Stocks Details

Whitehaven Coal Limited

Record Managed ROM Coal Production in June Quarter: Whitehaven Coal Limited (ASX: WHC) is engaged in the development and operation of coal mines in New South Wales.

Quarterly Update: In the recently released report for the June quarter, the management highlighted that the company achieved strong performance despite external challenges, including drought, bushfires and COVID-19. The quarter was marked by record managed ROM coal production of 8.2Mt, up 17% on the prior corresponding period. Production at the Maules Creek Open Cut Mine achieved the guidance, on the back of planned access to the high yielding Braymont seam, no labour shortages and improved excavator productivity. Production at Narrabri also met the guidance, however, Gunnedah Open Cuts mines reported production below the guidance, due to more extensive former underground workings than anticipated impacting Werris Creek and the heavy rains in the March quarter.

Production and Sales Highlights – Continuing Operations (Source: Company Reports)

Development Projects: The company has three main development projects, aimed at expanding managed ROM production over a decade. The Narrabri Underground Mine Stage 3 Extension Project has received its Secretary’s Environmental Assessment Requirements (SEARS) from the NSW Government and its EPBC Act referral from the Federal Government. The project is aimed at extending the approved life of the Narrabri Underground Longwall Mine from ~2031 to ~2044. The Vickery Project is now in the final stages of the NSW Government’s evaluation process, with a decision expected within the coming weeks. The Winchester South Metallurgical Coal Project continues to progress through the Queensland Government’s major project development process, with results from ongoing coal quality drilling expected at the end of 2020.

Outlook: A slowdown in industrial activity, uncertainty regarding demand from China and steel production cuts in Whitehaven’s key metallurgical coal markets of India and North East Asia, weighed heavily on coal prices and WHC’s shipments out of Q4FY20. As at 30 June 2020, the company had fixed-price contracts for 1.55Mt of managed thermal coal sales, with delivery expected in two tranches of 980kt and 570kt in the September quarter and December quarter, respectively. The company will be providing FY21 guidance in the release of the FY20 results on 26^th August 2020.

Key Risks: The company's performance in the future can be impacted by future coal prices, which are influenced by the outcome of future sales contract negotiations, industrial production levels, changes in coal demand, and general economic activity. Certain unforeseen circumstances may cause delays in project development, exploration milestones and other targets, resulting in delayed revenues. Last but not the least, weather and natural disasters, unexpected maintenance and technical problems, or failure of key equipment, may impact coal mining operations and can lead to lesser production, delayed deliveries and increased costs.

Valuation Methodology: EV/EBITDA Multiple Based Relative Valuation (Illustrative)  

EV/EBITDA Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

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

Stock Recommendation: Over the last three months, the stock has corrected by ~28.08% and is trading near its 52-week low level of $1.375. We have valued the stock using EV/EBITDA multiple based illustrative relative valuation method and arrived at a target price of low double-digit upside (in percentage terms). For the purpose, we have taken peers like Yancoal Australia Ltd (ASX: YAL), New Hope Corporation Ltd (ASX: NHC) and Energy Resources Of Australia Ltd (ASX: ERA). Considering the performance in the June quarter, progress on major development projects, valuation, and current trading levels, we give a "Buy" recommendation on the stock at the current market price of $1.52, up 4.11% on 14^th July 2020.

Strike Energy Limited

Decent Progress on West Erregulla Gas Project Development: Strike Energy Limited (ASX: STX) is primarily engaged in the exploration and evaluation of gas resources.

Q2FY20 Project Highlights: In May 2020, the company's West Erregulla Gas Project was awarded Lead Agency Status by the Western Australian Department of Premier and Cabinet, to acknowledge the project's significant strategic importance to the economy of WA. The company reported good progress on the WE3 program under West Erregulla upstream development and has started the operational phase of the program. The company is currently targeting a late August / early September spud for WE3. During the quarter, the company also partnered with Australian gas infrastructure leader AGIG to design, build, own and operate a 50 TJ/day gas plant under West Erregulla midstream development, to process gas from the proposed Phase 1 West Erregulla development under a long-term tolling arrangement. With regard to the South Erregulla project, the company completed reprocessing of 23 historical 2D seismic lines of various vintages that cover the Greater Erregulla region. During the quarter, the company also completed the interpretation and modelling of the 3D seismic acquired over the Walyering gas discovery and discovered a robust, drillable wet-gas opportunity at the prospect. Operating cash outflow for the June quarter stood at $407k.

