Urgalzmine, my apologies for the late reply, have been quite busy. I think your point is very valid and you are correct to say that ROCs share price has taken a battering over the past few years. While the price of the company has been in freefall the underlying intrinsic value has only gone one way and that is up. To prove such a point I will try and point out how I come to my conclusion, do not take any of the comments personally as they are not aimed at you. Also to everyone that reads this thread please note that this is my view only and in no way is financial advice.
Dr Doran has little influence in affecting the share price and as a geologist and not businessman is often very cautious in his approach to forecasts of production and in calculating recoverable 2P reserve figures. In my view ROCs reported 2P figures are well below the actual amount of oil the company will likely recover, which many analysts have also highlighted. I think based on ROCs assets you could easily argue a share price somewhere north of $4 and I have no doubt it well reach this target in due time. In my experience price always catches up to value, however sometime this process takes a lot longer than one would like.
In 2005 the company had virtually no revenue and no production. Since the start of 2006 Production and revenue have been in a strong upward trend over the last two years, having grown significantly from 0.06MMBOE and $AU5.5m in 1Q06 to >1MMBOE and $AU108.5m in 1Q08. Now the company has grown to be well balanced P + E Company with consistent production of around 10,00BOPD which is generating significant cash flows.
In terms of looking at the firm’s income statement and seeing a negative NPAT and in turn EPS, you would have to be ignorant to believe the truth behind these figures, because they definitely do not show a true of the underlying cash position of the company, which is extremely strong. Due to ROCs hedging procedures (note: they only have a small amount of total production hedged) they have had to write of around $US70m, which was a non cash loss. Also ROCs conservative approach to expensing exploration even though some projects are potentially commercial also hides the true position of the company to some extent. Exploration expenses accounted for $US89m in the full year 2007.
Let me use a very simple and rough method to value ROCs oil in the ground assuming a conservative value of $US22.50 per barrel, and ignoring the time value of money. I will also take into account the differences in crude prices received from different fields. My other assumption will be an ER of $0.95 and 300m shares on issue. Yet with an oil prive any where above $100/barrel using a value of $US22.50 for in ground resources is considerably low.
Cliff Head:
10MMBO*0.375 = 3.75MMBO (net ROC)
3.75MMBO*$AU23.68= $88.82m
Value per share = 88.82/300 = $0.296
Note: the JV believes due to good reservoir performance, recovery levels are likely to be considerably higher than original estimates, which have not been factored in to this figure.
Zhao Dong:
Oil trades @ a 15% discount to Brent, which therefore values each in ground barrel at $AU20.13
C&D oil fields: 9MMBO (Net ROC) + C4 9MMBO (conservative estimate)
18MMBO*$AU20.13 = $362.37
Value per share = 362.37/300 = $1.21
Enoch + Blane:
Oil trades at a slight premium to Brent (assume 2%) which therefore values each in ground barrel at $AU24.16
Combined 2P reserves is equal to 4.3MMBO
4.3MMBO*$AU24.16 = $103.88
Value per share = 103.88/300 = $0.346
Chinguetti:
1.05MMBO (net ROC) sells at or very close to Brent spot, i.e. $AU23.68
1.05MMBO*$AU23.68 = 24.86
Value per share = 24.86/300 = $0.083
Beibu Gulf:
Wei 6-12 & Wei 6-12-S 2P estimates range from 19-29MMBO with considerable upside. For this sake I will assume smack bang in the middle @ 24MMBO (Net ROC: 4.7MMBO). However there are 4 additional oil accumulations (Wei 12-8 East and West, Wei 12-2 & Wei 12-3) in the south end of the block where there lays a potentially larger reserve of oil with an estimated P50 oil in-place of about 189MMBO. However a large majority of this oil is much heavier and viscous that the north end of the block. Using a recovery of 17.5% this equates to recoverable reserves of approx 33.1MMBO (Net ROC: 6.5MMBO).
If CNOOC chooses to back in to gain a 51% interest ROCs interest in the block will fall to 19.6%. At 19.6% recoverable reserves net to ROC would be 11.2MMBO. The crude in the north part of the block will likely sell at the Brent spot price however the crude in the south of the block will probably sell at a 15% discount to Brent.
(4.7MMBO*$AU23.68) + (6.5MMBO*$AU20.13) = $242.14m
Value per Share = 242.14/300 = $0.807
Massambala:
This has yet to be appraised, so until appraisal is conducted this is only a rough and speculative estimate. Heavy oil discovery onshore Angola with an estimated P50 oil in-place of about 200MMBO. ROC said based on heavy oil technology it would not be unreasonable to assume recovery of around 20% and perhaps considerably more. For this sake we will be even more conservative and assume a recovery of 15% which equates to recoverable reserves of around 30MMBO (Net ROC: 18MMBO). The oil would sell at a substantial discount to Brent, probably in the order of around 30%. Hence the value of a barrel of oil in the ground equates to $AU16.58.
18MMBO*$AU16.58 = $298.42m
Value per share = 298.42/300 = $0.995
Mauritania:
Additional Development upside includes;
Banda Gas and Oil Field: Recent appraisal drilling – a 2km step out to the east confirmed the consistency of the discovery well. I.e. 14m of net gas pay overlying 10m of net oil pay. Potential P-50 in place resources has previously been estimated around 1-4TCF of gas. Hence the latest appraisal well should only confirm that range, (3.69% ROC interest). Also there has been greater confidence in the geological model and greater understanding of the reservoir which should prevent any problems that occurred with Chinguetti from re-occurring in Banda and other development candidates.
Pelican Gas Field: Potential P-50 in place resources has been estimated around 1-2TCF of gas, of which ROC has a 4.95% interest. Both Banda and Pelican have the potential to be future cornerstone projects in an LNG development.
Tiof: Potential P-50 in place resources has been estimated around 500MMBO, of which ROC has a 3.69% interest.
In terms of exploration, If you can find a mid tier exploration and/or production company with a market cap under $1.5b that has a better exploration portfolio than ROC then be my guest in pointing this out to me, as I would be most curious to know. ROC is one of a few small to mid cap companies in the world that is able to gain exposure to major petroleum systems in which a large majority of the majors (both private and government enterprises) are exploring, developing &/or producing. I won’t go in to much detail, as this info is readily accessible but such areas include: onshore Angola, offshore (deepwater) Madagascar, offshore Equatorial Guinea, North West Shelf (Carnarvon Basin), Mauritania and the Beibu Gulf (China). How much value you place on this is highly questionable, so I will not even try and attempt to do so. Nevertheless many analysts have put a figure of around $0.50 on ROCs exploration assets.
This has turned into a novel and I doubt anyone will read it but hope it helps explain why John Doran has not only been a great CEO in terms of being transparent and open with shareholders but most importantly in building significant value in the company over the past few years as well as positioning the company to add potentially company transforming value in the future. So until the drilling success picks up it looks like it’s just a waiting game for the moment. Have traded in and out for 3 years and now quite comfortably hold, absolutely no worries on my part with the trend over the last 2 years, has just created even more value in such a good company. In terms of bringing fields in to development, you only have to look at the success of the company in dealing with tricky and highly complex fields, which has given the company worldwide recognition.
GREENS