It is an imprecise science picking the bottom of a share price or that of a commodity, and it is just as hard to pick the turning point and the top of such prices.
Whilst it may appear obvious, it is important to maintain your nerve and confidence in your investment, as well as in the Board of Directors and management team. No matter what the environment, some investors will always need to sell as changing circumstances inevitability affects most of us during our lifetime. It is just a pity if the need to sell occurs at such a time as this, when fear and uncertainty prevail, and fundamental value seems to go out the window, and the value drivers that remain intact, seem to have been ignored or overlooked.
NZOG and Pike River seems to have displayed a SP performance that represents an inverse relationship to those of many other leading stocks on the NZX. I agree with earlier comments that at present, there are many shares that are undervalued. The art is in separating the wheat from the chaff, and looking through the distinguishing features of good value versus exceptional value.
In an environment where cash is king, a high degree of certainty around both cash generation and profitability is worth more than a low degree of certainty.
In this case we have:
- A rapidly depreciating $NZ that will fall well beyond most forecasts of an average of 70 cents in FY2009.
- Turnover for FY2009 that is likely to be close to $200 million (and rising thereafter), assuming NZOG's share of Tui production at 1.125 mmbl, at an average of US$120 and a conversion rate of 69 cents. Each additional 100,000 bbl to NZOG is worth approx NZ$17 million.
- Any further downward pressure on the oil price appears likely to be more than compensated by Tui production outperforming expectations of 9 mmbl (or NZOG share of 1.125 mmbl), and further $NZ currency depreciation resulting in the $NZ average for FY09 being considerably lower than 69 - 70 cents.
- Kupe gas presold to Genesis at contracted prices with built in indexing of this pricing i.e. price only upwards, no potential reset downwards.
- Kupe LPG being substituted for imported LPG, therefore sold at world prices, and gaining a market share in excess of 20%.
- Tapis oil out of Tui being of excellent quality and in short supply in south East Asia. Note that the Tapis premium has widened considerably in recent weeks.
- Pike River has sold approximately 70% of life of mine production at world prices.
- By world standards, a very acceptable break even point for the Tui oil JV and the Pike River coking coal operation.
- Further front end loading of Tui cash flow is highly likely as a result of modifications to the FPSO in the 2008 calendar year. The SP effect of this has been noted by McDouall Stuart as 13 cps.
- Further upward revision to the Kupe reserves highly likely (name a Taranaki gas field that hasn't substantially exceeded initial reserve estimates) and therefore the amount and duration of cash generation will increase in the near term.
- The Brunner seam at Pike River overlays the Paparoa seam. The Paparoa seam is highly likely to be investigated, with reserves estimates and a mine plan determined within 18 months. Again, this is conducive to additional cash flow, and is likely to increase the value of the underlying asset.
- Due to the depreciation of the $NZ, and the purchase of most Forex at much better rates than prevail today, the underlying value, or sunk investment in Tui, Kupe, and Pike is now worth more.
It always make sense to separate the assets out i.e. Tui, Pike, Kupe...etc, and compare these to the the valuation implied by the market. Over recent months, many brokers have confirmed the significant difference between the implied valuation and their own, with some suggestions that NZOG could now be the prey rather than the predator. It is not hard to see why this view is gaining currency. My view is that as Pike, and Kupe near completion, or start producing, the valuation gap will widen. Reserve and/or production upgrades to Kupe and possibly Tui are likely to further widen the valuation gap, and contribute to the trend of a significant valuation gap.
Pike River is a world class mine, with a very high grade of HCC, a transport agreement that allows some increase in mine production, and is sitting on additional reserves that have been valued at nil. A distribution of NZOG's PRC shares to NZOG shareholders won't ever happen as the realisation of the strategic premium from NZOG's 31% stake wouldn't be realised. NZOG have 2 directors on the Pike River board, so they ought to be able to gauge a good time to sell. Contrary to market perception and behaviour, HCC is on a very solid price track, with pricing expectations for FY10 above US$300 tonne. Pike River is a pure HCC play, whereas most other coal have a mix of both coking and thermal coal. So it appears that the Pike River SP is getting caught up in the general malaise around commodity and coal stocks rather than anything that is coking coal specific.
Dividends
There has been considerable comment about dividends. NZOG have announced that dividends relating to FY08 have been paid. The criteria relating to the payment of dividends for subsequent years have been outlined.
The low CAPEX for FY09 certainly seems to be conducive to payment of a healthy dividend for FY09, with broker expectations ranging from 5 cps to 10.9 cps. As the SP is at a significant discount to valuation, it is arguable that retention of cash to be used for dividends will not be fully reflected in the SP, and is therefore better paid out to shareholders. Certainly, the shareholders could do with it, cash flow warrants healthy dividend payments (i.e. an interim and a final) for FY09 (i.e. around or in excess of 10cps), and in a NZ context is very likely to underpin the SP which can only be a good thing, as it prevents further erosion of shareholder value.
For many reasons, including the quality and increasing nature of the cash flow, the anticipated positive trend in both reserves and the underlying value of the assets, together with other reasons that have been weighed up and outlined above, my view is that both NZOG and Pike appear oversold. NZ has a tendency to undervalue its shares, particularly those that it is not overly familiar with. It appears that this behaviour is more prevalent than ever, and in NZOG's case may require an outsider to recognise its real value. I hope this is not the case, and certainly the task of the Directors and management team is to support and facilitate the creation of value, and to communicate this to shareholders and the market, but they may remain challenged for this to be reflected in the SP.
Here is a link to an article that appeared overnight on CNBC, and which contains the view the commodity prices and oil will turn in the short term.
http://www.cnbc.com/id/26158141