(Scotia Capital Inc. - Canada)
Valuation: Based on our risked NAV ($12.40/share) that also equates to 10.6x F2015E debt-adjusted CF and 2.20x our 2P NAV.
Key Risks to Target: Commodity prices, exploration, project execution, political/regulatory.
agreement on revised gas pricing and conclusion of potential farmout/dispositions.
shut in. Production also was impacted by temporary curtailments from
one well in Bangladesh (Block 9). Niko anticipates company-wide
revised risked NAVPS estimate of $12.40 (vs. $13.17).
Indonesia/Trinidad exploration program. While the exploration program
Q3/F13 – Inching Closer to Revised Gas Pricing
¦ Niko reported lower-than-expected CFPS on weaker D6 volume that continue to slide,
but appears to be inching slightly closer toward an agreement on revised gas pricing
and conclusion of potential farm-out/dispositions. The 9% lower than expected sales
volume was primarily due to natural declines and scheduled maintenance at D6 where 8 of
18 wells remain shut in. Production also was impacted by temporary curtailments from one
well in Bangladesh (Block 9). Niko anticipates company-wide Q4/F13 volumes of ~130
mmcfe/d (below our previous estimate of 141 mmcfe/d) and will likely provide F2014
guidance once the partners finalize workover and development plans for D6.
¦ We continue to look upon the next six to eight months as potentially challenging for
Niko based on the complex and higher-risk nature of its Indonesia/Trinidad exploration
program. While the exploration program has yet to hit a big discovery, we look at the
establishment of reservoir and charge at Ajek-1 as a step forward in the de-risking process.
The Cikar-1 well on the West Papua IV block (40% WI) spud in late January, with projected
drilling time of 60-70 days. Cikar-1 will be testing a Kais reservoir (Miocene carbonate)
target in what management has noted as one of the more robust areas of Indonesia for oil/gas
seeps. The reservoir is anticipated to be oil-bearing across an estimated 34,000 acres of
closure (four-way), which could prove to be one of the largest targets drilled in 2013. The
well is partnered with Statoil (40%) and Tately (20%).
¦We maintain our Sector Perform rating on Niko Resources and have reduced our
one-year target price to $12.50 from $13.50 per share, based on our revised risked
NAVPS estimate of $12.40 (vs. $13.17) (see Exhibit 1). Our revised NAVPS estimate
incorporates the company's updated balance sheet.
¦We have further reduced our production outlook for F2013/14 based on the
weaker production figures and challenges at the D6 and Bangora fields.
¦ Upcoming potential catalysts – all eyes on Indonesia. From an exploration standpoint, we
continue to look toward the Cikar-1 well (results in late March/April) as the next important
drilling catalyst. The well is targeting P50 unrisked prospective estimates of 380 mmboe.
Following Cikar, the rig is expected to move to a shallower Pliocene target at Untung-1
(West Papua) or to the Cendrawasih Block (Exxon partnered) to drill the Elang-1 prospect.
Drilling of the first exploration well in NCMA-2 Block in Trinidad is expected to commence
¦In our view, Niko's ability to secure additional proceeds through various farmouts/dispositions remains a critical concern in the near term. The company
confirmed that it is in process/negotiations on a variety of alternatives that could net
$135M in proceeds and seems confident in its ability to do so by late March/April.
¦In our view, any progression in India around revised gas market pricing for D6 remains
a significant wildcard for the name. Increasing gas price could help: (1) balance sheet
and (2) work toward full approval/development of the G2 satellite/R1-complex at the
D6 field. Niko also plans to spud the MJ-1 exploration well in the coming month that
will target 819 bcf + 56 mmbbl of unrisked P50 prospective resources.
Operations Update – Production Continues to Struggle
¦ Tracking below F2013 guidance. In our view, the previously announced F2013 production
guidance of 168 mmcfe/d, inclusive of full-year declines from D6, will most likely prove
aggressive given its nine-month average production of 169 mmcfe/d and Q4/F13 production
forecast of 130 mmcfe/d. Previous cash flow guidance of US$148M is also expected to fall short
under our base outlook of US$124M, with Niko's Q4/F13 cash flow guidance now at US$25M.
¦ In-line D6 production decline. Niko’s oil and gas revenues for the quarter and year-to-date
decreased from the prior year’s periods, primarily due to natural production declines and greaterthan-anticipated water production at the D6 Block along with the impact of a six-day scheduled
maintenance shutdown in November 2012 of the FPSO servicing the MA field. Declines are
expected to continue until workovers are completed and/or additional wells are tied in.
¦ The pricing wildcard. Reliance/Niko have received the Rangarajan Committee's
recommendation that bases gas pricing for D6 on a Brent-linked blended gas price that would 118
amount to $8-$8.50/mmBtu. While we see the price increase as unlikely to take effect until
April 1, 2014, with the expiry of the current five-year sales contract at $4.20/mmBtu, any
firm agreement on pricing could be meaningful for F2015 cash flow and proceeding with D6
¦ Development approval D6 and NEC-25. With a higher gas price in hand, the D6 partners
could look to workover/recompletion work on 8 of the initial 18 wells that are currently shut
in. Niko has estimated that production contribution from the workovers could total 350-400
mmcfe/d gross. The partners have also submitted a plan of development for the G2 satellite
along with the R1-complex that could also add ~100 mcmfe/d net to Niko's working interest;
however, Reliance/BP have noted that production could be two to three years out and total
costs could be north of US$1.5B gross. The NEC-25 development plan is expected to be
submitted in March 2013; Niko has estimate net contribution from an NEC-25 development
(three to five years) could be ~100 mmcfe/d.
Q4 – CFPS Falls Below on Weaker Production
¦ The numbers. Niko reported Q3/F13 CFPS of US$0.47, 12% below our estimate of US$0.54
and 7% below the consensus estimate of US$0.51. Major sources of variation to our estimate
were lower sales volume and realized prices, partially offset by lower G&A and taxes.
¦ Average production during Q3 was 145 mmcfe/d, which was 9% below our estimate of 160
mmcf/d. Operating/production costs continue to increase due to mechanical issues in
Bangladesh and maintenance activities at the onshore terminal and subsea system at D6.
¦ Balance sheet – tightening up as activity increases. Niko reaffirmed that it remains
relatively well funded for its F2013 capital program. Any aggressive exploration plans in
Indonesia and Trinidad and further resurgence of activity in India (exploration or
development) could put some strain on its balance sheet. That said, we would not rule out the
company evaluating potential farm-outs or additional financing over the next 12 months.