The merits of combining the production expertise of Melrose with the development potential of Petroceltic International (PCI) looked pretty straight forward when the merger of these two London-quoted companies was announced in August. Despite that, Petroceltic's share price has drifted downwards since the autumn and reflects neither the underlying value of the combined group's assets, nor the logic of the merger.
- Shares trade far below underlying asset value
- Better balance between exploration and production
- Go-ahead for key Ain Tsila development
- Probable resources upgrade
- Riskier operating in Algeria
- Egyptian receivables
Before the merger, Melrose's value was checked because it was difficult to deal in its shares. Simultaneously, investors worried that Petroceltic would have to raise lots of additional equity, diluting the interests of existing shareholders. Put the two companies together, however, and Melrose's daily production of 28,000 barrels of oil equivalent (boe) from existing, albeit ageing, wells in Egypt and Bulgaria would generate enough cash to fund the combined group's exploration programmes in Kurdistan, Egypt, Romania, Bulgaria and Italy. Melrose had modest capital commitments so, in return for providing funding, it would eventually profit from the development of Petroceltic's main asset, a 56.6 per cent holding in the hugely promising Ain Tsila gas/condensate field in Algeria.
| PETROCELTIC INTERNATIONAL (PCI) | ||||
|---|---|---|---|---|
| ORD PRICE: | 7.1p | MARKET VALUE: | £312m | |
| TOUCH: | 7.0-7.1p | 12-MONTH HIGH: | 9.05p | LOW: 5.46p |
| DIVIDEND YIELD: | nil | PE RATIO: | 9 | |
| NET ASSET VALUE: | 9p† | NET DEBT: | see text | |
| Year to 31 Dec | Turnover ($m) | Pre-tax profit ($m) | Earnings per share (¢) | Dividend per share (¢) |
|---|---|---|---|---|
| 2009 † | 0.21 | -6.1 | -0.5 | nil |
| 2010 † | 0.27 | -12.6 | -0.7 | nil |
| 2011 † | 0.42 | -8.2 | -0.4 | nil |
| 2012* | 53.0 | 19.0 | 0.4 | nil |
| 2013* | 204 | 89.6 | 1.2 | nil |
| % change | +285 | +372 | +200 | - |
Normal market size: 40,000 Matched bargain trading Beta: 1.4 *Goodbody Stockbrokers forecasts †Figures predate Melrose merger £1 = $1.49 | ||||
The only trouble is that production from Ain Tsila is still some way off - the third quarter of 2017 at the earliest. Nevertheless, authorities in Algiers recently approved the plan to develop the field, which outlines a 25-year life span based on resources of 2.1 trillion cubic feet of gas, 67m barrels of condensate, and 108m barrels of liquified petroleum gas. Those estimates could yet rise substantially, but they generate an estimated value for Petroceltic's Ain Tsila holding of 7.1p per share, the same as the share price. In other words, Petroceltic's other exploration projects are thrown in free, yet analysts at investment bank Merrill Lynch reckon they are worth 5.2p per share; and there is the value of the group's producing assets, too.
It's difficult to understand why Petroceltic's shares are trading 43 per cent below estimates of underlying net asset value. Admittedly, BP's recent experiences at the hands of rebels in Algeria would have raised the risk profile for Ain Tsila. And there are concerns that the group has been slow to receive payment for debtors due in Egypt, although receiveables are down by a third on their peak. The merger also meant that Petroceltic became a net borrower (though net debt is only 30 per cent of shareholders' funds). However, Petroceltic has just secured a low-interest $300m (£201m) debt facility with HSBC and plans to get a full listing on the London Stock Exchange, which could help to cut its cost of capital.
