Stifel research28 May 2019 08:36
Morning all - Stifel have issued another research piece this am...I think probably at the behest of the company to try and shore up the SP - target remains 35p, remains a buy and an 'undemanding' valuation.
Summary
Amerisur is a debt-free, stable cash generator producing oil from three fields across two licences onshore Colombia. The investment thesis is simple: recycle $35-45M of annual operating cash flow into a mixture of short and long-cycle exploration-led reinvestment opportunities. Here we provide an asset overview, summarise recent events and lay out our view of the trajectory of the business. It is intended principally for those new to the company rather than those already expert. While our financials have been tweaked, our target price and rating are unchanged.
Key Points
We see two reasons for the shares to re-rate on a 12-month view.
First, the easy bit: the undemanding valuation gives share price leverage should the company deliver on achievable production targets. It currently trades at 80% of our heavily risked Core NAV (Figure 17), vs the sector at 100%, and we think this gap would close if all 2019 targets were hit - something that we have reasonable confidence in. Key guidance is for 5-6 kb/d of production and organic capital spending within CF, c.$30-35M.
Secondly, and more contingent: its small size (c.$150M EV) gives valuation leverage to any exploration success. The CPO-5 licence is already in production but can grow significantly (Figure 1), while the southern Colombia exploration assets benefit from validation by a $93M farm-in from US super-independent Occidental, a long-established producer in country looking to replace 30 kb/d of net production from its declining Colombian asset base.
Importantly, we also believe that the exploration opportunity set is evergreen on a 3-5 year view, reducing the importance of any one well and taking some of the volatility out of the share price, we believe.
The right capital structure for the assets: Stable production and limited capital requirements at the existing asset base + no debt means broadly flat OpCF for 3-5 years, the majority of which can go into exploration rather than maintenance / debt financing. There's also the potential for small-scale returns to shareholders given annuity-like cashflows from midstream infrastructure, although these aren't yet in our model.
Manageable financial exposure: Three factors play into this: (1) very short time gaps between discovery and cash flow, especially in CPO-5, a matter of weeks; (2) low cost onshore environment, with wells typically $5-10M; and (3) sensible historical portfolio management, with $40M of costs defrayed via the Oxy farm-out and a 30% working interest held in CPO-5.
Abundant subsurface running room: Licences are geographically very large and there are multiple play types on offer. As such, both CPO-5 and the Putumayo portfolio look capable of occupying a multi-year work programme so we don't think the com
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