Valiant

[]

Westhouse says...

Buy. Valiant unveils 2012 exploration and appraisal plans

Valiant has announced an operational update highlighting its exploration and appraisal programme for 2012, as well as confirming the start-up of production from its Causeway development, with a total capital spend of US$260m.

· Development: The Causeway field is progressing as planned and first oil remains on track for H2 2012, with a net capital cost to Valiant of US$120m (Valiant: 64.5%). We estimate that on a risked basis, the value of the Causeway project to Valiant is excess of US$91m.

· Exploration: Valiant has announced an ambitious exploration and appraisal programme of up to six wells, targeting net P50 prospective resources of 190mmboe. The highest impact prospect is Handcross, in the West of Shetland, for which the company is trying to acquire a rig, to enable the well to be drilled in 2012. Handcross is on trend with the BP-operated Schiehallion and Foinaven fields and is targeting 162mmboe net to Valiant (Operator: 90%). Valiant’s partner in the project is privately-owned Enovation Resources. In the event of success, and Handcross being an oil discovery, we estimate that it could be worth over US$1.2bn in a fully developed, unrisked case to Valiant, and a game-changer for the company. However, it would require substantial capex in order for the project to be progressed to completion.

RBC Capital Markets says...

Sector Perform. Operating in the competitive North Sea sub-sector of the International E&P universe, we see more attractive investment opportunities offering either stronger exploration track records and clearer, upcoming potential catalysts or more robust production growth profiles. Valiant’s production base generates significant cash flow (trading at 1.1x 2012E CFPS), but at 28mmboe and ~7,500b/d lacks the scale and growth potential to generate interest from typical North Sea acquirers, in our view. Meanwhile, its recent exploration track record has been below average with a success rate of one-in-five during the last 18 months.

New recommendation and price target: We rate the stock Sector Perform (previously Outperform), Speculative Risk. In setting our price target at 600p (down from 800p) or 0.7x our new NAV, we have only included the tangible assets of the business: producing fields, net financials, and probable development opportunities. In our view, Valiant needs to achieve another commercial exploration success before the stock price will reflect the potential of its exploration inventory.

Potential catalysts: The small Causeway oilfield is due onstream in H2/12, and is critical to ensuring Valiant delivers production growth in 2012. Causeway is the company’s first operated development. A deepwater rig slot for the high-impact, ~180mmboe Handcross prospect remains elusive and at this point there is no certainty a well will be drilled in 2012. Lower key North Sea wells on the Orchid and Tryfan prospects are scheduled for H1/12.

Funding: Steady production and stable oil prices should see Valiant generate free cash flow in 2012. Based on its current portfolio, Valiant should remain comfortably funded through 2012 with over $150 million of available headroom under its existing debt facility.

Risks: Valiant is exposed to above-average levels of commodity price risk with an asset portfolio weighted towards near-term oil production. A $10/bbl swing in Brent price assumptions is estimated to move our NAV by 16%. Through 2012 project execution risk is material ahead of the Causeway development, as is exploration risk, particularly if the Handcross prospect is to be drilled.