Karoon Gas Australia Limited

 
The company is a global oil and gas independent with a current market capitalisation of about $ 465 million. As at 30 June 2015, it had cash at bank of $ 555 million and no outstanding debt. Following the success of appraisal in the Santos Basin in Brazil, the company is looking to transform into a producer.


Brazil: Santos Basin (Source: Company Reports)
 
The value proposition that it offers is considerable. Its growth is exploration led with an exploration success drilling rate of approximately 62% since its IPO. Its appraisal success establishes proven deliverability in Kangaroo and Echidna as well as the Santos Basin. The updates on resource estimates by KAR for Kangaroo (54 mmbbl gross) and Echidna (75 mmbbl gross) oil discoveries are encouraging. The work programme for calendar year 2016 is targeted with a focus on the appraisal of Kangaroo and Echidna, and the company aims to take full advantage of the falling drilling and development costs. Karoon’s phased development programme envisages the appraisal program followed by early production system followed by full field development. The size of the development is manageable and entirely appropriate for a company of size. The funding capability is well established because, in addition to the sizeable cash holdings, the company has $ 200 million worth of contingent milestone cash receivables outstanding. Finally, the company has multi-billion barrel exposure to net prospective resources in Australia, Brazil and Peru.
 

KAR Daily Chart (Source: Thomson Reuters)

Among the highlights for FY 2015 are the success of the exploration led growth strategy in delivering the Echidna light oil discovery and the Santos Basin in Brazil. The sale of the Browse Basin resulted in an injection of upfront cash of USD $ 600 million and has provided the company with a robust balance sheet to navigate the current uncertain oil and gas market and to carry forward projects that can create long-term value. The encouraging results from the Santos Basin and the robust finances provide long-term investors with the potential of plenty of upside. We rate the stock as a Buy at the current price of $1.665.
 

Mesoblast Limited

 
FY 2015 has brought a boost to Mesoblast limited (ASX: MSB) as the company is now able to reinforce its position as a global leader in the field of cell-based regenerative medicine. The recent announcement about the additional Phase 2 trial results of the lead product candidate relating to the treatment of chronic heart failure (CHF) presented at the 19^th Annual Scientific Meeting of the Heart Failure Society of America in National Harbor, MD, USA, is quite promising. Primarily, the results demonstrated that Company’s mesenchymal precursor cell (MPC) therapy had the utmost cardioprotective effect in the subset of patients affected with more advanced heart failure. Further, the news about Mesoblast’s Japanese development partner JCR Pharmaceuticals Ltd receiving regulatory approval for the regenerative medicine product to treat acute Graft versus Host Disease (GvHD) in Japan has been encouraging as Mesoblast is entitled to receive milestone payments on regulatory approvals along with royalties on sales. This has played a positive role post a lull period for MSB.



Expenses from Continuing Operations (Source: Company Reports)

Notably, two additional phase 3 clinical programs were initiated, one for chronic back pain due to degenerative disc disease and the other for steroid-refractory acute graft versus host disease. Including the heart failure therapy, the company now has three Tier 1 product candidates in active phase 3 recruitment. Moreover, on the basis of encouraging phase 2 results in diabetic kidney disease, the product candidate for inflammatory and immune-mediated conditions has been elevated to Tier 1 status. The company is predominantly focusing its resources on these advanced product candidates but continues to invest in a strong pipeline of products.
 
The company continues to have a strong position in intellectual property and the proprietary mesenchymal lineage adult stem cell (MLC) platform allows the development of product candidates which have the potential to significantly improve the treatment outcome of a number of serious and debilitating conditions. This is because of the ability of MLCs to produce biomolecules that can repair tissue through multiple and diverse mechanisms. The aim of regenerative medicine is to restore affected cells and tissue which may give it broad applicability in treating diseases with inadequate current care standards or where there is no current approved therapy.
 
Like many early stage clinical development companies, the company has never made a profit and for FY 2015, the loss after income tax was $ 119.36 million compared to $ 80.95 million in the previous year. The increase reflects the continued investment in the clinical development programs as they move into late stage development. Revenue from continuing operations was $ 23.7 million compared to $ 26 million in the previous year and other income was $ 18.8 million compared to $ 11.1 million for the previous year mainly on account of foreign exchange gains of $ 12.84 million.


MSB Daily Chart (Source: Thomson Reuters)
 
Many of these early stage drug development companies typically focus on one product and it is interesting to note that this company has as many as four product candidates in late stage clinical trials. This gives it a much better chance to produce at least one block buster with accompanying multi-bagger returns. The company has a cash balance of 124 million and will need to raise fresh capital in around 18 months at the current burn rate. However, the prospects for this look good at the back of updates such as U.S.-based Celgene has taken a substantial interest in the company. If you have the appetite for the investment risk associated with speculative growth companies, we would recommend that you buy this stock at the current price of $3.15.
 

AWE Limited

 
With updates such as spudding of the second well out of the two planned exploration wells in block QK 12-3-1 D in China with few promising highlights of production reserves, AWE Limited (ASX: AWE) has taken some attention now. The recent news about successful linking of Yolla-5 development well to export facilities on the Yolla platform alongwith commencement of production has been attractive. The production rate from the BassGas facilities has been moved-up to about 64 TJ/day.
 
The results for FY 2015 show net 2P reserves up by 25% to 114 mmboe after positive appraisals at Perth Basin and Sugarloaf. The Company also reported about reserves to production ratio of 22 years. Net 2C contingent reserves are up by 57% to 121 mmboe and the total of the two at 235 mmboe is up by 40%. The full year production of 5.1 mmboe is at the top end of the guidance range. Development expenditure of $ 243 million and exploration expenditure of $ 63 million reflect the disciplined approach of management. Sales revenue of $ 284 million was 2% lower than the guidance because of the low prices of oil. Field EBITDA came to $ 143 million after production costs and royalties of $ 141 million. Statutory net loss after tax of $ 230 million included $ 138 million by way of non-cash impairment charges and the underlying net loss after tax of $ 52 million is because of the lower prices of oil and lower production owing to planned downtime. The liquidity position included $ 47 million in cash, drawn debt of $ 170 million and undrawn debt of $ 230 million.
 

Dongara/Wagina and Waitsia Discoveries (Source: Company Reports)

Managing director Bruce Clement said that this was another year of significant achievements because of the management in minimising the impact of the low oil price environment by increasing production and keeping exploration expenditure within the guidance range reflecting the continued focus on containing costs. Major highlights include the successful Perth Basin exploration and appraisal program in which the company added substantially to reserves. The program resulted in the discovery of the Waitsia field which is the biggest onshore conventional gas discovery in Australia in the last 30 years and could potentially be the fourth largest gas field in that country. It has been prioritised for commercial development. The priority for the company now is to maintain financial discipline and maintain the strength of the balance sheet.
 
We note that AWE’s current market cap of $679 million effectively values reserves at less than $ 7 per barrel which is around 1/10 of the current benchmark prices though it is true that all these reserves are not proven. In addition to the already producing oil and gas assets, the company is in a position to exploit even more properties. This again is not a risk-free investment but investors willing to wait for the long-term could benefit substantially, and therefore we rate this stock as a speculative Buy at the current price of $0.64.


AWE Daily Chart (Source: Thomson Reuters)