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Eland on both feet

The Aim-traded oil and gas minnow could soon have the production scale – and cash generation – to be a mid-tier exploration and production company
October 12, 2017

Who’d be an investor in oil stocks? Predicting near-term crude prices is a fool’s errand – every company and their dog claims to have a ‘world-class’ asset, and there are serious doubts about the future utility of the sector’s key product. Every drill location is either expensive or high-risk (or both). Worse, few UK-listed groups pay a dividend, or even have plans to return capital to shareholders. Perhaps this gloomy mood music explains the rating of Aim-listed Eland Oil & Gas (ELA), a well-funded Nigeria-focused driller that expects growing production from its main field to soon accelerate to 8,100 barrels of oil per day (bopd). Assuming no additional production, $50 (£38) Brent crude and little change to sub-$30 a barrel operating costs, investors can expect operating cash flows of around $60m a year - around a third of the group’s pitiful market valuation.

IC TIP: Buy at 62.5p
Tip style
Speculative
Risk rating
High
Timescale
Medium Term
Bull points

Large, diverse portfolio

Production growth 

Funded expansion

Discount to core NAV

Bear points

Country risk

Oil price volatility

Management is confident the company will go much further. In fact, funded from its own cash generation and existing finances, Eland expects full-field development of Gbetiokun and Ubima – two of its most attractive prospects – will result in yet another step change in sales. Factoring in production from both of these fields, together with existing output from Opuama, analysts at Peel Hunt believe production should average 11,000bopd in 2017 and 19,200bopd the year after. And while this will start to deplete the reserves base, Eland has a raft of exploration fields and contingent resources with which it can replace production. Broker Canaccord estimates these fields hold a further 53m barrels, albeit on an un-risked basis.

Indeed, the company will have to develop its wider portfolio if it wants to avoid reversion to a chunky 85 per cent tax rate on its profits. However, chief executive George Maxwell assured us that this rate merely acts as an incentive to drill (and thereby increase the government's future royalty stream). The Opuama venture has also amassed taxable losses of $315m.

Such a rosy picture should always be greeted with some scepticism. That’s especially true of an oil company operating in Nigeria, which has been the backdrop for a handful of investor nightmares in recent years, Afren and San Leon Energy (SLE) among them. On this front, Mr Maxwell concedes that Nigeria is “always a tough environment”, but is confident of the protections he has put in place. To mitigate the above-ground risk of pipelines, the company exports some of its oil via ships. Mr Maxwell also takes corruption seriously, and describes the transparency of the group's IPO document as unrivalled. Unlike previous disasters, Eland’s borrowings don’t pose much concern. And while the working capital position was negative at the half-year mark, this should start to unwind with increasing production.

ELAND OIL & GAS (ELA)   
ORD PRICE:63pMARKET VALUE:£137.6m
TOUCH:62-63p12-MONTH HIGH:66pLOW: 33p
FORWARD DIVIDEND YIELD:nilFORWARD PE RATIO:1.3
NET ASSET VALUE:69¢NET CASH:$8.8m
Year to 31 DecTurnover ($m)Pre-tax profit ($m)Earnings per share (¢)*Dividend per share (¢)
201411.7-16.9-11.2nil
201518.1-9.6-3.9nil
20162.4-14.217.3nil
2017*60.426.111.9nil
2018*212.9146.163.8nil
% change+252+460+436-
Normal market size:5,000   
Matched bargain trading    
Beta:1.10   

£1=$1.32.

*Peel Hunt forecasts, adjusted EPS figures