields of Otakikpo and Ogo, there has been operational progress
at both fields resulting in cash flow to the business.
A statement made
available to harboursandport.com noted that the market attributes no value to
the 774mn boe Ogo discovery, which our TP captures but that the company has
upgraded its rating to BUY (from Hold), and however cut cuts its TP by 11%, on its
lower oil price estimates, to GBp31.
The statement read;
“We update our Lekoil estimates following the ramp-up of commercial production
at the Otakikpo field and our expectation of phase 2 development in 1H18. We
are now more optimistic, as after months of delay we see operational progress
at both the Otakikpo and Ogo fields, and are pleased that cash has begun
flowing into the business. We think the market attributes no value to the 774mn
boe Ogo discovery, which our TP captures. We therefore upgrade our rating to
BUY (from Hold), but cut our TP by 11%, on our lower oil price estimates, to
GBp31.
Finally
monetising Otakikpo
We had downgraded
Lekoil to Hold due to production delays and a strong share-price recovery.
However, given the stock de-rating and the ramp-up of production at Otakikpo,
we now upgrade to BUY. We are impressed that Lekoil has been able to transform
Otakikpo from a swamp site to a producing field over the past two years. We
believe Lekoil is now fully on track to create value and expect shareholders
will start to see some return on their investments. The Otakikpo field began
commercial production in mid-February at 5kb/d, has ramped up to more than
6kb/d and Lekoil targets 10kb/d by year-end. We expect c. $40mn in FCFE net to
Lekoil over a 12-month period of 10kb/d production and see the development of
phase 2 as a medium-term catalyst.
Otakikpo
phase 2 is coming, largely priced in…
Lekoil expects
production from Otakikpo phase 2 to start in late 2018/early 2019. It plans to
perform 3D seismic by 4Q17 and drill five new wells, funded mostly by debt and
cash flows from phase 1, with estimated capex of $110mn. Production from phase
1 and 2 should peak at c. 20kb/d for an extended plateau, with FCFE net to
Lekoil of $61mn and $76mn in 2019E and 2020E, respectively. We estimate Lekoil
will have to draw down additional debt of c. $100mn to complete phase 2. Given
current net debt of c. $40mn, we estimate total debt at $83mn post completion
of Phase 2. …
but
the Ogo discovery is not in the market price
Our valuation for
Otakikpo alone implies a fair value of GBp19, close to the current market
price. We think the market gives no value to Lekoil’s 774mn boe Ogo discovery
in OPL 310, offshore Lagos. This was understandable when there was no funding
partner or appraisal work programme for the field, but given that a memorandum
of understanding (MoU) has been signed with the funding partner, General
Electric (to fund 85% of field development), and two appraisal wells are to be
drilled, with a prospective spud date in 1H18, we think attributing value to
Ogo is justified. Our model implies a risked NAV of GBp18 for Ogo alone, risked
at 75%. Finally, we also expect an important catalyst in ministerial consent on
Afren’s initial 22.9% stake in OPL 310. Lekoil has received ministerial consent
for the transfer of its initial 17.1% participating interest, but we await
consent for its 22.9% interest.
Risks
We upgrade our
rating to BUY, but reduce our TP to GBp31 (from GBp35) due to our lower oil
price estimates of $50/bl in 2017 and 2018, implying 72% upside. Downside risks
to our investment case are delays in the completion of Otakikpo phase 2 and
ramp-up in phase 1; failure to obtain ministerial consent for Afren’s stake in
OPL 310; less positive reserve results from appraisal drilling; and oil price
risks,” the statement concluded.
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