Stocks’ Details
 

Oil Search Limited

Decent Increase in Total Production and Sales Volume: Oil Search Limited (ASX: OSH) is engaged in exploration, development and production of oil and gas resources. As on 25 February 2020, the market capitalisation of the company stood at ~$9.38 billion. The company has recently appointed Dr Keiran Wulff as Managing Director. OSH has recently released its full-year results for the period ending 31 December 2019 wherein it reported an increase of 11% in total production to 27.9 mmboe and a similar rise in total sales to 27.8 mmboe. During FY19, revenue of the company witnessed a slight increase of 3% and stood at US$1,584.8 million. In the same time span, net profit after tax was US$312.4 million. The Board has declared an unfranked final dividend of 4.5 US cents per share, bringing the total dividend to 9.5 US cents per share. 


FY19 Financial and Operational Highlights (Source: Company Reports)

Future Guidance and Expectations: The company has provided guidance for FY20 and expects to produce in between 27.5 – 29.5mmboe at production costs ranging between US$11.0 per boe to US$12 per boe. The expected unit production costs are driven by higher production and lower work programmes, including earthquake remediation work.

Valuation Methodology: EV/Sales Based Valuation

EV/Sales Multiple Based Valuation (Source: Thomson Reuters), *1USD = 1.51 AUD

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: As per ASX, the stock of OSH is trading very close to its 52-week low level of $5.850, proffering a decent opportunity for accumulation. During FY19, EBITDA margin of the company stood at 69.4%, higher than the industry median of 32.2%. In the same time span, net margin of the company was 19.7% as compared to the industry median of 13.9%. This indicates that the company is managing its costs well and is able to convert its revenue into profits. Considering the current trading levels, higher margins and modest outlook, we have valued the stock using EV/Sales based relative valuation method and have arrived at a target price offering an upside of higher single-digit (in percentage terms). Hence, we recommend a “Buy” rating on the stock at the current market price of $6.010, down by 2.276% on 25 February 2020.
 

Liquefied Natural Gas Limited

Financially Stable Balance Sheet: Liquefied Natural Gas Limited (ASX: LNG) is engaged in the exploration of natural gas. As on 25 February 2020, the market capitalisation of the company stood at ~$69.2 million. The company has recently released its quarterly report for the period ending 31 December 2019, wherein it reported net operating cash outflow of $6.9 million. The company continues to manage its liquidity and remains debt-free with total cash position of $8.3 million. In the same quarter, the company extended the validity period of its binding EPC contract with KSJV.


Statement of Cash Flow (Source: Company Reports)

What to Expect: The company expects continuity in normal business activity and expects to achieve goals of operating its liquefaction projects. LNG is focused on signing binding offtake agreements with investment-grade counterparties and increasing its liquidity position to sustain its operations.

Stock Recommendation: As per ASX, the stock of LNG is trading very close to its 52-week low of $0.105. During FY19, gross margin and net margin of the company witnessed a substantial improvement. In the same time span, current ratio of the company stood at 6.37x, higher than the industry median of 1.25x. This indicates that the company is capable of paying its current liabilities using its current assets. On the TTM basis, the stock is trading at a price to book multiple of 2.2x, lower than the industry average (Energy) of 8.3x. Considering the trading levels, improvement in margins and valuation, we recommend a “Hold” rating on the stock at the current market price of $0.117, down by 2.5% on 25 February 2020.
 

Carnarvon Petroleum Limited

Update on Dorado 3D Seismic Data: Carnarvon Petroleum Limited (ASX: CVN) is engaged in the exploration and production of oil and gas. As on 25 February 2020, the market capitalisation of the company stood at ~$461.49 million. The company has recently announced that it has received the first preliminary data set from the 2019 Keraudren 3D seismic survey and stated that the work is progressing for the start of FEED phase. The data acquisition area was extended to include several field explorations prospects and the assessment is intended to occur throughout the 2020.

Strong Cash Balance: The company has recently provided an update on quarterly activities for the period ending December 2019 wherein it reported exceptional flow tests from both intervals tested in the Dorado-3 appraisal well. At the end of the quarter, the company had a strong cash balance of $119 million which can easily fund the expenditure for FY20. During FY19, net cash used in operating activities stood at $0.84 million.


Cash Flow from Operating Activities (Source: Company Reports)

Stock Recommendation: As per ASX, the stock of CVN is trading very close to its 52-week low of $0.275, proffering a decent opportunity for accumulation. During FY19, assets/equity ratio of the company stood at 1.02x, lower than the industry median of 1.96x. On the TTM basis, the stock is trading at a price to book multiple of 2.9x, lower than the industry average (Oil & Gas) of 11.6x. Considering the current trading levels, decent cash position and other aforesaid factors, we recommend a “Speculative Buy” rating on the stock at the current market price of $0.290, down by 1.695% on 25 February 2020.
 
 
Comparative Price Chart (Source: Thomson Reuters)

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