Three years ago, the market lost confidence in mid-tier Russian oil company Exillon Energy (EXI). A bungled sales process effectively handed control to two businessmen, sparking a boardroom exodus, a litany of shareholder complaints and an admission from chairman David Herbert that chief executive Mark Martin "was no longer able to exercise practical control over the company's operations and assets". Now, an oil crisis and a new management team later, Exillon is starting to generate investor attention again, not least because its share price seems disconnected with the quality of the assets, the company's cash generation and the position of the oil market. And although corporate governance concerns are likely to persist, we think sentiment is finally changing.
- Undervalued resource base
- New management
- Cash-rich
- Possible dividend
- Falling production
- Corporate governance record
Operationally, the company looks to be in fine fettle, even though a focus on balance sheet strength and clearing debts has led to production falls. In the first half of 2016, the combined output from its oilfields in Timan-Pechora and West Siberia averaged 14,807 barrels a day. Despite dealing with an average oil price of just $23.89 in the period, Exillon managed to book a cash profit of $14 per barrel and pre-tax profit in the six months rose 73 per cent to $26.8m (£22.1m). Operating cash flow was further supported by a mining tax cash reimbursement of $26.8m (the same level as pre-tax profit), demonstrating the favourable regulatory regime in which the company operates.
The price of running the business for cash and the sharp drop in sustaining capital expenditure has been falling production. Average output in November stood at 12,252 barrels a day, having peaked at 18,731 in December 2013. Since 2015, this decline has been offset by a very favourable law that exempts Exillon's production from Russian mineral extraction tax and costs have fallen as a result of the rouble's decline.
These details are not factored in to the most recent analyst forecasts included in the table below, which are more than a year old and include an overly optimistic $80 average estimate for Brent crude this year. But even a basic assessment of Exillon's current trading reveals a strong investment case. If operating margins were to remain level with the first half of 2016, production of 12,200 barrels a day through 2017 sold at an average of $40 a barrel would generate about $75m in operating income. While this is a real back-of-an-envelope calculation, it nevertheless helps demonstrate the potential. And even after factoring in capital committed to a new drilling programme at Timan-Pechora, Exillon should be rapidly building its net cash position, which stood at $85m last August. Dividends are now on the board's agenda.
EXILLON ENERGY (EXI) | ||||
---|---|---|---|---|
ORD PRICE: | 155p | MARKET VALUE: | £250m | |
TOUCH: | 153-155p | 12-MONTH HIGH: | 157p | LOW: 60p |
FORWARD DIVIDEND YIELD: | nil | FORWARD PE RATIO: | 7 | |
NET ASSET VALUE: | 261¢ | NET CASH: | $104m |
Year to 31 Dec | Turnover ($m) | Pre-tax profit ($m) | Earnings per share (¢) | Dividend per share (¢) |
---|---|---|---|---|
2013 | 321 | 38.9 | 20.0 | nil |
2014 | 260 | 64.6 | 32.0 | nil |
2015 | 198 | 78.9 | 41.0 | nil |
2016* | 176 | 14.6 | 7.0 | nil |
2017* | 294 | 38.2 | 19.0 | nil |
% change | +67 | +162 | +171 | - |
Normal market size: 3,000 Matched bargain trading Beta: 0.79 £1=$1.21 *Mirabaud Securities forecasts |