Fletcher Energy (FEG) is a New Zealand based company involved with exploration, production and distribution of oil and natural gas and whose ADRs trade on the NYSE. FEG has major operations in New Zealand (where they are fighting some anti-trust measures), Canada, the United States, and Brunei. Current proved resources are 426 million barrels of oil equivalent (boe), 62% of which is in N.Z., 31% in North America, and 7% in Brunei. Barring new discoveries, Morgan Stanley Dean Witter (MSDW) expects production in N.Z. to decline after this year.
It conducts exploration in Brunei with its partner JASRA and has majority interest in three offshore fields there. It also has major operations in North America with three fields in Canada (Willesden Green, Kirkpatrick Lake and Dulwich) and is entering the electric utility business there. Based on last Friday's close at a little under $35, WSJ reported the following: P/B = 1.5 (40% of DJ Oil Drilling Index average), Debt/Equity = 0.41, P/E = 5.9 (26.9% of the industry average), and a return-on-equity vs. industry of 158%.
According to MSDW from their report on FEG on 10/14/97 "We believe that Fletcher is the most undervalued E&P stock that we cover under any valuation parameter. On the basis of enterprise value/boe, Fletcher is trading at only US$4.36/boe, which represents a significant discount to the US average of US$10.74/boe.
However, our preferred valuation methodology in most cases is forward price/cash flow, which is readily quantifiable and less subject to interpretation than other measures. On this basis, Fletcher is selling at only 4.0 [currently about 3.0] times FY1998 cash flow; in the US, the blended average is 7.75 times 1997/8 cash flow (we use a blended rate because Fletcher has a June year-end)."
MSDW initiated coverage of FEG in October with a "Strong Buy" recommendation at a price of about $47 (US) per ADR. MSDW cited as reasons: 1. FEG "trades at an unwarranted discount to its peers; 2. The company's exploration efforts offer significant upside over the next two years, and 3. "FEG's management has an impressive track record and is focused on creating shareholder value". MSDW noted that up to 66% of management's salary is determined by shareholder value. I'll also note that FEG has a minority stake in Capstone Turbine, which is developing turbines for the cogeneration market.
FTR MSDW managed or co-managed a public offering of Fletcher Challenge Capital within the last three years. Also, I bought FEG this past week at $36.
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