OT: Lundin Oil's peer group - Lasmo. Investors Chronicle (UK), July 14
Investors Chronicle Large Company Tips: Lasmo
Share Price: 139P
Buy
Bull points:
- Company heading for record profitability
- Undervalued compared with US peers
- Breaks even with oil at $12.75 per barrel
- Oil likely to stay above $22 per barrel medium term
Bear points
- Not producing at peak rates
- Assets in politically risky areas
The bosses of independent oil companies probably still have panic attacks whenever they recall the moment they heard that the oil price had dipped below $10 a barrel. While the rest of us were looking forward to cheaper petrol, Lasmo's board was facing financial meltdown. At the time the company needed Brent crude to fetch $15 a barrel just to break even. A new era of sub-$10 oil would have killed the prospects of shareholders ever making a return on their investment.
Though that threat subsided, the trauma had an enduring effect. Lasmo - like other oil explorers - was forced to reappraise its cost base. Western oil companies introduced a new threshold of profitability on a project-by-project basis, sidelining any development that wouldn't break even with oil at $14 or so. As a result, capital spending projects were axed across the board, enabling Opec to regain pricing power in world markets.
The cartel has said that it wants to see oil trading within the range $22- $28. Its problem at the moment is keeping a lid on prices. But assume that Opec is able to keep oil at around $22. Now recall that most oil explorers would be profitable with a price significantly below $22 - Lasmo says $12.75 is now the threshold. So, the obvious question is: why hasn't the oil sector rebounded?
The answer is that it has, at least in the US. Lasmo shares may be 60 per cent off their peak, but the US exploration and production index is close to record territory. Mark Redway, oil analyst with stockbroker Old Mutual Securities, recently calculated that the forward price/earnings ratios for Lasmo's peer group in the US stand at anywhere between 20 and 30. Lasmo's forward PE ratio lies somewhere between seven and eight.
The rise of the US dollar against sterling over the past few months has only accentuated the disparity in valuations. Analysts reckon the net value of Lasmo's assets in the ground is between 170p and 225p per share, depending on their oil price forecasts. Buying Lasmo now is a punt on the argument that either its shares close the gap, or a US company comes along with an offer that's too good to refuse.
Lasmo's plan to buy back its own shares should highlight their cheapness. So far this year the company has earmarked GBP41m to spend on share buy-backs - the proceeds of last year's disposal programme. That should account for over 3 per cent of Lasmo's issued capital. Thereafter, the board has received shareholder permission to buy back up to 10 per cent of shares in any one year.
Sceptics argue that Lasmo won't have the spare cash to buy back shares in bulk until its disposals programme speeds up. Meanwhile, the company's production portfolio won't be running at peak rates until 2003 or 2004. By that time, where the oil price will be is anyone's guess.
Further, Lasmo's portfolio includes assets in politically risky areas such as Libya, Pakistan, Algeria and Indonesia. One of the reasons for the outperformance of the US exploration sector relative to the UK is that US companies enjoy assets in safer places.
Then there is the argument that Lasmo's management has a record of fluffing its lines. Last year's takeover of Monument Oil did, after all, coincide with an oil price crash and investor flight.
Granted, Lasmo's basket of projects does include some exotic locations, many of which are a few years from fruition. But those safe US fields are well on the road to decline and replacement oil has to come from somewhere. As for the Monument acquisition, it may have looked overgenerous at the time, but with oil edging towards $30, you couldn't buy those gas reserves in Liverpool Bay at a price as keen as the one Lasmo paid.
As for its overseas developments, there was a welcome step forward in June when the Pakistani government gave its blessing to a 20-year deal to sell gas from the Bhit field (one-third of which belongs to Lasmo).
Mind you, what would really get Lasmo's shares motoring is if it could announce clear-cut progress in restructuring its portfolio. Chief executive Joe Darby talks of selling assets or even swapping them to give a better balance between near-term and longer-term projects. A few pieces of good news on that front would surely launch Lasmo into a higher orbit. Buy.
Oil exploration and production
Ord price: 139p
Market value: GBP1.9bn
Touch: 138-140p
12 month High: 173p
Low: 90p
Dividend yield: 1.8%*
PE ratio: 7*
Net asset value: 93p
Net debt: 33%
Normal market size: 100,000
beta: 0.48
Investors Chronicle, July 14 |
