ChapelHill retains a HOLD rating for Oando despite dilution of Share Valuation


Wednesday, September 25, 2013 12:00 AM / Chapel Hill Denham

We update our earnings forecasts on Oando Plc (Oando) post the publication of the H1-13 results. We cut our 12-month target price (TP) to N11.28 from N13.85 previously, but maintain our HOLD rating on the stock.

Capital raising dilutes share value
We raise our FY-13E EPS by 28% on the back of an improved outlook for Oando’s upstream and midstream businesses in FY-13E. Oando reported FY-12 Energy Services (ES) revenue of N20.4bn, 37% above our FY-12 target of N14.9bn. The variance was due to the deployment of a third rig “OES Passion” during the year. Oando’s Gas and Power (G&P) revenue of N58.0bn surpassed our target of N16.3bn due to a greater-than-expected increase in the utilisation of its Eastern Horizon Gas Company (EHGC) 128km pipeline. Having incorporated the increased capacity utilisation into our valuation, our revised forecasts imply a 3-year ES and G&P revenue CAGR of 24% p.a. and 48% p.a. between FY-11 and FY-14E vs. 15% p.a. and 12% p.a. previously. We expect Oando’s fourth rig “OES Respect” to be contracted out in FY-13E to further boost revenue from the segment going forward. We also forecast average gas sales of 90mmscf/d into FY-15E, up from 62mmscf/d previously. We believe increased gas sales will be sustained from EHGC and more clients will be signed on over the medium term. While we forecast a 139% growth in its fair market capitalization to N61.5bn, the dilutive effect of the recently concluded N54bn rights issue lowers the value per share from our old target price (TP) of N13.85.

Exploration and Production (E&P): a lot of optimism required... We forecast a 3yr E&P revenue CAGR of 16% p.a. between FY-12 and FY-15E. This is an upward revision from our previous 4% p.a. CAGR forecast. We raise our medium term expectation from Oando’s Ebendo field (OML 56) to c.1,500bpd from c.500bpd previously. The repair of a damaged oil evacuation pipeline on the field and the positive results from drilling campaigns on Ebendo wells 5 and 6 should reflect on net production in our opinion. We expect Akepo field (OML 90) to come on-stream in FY-13E and at least one well on Qua Ibo field (OML 13) to commence production in FY-14E. Oando is currently in the process of raising c.US$1.5bn for the acquisition of assets from ConocoPhilips, which includes a 20% stake in productive assets of 43,000boepd. We have left out potential additional production from this acquisition in our valuation pending the conclusion of the deal. According to management, the capital is to be raised from a mixture of equity and debt. We make conservative assumptions about the success of the capital raising effort, and we acknowledge the prospects for further share value dilution.  

Improving profitability on the back of revenue diversification. Oando’s FY-12 EBITDA margins improved to 5.8% from 2.5% in FY-11. We forecast an increase to 8.9% in FY-13E, as contribution from the more profitable midstream and upstream businesses increases. E&P EBITDA margins rose to 64% in FY-12 from 46% in FY-11, indicative of improved profitability.

We lower our target price to N11.28 from N13.85, but maintain our HOLD recommendation despite the recent price retraction. Oando trades on an FY-14E P/E and EV/EBITDA of 2.5x and 4.9x vs. its EM peer average of 8.3x and 5.4x respectively.

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