Cooper Energy Limited

Company Overview: Cooper Energy Limited (ASX: COE) is an exploration and production company, mainly involved in the supply of gas to south-east Australia. The company is involved in low-cost Cooper Basin oil production. COE has a portfolio of gas supply contracts and one of the most extensive portfolios of gas-focused acreage and assets, including well-located reserves and resources in the Otway and Gippsland basins. The company’s strategy is focused on providing attractive returns for its shareholders and good commercial outcomes for its customers.

COE Details

Long-term Outlook Underpinned by Growing Production: Cooper Energy Limited (ASX: COE) is an exploration and production company that generates revenue from the commercialisation and sale of gas to south-east Australia and from cash-generating Cooper Basin oil production. The company’s exploration assets include Sole gas field in the Gippsland Basin, which recently became the first new offshore gas development in south-east Australia to commence production in several years. The company also owns the Casino Henry operations in the offshore Otway Basin and undeveloped resources such as Manta and Annie. In August 2020, the company entered into the Transition Agreement with APA Group to provide the framework for commencing Sole gas sales agreements (GSAs) and commissioning the Orbost Gas Processing Plant (OGPP) as early as possible. This agreement has enabled COE to commence supply under its Sole gas sales agreements, providing a material uplift in sales volumes, realised pricing and cash flow. Notably, the company saw 82% YoY growth in H1FY21 production and 86% YoY growth in sales volume.

Daily gas production rates (TJ/day) (Source: Company Reports)

Looking ahead, COE and APA are focused on increasing production to achieve 68 TJ/day. The company is currently working on the recommissioning of its Athena Gas Plant. It is expected that the first commissioning gas through the plant will be in Q1FY22 and cutover of processing from the Iona Gas Plant to the Athena Gas Plant is expected in Q2FY22. Currently, there is a strong gas demand in southern Australia and COE believes that the supply shortages will grow in future. Hence, the outlook of gas demand in Australia seems optimistic. With improving performance at the Orbost Gas Processing Plant, commencement of the Sole Gas Sales Agreements, and decent gas market fundamentals, the company is well placed to continue growing production, revenue and cash flow.

Decent Revenue growth in H1FY21: For the half-year ended 31 December 2020, the company reported total production of 1.20 MMboe, up 82% on the previous corresponding period (pcp). Further, the company reported sales volumes of 1.21 MMboe, up 86% on pcp. Due to the rise in production and sales, the company’s revenue grew to $48.62 million in H1FY21, up 24% on pcp. The total cost of sales increased by 74% YoY to $43.5 million in H1FY21 due to Sole revenue and cost sharing arrangements per the Transition Agreement. Statutory net loss for H1FY21 stood at $23.06 million.

Revenue Trend (Source: Analysis By Kalkine Group)

Record Sales Volume Reported in Q3FY21: For Q3FY21, the company reported quarterly sales volume of 0.82 MMboe, up 55% on the previous quarter, mainly due to higher gas production from Sole following reconfiguration of the Orbost Gas Processing Plant (OGPP). Sole sales revenue increased ~200% on the previous quarter, due to higher sales volumes and less Sole gas sold on the spot market. Total oil and gas production stood at 0.77 MMboe in Q3FY21, up 46% on the previous quarter. Further, the company reported sales revenue of $35.9 million, up 46% on the previous quarter. As at 31 March 2021, the company had cash reserves of $109.1 million and drawn debt of $225.0 million.

Key Metrics:  For H1FY21, the company reported a gross margin of 10.5%, down from 36.1% in H1FY20. Further, the company reported EBITDA margin of 7.8% in H1FY21, down from 33.9% in H1FY01. Current ratio for H1FY21 stood at 1.18x, down from 2.70x in H1FY20.

Liquidity Profile (Source: Analysis By Kalkine Group) 

Top 10 Shareholders: The top 10 shareholders together form around 52.60% of the total shareholding, while the top four constitutes the maximum holding. L1 Capital Pty Ltd. and Challenger Managed Investments Ltd. are holding a maximum stake in the company at 11.75% and 8.27%, respectively, as also highlighted in the chart below:

(Source: Analysis By Kalkine Group)

Rising Gas Sales: In a recent operational update, COE informed that since 1 April 2021, its sales volumes have averaged 51 TJ/day and have reached 59 TJ on a number of days. Due to higher seasonal demand, the gas sales into the Sole contracts have increased up to maximum daily contract quantities. COE also notified that the Sole gas field reservoir is performing without interruption and in line with expectations.

Key Risks: COE operates in a highly regulated environment, thereby carrying a risk that regulatory approvals are withheld or take longer than expected time, which could impact the company’s plans and operations. The company is exposed to the risk related to the low side reserve outcomes, cost overruns, production decrease or stoppage, which may result from facility shutdowns, mechanical or technical failure and other unforeseen events

Outlook: In the calendar year 2021, COE expects to deliver a minimum of 49 TJ/day on average under its Sole Gas Sales Agreements (GSAs). Due to lower-than-expected gas processing rates at OGPP and re-scheduling of some Athena Gas Plant commissioning activities to FY22, the company has recently revised its FY21 guidance. The company’s sales volume is now expected to be towards the middle of the guidance range of 2.9 – 3.1 MMboe, which is still higher than the sales volume of 1.5 MMboe in FY20. The total FY21 production is expected to be towards the lower end of the guidance range of 2.7 – 2.9 MMboe, higher than the production of 1.56 MMboe in FY20. Due to the re-scheduling of some Athena Gas Plant commissioning activities to FY22, the company had reduced its Capital expenditure guidance from $45 – 50 million to $35 – 40 million.

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

Source: Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

Stock Recommendation: Over the last three months, the stock has corrected by 12.69% and is trading lower than the average 52-week’s price level band of $0.235 - $0.460, offering a decent opportunity for accumulation. We have valued the using an EV/Sales multiple based illustrative relative valuation method and arrived at a target price with an upside of low double-digit (in % terms). We believe that the company can trade at a slight discount to its peer mean EV/Sales (NTM trading multiple), considering the net loss incurred in H1FY21, volatility in oil and gas prices, and uncertainty surrounding COVID-19 pandemic. We have taken peers like Senex Energy Ltd (ASX: SXY), Karoon Energy Ltd (ASX: KAR), Woodside Petroleum Ltd (ASX: WPL), etc. Considering the company’s decent performance in Q3FY21, FY21 production and volume guidance, current trading level, and valuation, we give a “BUY” rating on the stock at the closing price of $0.285, up by 5.55% as on 2 June 2020.

COE Daily Technical Chart, Data Source: REFINITIV

Technical Indicators Defined: -

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above.

Disclaimer

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