Operating Cash Flow (Source: Company Reports)

Update on Cooper Basin Assets: After a detailed review of the Cooper Basin assets, the company updated that it will apply a non-cash pre-tax impairment of ~$91 million as at 30^th June 2020 to fully impair its assets in the Cooper Basin.

Key Risks: Although the company issues reasonable forward-looking statements, a variety of variables can impact the actual results, actions, and developments. These variables can be related to price fluctuations, changes in demand, drilling and production results, reserve estimates, regulatory developments, project delays or advancements and approvals and costs estimates.

Stock Recommendation: Over the last three months, the stock gave returns of 50% and is trading slightly above the average of its 52-week trading range of $0.061 - $0.315. As on 30^th June 2020, the company was debt-free, with cash on hand amounting to $21.6 million. Considering the development with respect to key projects, a debt-free balance sheet, and current trading levels, we give a "Hold" recommendation on the stock at the current market price of $0.195, as on 14^th July 2020.

Karoon Energy Limited

KAR Remains Committed to Execute Baúna Acquisition: Karoon Energy Limited (ASX: KAR) is an international oil and gas exploration company with projects in Australia, Brazil and Peru.

Shareholding and Management Update: Norges Bank recently became a shareholder of the company with a voting power of 5.11%. As per another update, Scott Hosking resigned from the position of Company Secretary and will continue to serve the company as the Chief Financial Officer. Nick Kennedy was appointed as the new Company Secretary as Hosking's resignation.

March Quarter Operational Highlights: During the quarter, the company conducted low cost internal geological and geophysical studies and mapping work at the Santos Basin, Block S-M-1537 in Brazil. Moreover, at the Santos Basin, Blocks S-M-1037, S-M-1101 in Brazil, the company commenced conceptual engineering studies to evaluate the possibility of utilising a redeployed production system for future development of the Neon oil field. With regard to the Bauna operations, production during the quarter stood at 1.5 million barrels of oil at an average production rate of 16.5k barrels/day. Exploration and evaluation expenditure for the quarter came in at $237k, with total cash used in operating activities amounting to $7.01 million.

Operating Cash Flow (Source: Company Reports)

COVID-19 Impact: In response to the slowdown in oil demand due to COVID-19 and a massive decline in oil prices, the company introduced cost reduction measures, including consolidation and reduction of offices and workforce. Despite the adverse impact, the company is committed to complete the acquisition of the 100% operated interest in Santos Basin Concession BM-S-40, the producing Baúna oil field and the undeveloped Patola oil discovery. However, the availability of debt finance for closing the acquisition remains subject to a final bank case, including agreeing on relevant oil pricing and associated hedging that will determine the final borrowing base amount available for the acquisition.

Key Risks: The company might not be able to achieve accurate outcomes due to a false interpretation of complex and uncertain data for geological evaluation. Insufficient insurance coverage for risks associated with oil and gas exploration, evaluation, development, and production can adversely impact operations. Moreover, a volatile oil and gas market may impact the company's ability to attract capital and may impact the return from operations.

Valuation Methodology: EV/EBITDA Multiple Based Relative Valuation (Illustrative)  

EV/EBITDA Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

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

Stock Recommendation: Over the last six months, the stock has corrected by ~58.15% and is trading close to its 52-week low of $0.340. As at 31^st March 2020, the company was well-capitalised with $504.5 million of cash and no drawn debt. The Baúna Acquisition, if executed, has the potential to deliver long term value to shareholders. The company expects to release its FY20 results on 25^th September 2020. We have valued the stock using an EV/EBITDA multiple based illustrative relative valuation method and arrived at a target price of low double-digit upside (in percentage terms). Considering the performance in the March quarter, progress on Baúna Acquisition, key risks, valuation, and current trading levels, we give a "Speculative Buy" recommendation on the stock at the current market price of $0.560, down 0.885% as on 14^th July 2020.

Comparative Price Chart (Source: Refinitiv, Thomson Reuters)

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