North Sea-focused Ithaca Energy is aiming to bring into production two projects that should lift its net output to over 20,000 barrels of oil per day by 2013. From current daily production of 5,010 barrels, that should translate into a big increase in turnover and profits - one that should demand a re-rating of its shares.
- Strongly growing production
- Low risk development model
- Innovative financing deals
- Funded for growth
- Project slippage
- Recent production problems
Ithaca aims to squeeze the remaining drops of profitable production from mature oil and gas fields. By having little involvement with exploration, the company is a comparatively low-risk proposition compared with explorers, which can live or die depending on the outcome of a very small number of wells. Instead, Ithaca looks to fast-track field developments by applying its technical expertise and ample financial resources; its bosses also generate value by completing clever deals.
The more advanced of its two major developments is Athena in the Outer Moray Firth. This field is being developed using a floating production platform, which, due to more extensive conversion work being required than first anticipated, is still undergoing the final stages of preparation in Dubai. As a result, first oil has been delayed from late 2011 until this spring. Though disappointing, delays are common - almost expected - in natural resources projects and this one shouldn't hit the project's profitability significantly. Athena is expected to almost double Ithaca's output once oil starts to flow.
The financial nous of Ithaca's bosses is neatly illustrated by progress on the company's second major development: Greater Stella Area in the central North Sea. Ithaca plans to develop Greater Stella as four fields around a central hub. A deal completed last year gives FTSE 100 oil firm Petrofac gives a 20 per cent interest in Greater Stella in return for the use of a Petrofac-owned production platform. The separate acquisition by Ithaca of Challenger Minerals offsets the effect of the Petrofac deal and raises Ithaca's interest in the project to 55 per cent.
| ITHACA ENERGY (IAE) | ||||
|---|---|---|---|---|
| ORD PRICE: | 142p | MARKET VALUE: | £368m | |
| TOUCH: | 141-142p | 12-MONTH HIGH: | 196p | LOW:40p |
| DIVIDEND YIELD: | nil | PE RATIO: | 4 | |
| NET ASSET VALUE: | 123p | NET CASH: | $99m | |
| Year to 31 Dec | Turnover ($m) | Pre-tax profit ($m) | Earnings per share (¢) | Dividend per share (p) |
|---|---|---|---|---|
| 2008 | 2 | -30 | -23.0 | nil |
| 2009 | 101 | 8 | 5.0 | nil |
| 2010 | 132 | 38 | 27.0 | nil |
| 2011* | 102 | 4 | 1.0 | nil |
| 2012* | 286 | 126 | 49.0 | nil |
| % change | +182 | +3,400 | +4,800 | - |
Normal market size: 4,000 Matched bargain trading Beta: 1.6 *Cenkos estimates (profits & earnings not comparable with historic figures) £1=$1.536 | ||||
Developing the Greater Stella fields by floating platforms, which also function as storage vessels, allows higher oil flow rates than would be possible feeding producing into fixed but narrow pipelines, and using a partner's vessel makes the project more profitable than hiring one. Ithaca had been targeting doubling daily production to around 10,000 barrels once Athena came onstream. The Petrofac and Challenger Minerals deals have lifted production expectations to over 20,000 barrels by mid-2013.
The deal with Petrofac is not the first time Ithaca has completed an innovative financing arrangement. In October 2008 it sold a 25 per cent interest in all its projects to Dutch firm Dyas in a fund raising that launched the company on its current growth track.
Ithaca's development model carries lower risks than exploration but is not free of them. The failure of both pumps at the Jacky field severely dented production and profits in the first half of 2011, although output was quickly restored once the pumps were replaced. Mechanical failures also resulted in lost production at Beatrice and the Cook field.
