BULL POINTS:
■ Exciting 2010 exploration campaign
■ Farm-out deal reduces risk
■ Funded for acquisitions
■ Growing production
BEAR POINTS:
■ Tough tax regime in Indonesia
■ Still loss-making
Asia-focused Salamander Energy is set for an exciting few months as it starts a drilling programme that could transform its prospects. Of 12 exploration wells to be drilled in 2010, the Bang Nouan well in Lao started last month, though it is the wells to be drilled this summer that could really drive the shares.
Salamander aims to drill the Angklung prospect in Indonesia and Rock Lobster and Tiger Prawn prospects in Vietnam in June or July. Angklung is targeting 125m barrels of oil equivalent (boe) and is the first exploration prospect in an area where seismic surveys have indicated potential resources of over 500m barrels. Following extensive evaluation work, Salamander's bosses reckon that Angklung is low risk. The Vietnam wells are targeting an undrilled - and therefore higher risk — basin, but they could be substantial: Rock Lobster is targeting 57m barrels and Tiger Prawn is targeting 82m.
| IC Tip Rating |
|---|
Tip style: Growth Risk rating: High Timescale: Short-term |
The Bang Nouan well has got down to half its 3,800m target depth. Though targeting a substantial 1.1 trillion cubic feet of gas, management considers this the riskiest of the 2010 wells. The results of drilling are expected in April.
A farm-out deal to Origin Energy, announced in December, reduces Salamander's financial exposure and validates the quality of its portfolio. Origin is a sizeable Australian energy player, which is seeking to expand its exploration and production operations. It will pay the first $50m (£32.7m) of exploration costs over five licences, including Lao and Vietnam, and up to an additional $40m to appraise any discoveries. Salamander retains material positions in the blocks and will operate them. The Origin deal will cut Salamander's 2010 capital spending to $95m ($55m for exploration and appraisal, and $40m for production and development), which the company should be able to fund from operating cash flow.
| SALAMANDER ENERGY (SMDR) | ||||
|---|---|---|---|---|
| ORD PRICE: | 268p | MARKET VALUE: | £412m | |
| TOUCH: | 267-268p | 12M HIGH / LOW: | 311p | 117p |
| DIVIDEND YIELD: | NIL | PE RATIO: | 15 | |
| NET ASSET VALUE: | 245p | NET DEBT: | 22% | |
| Year to 31 Dec | Turnover ($m) | Pre-tax profit ($m) | Earnings per share (¢) | Dividend per share (p) |
|---|---|---|---|---|
| 2006 | 32 | -14.5 | -48.0 | nil |
| 2007 | 70 | 18.0 | 5.0 | nil |
| 2008 | 101 | -75.5 | -53.0 | nil |
| 2009 | 157 | -3.0 | -9.0 | nil |
| 2010* | 291 | 83.0 | 27.2 | nil |
| % change | +85 | - | - | - |
NMS: 3,000 Matched bargain trading BETA: 2.3 *Evolution Securities estimates £1=$1.529 | ||||
Salamander has just completed a $100m convertible bond issue, which will enable it to secure attractive assets or acreage that it spots in the market. The company has already acquired a 50 per cent interest in a block in the Hanoi Trough, in offshore north Vietnam, a little-explored basin that lies between proven hydrocarbon-bearing areas. The conversion price of the bond - 364p - was set at a 37.5 per cent premium to the prevailing share price. That's a vote of confidence in Salamander because analysts reckon it is the widest premium for a convertible bond issue this year.
Elsewhere, the company has increased its production from a 2009 average of 13,600 boe per day to 16,300 barrels in March and average production in 2010 could reach 18,000 barrels a day. One driver of higher production was the Kambuna gas and condensate field in Indonesia, which Salamander brought onstream last August. The taxation regime in Indonesia is harsh, but the project's risks are low and Salamander could increase volumes once permanent onshore receiving facilities are completed in the autumn. Despite increasing production, Salamander made losses in 2009 after taking into account exploration write-offs of $5.9m and hedging losses of $12m.
