A Little More in the Valuation Debate
Forsyth Barr seem to have an almost identical view of NZOG's value as Macquarie, and based on recent trading, perhaps ACC. The Forysth Barr research received is as follows:
New Zealand Oil & Gas (NZO)
Recalibrating for PRC Receivership
The terrible tragedy at PRC’s West Coast coal mine and the subsequent receivership of PRC has resulted in NZO’s share price falling approximately -38cps. In this note we examine the value of NZO following the PRC receivership.
What’s changed?
Earnings Impact: FY11 NPAT -$137.4m to -$104.0m.
Valuation Impact: -17cps to $1.20.
Recommendation: Upgraded from HOLD to ACCUMULATE.
PRC now in receivership
The receivers were called in on Monday 13 December as it became apparent that the mine environment was not going to allow a quick assessment of damage caused by the 19 November mine explosion.
Huge uncertainty over PRC value
Whilst the announcement that the receivers had been called in was not a significant surprise, it has done little to reduce the uncertainty for NZO and what its investment in PRC might be worth. Our analysis indicates that it is very unlikely that there will be any value left for PRC equity shareholders, but that NZO may recover some of its debt.
The key variable is PRC’s insurance contract. Whilst PRC has indicated that the maximum possible payout is $100m, we do not believe it will be that much, particularly once the time value of money is taken into consideration. Overall, we estimate that PRC is worth 5cps to NZO.
FY11 earnings will record a loss
We expect NZO will take the prudent course of action and write-off its PRC investment at the 1H11 result. We estimate the book value of NZO’s investment to be $142m.
Oil prices continue to surge
On the positive news front, oil prices have climbed substantially over the past three months. The WTIS price has risen to over NZD$120/barrel. To date, the market has not adjusted for the stronger oil prices, with no discernable improvement in the fortunes of NZO, nor the ASX300 Oil & Gas Exploration companies.
Investment View
The market has taken the view that PRC is worth nothing to NZO. We believe that this is overly pessimistic and NZO is currently trading at a -23% discount to our valuation (excluding exploration prospects). Our recommendation is ACCUMULATE.