Analyst
Oil and Gas: Centurion May Be Very Undervalued
Calgary, AB, September 21 /SHfn -- It is unusual for a firm headquartered in Calgary to have all its operations overseas, but such firms can enjoy spectacular success--Hurricane [T.HHL.A], for example.
The advantage of overseas operations is the greater probability of success that comes with drilling into unexplored oil and gas basins. Most of North America and much of Europe have been heavily explored. The opposite is generally true of basins in other areas, however. Low drilling density means a lot of good potential targets have not been touched at all. And what exploration has been done may have taken place long ago or used antiquated exploration technology.
Enter Centurion Energy [T.CUX]. As explained below, while important news is still to come on the company's overseas wells, CUX appears seriously undervalued.
Centurion has obtained concessions from two of the Arab world's large producers. The company has a 100% interest in the 420,000-acre El Manzella concession in Egypt. In Tunisia, it has a 75% (disputed) interest in a 520,000-acre block of land onshore, and a 100% interest in an 865,000-acre offshore block.
The evidence isn't all in yet, but this company appears to be seriously undervalued.
These are serious land-holdings: the company has already declared that some of its Egyptian programs are commercial, and the company plans to begin producing natural gas from two fields--Abu Monkar and El Wastani--next year.
But the company's existing production, about 2,000 barrels a day, is coming from three fields in Tunisia. That is also where its immediate exploration promise seems to lie. In early September, the company announced that a second well in its Al Manzah field flowed oil at 9,000 barrels a day on test, with no water production.
Although at first glance those production numbers seem astonishing, the well was drilled horizontally--a technology that results in greater production than does the more common vertical well. That said, Al Manzah #2 was a very fine well. The company will soon announce its optimum flow rate.
Centurion did not return inquiries from StockHouse about Al Manzah, presumably because the company did not want to prejudice its public report on production from the second Al Manzah well. That said, it is worth noting that prior to releasing test results on the well, the company expected to exit this year with oil production of 4,000 barrels a day. Al Manzah could change that forecast considerably.
A look at Centurion's most recent financial report suggests that, even at its fairly modest production rates for the first half of this year, the company is doing very well in terms of cash flow and earnings.
First Six Months 2000 1999
Cash flow (millions) $7.9 $3.5
Cash flow per share $0.12 $0.06
Net earnings (millions) $4.0 $0.2
Earnings per share $0.06 $0.00
To make a back-of-the-envelope calculation of the stock's worth from these numbers, double the cash flow per share for the first half. That gives $0.24, an estimate of the company's annual cash flow per share--calculated with the conservative assumption that nothing will change in the second half of the year. Then assume that a small company with good land holdings in very productive overseas oil and gas basins is worth, say, four times annual cash flow--a generous multiple, but not unreasonable. The result is $0.96, which is roughly the stock's present trading price.
Having made those assumptions, it is worth taking a look at the charts, which illustrate that investors have shown a keen appreciation of the Al Manzah well in the last two weeks. The result has been good volume, excellent share appreciation and a very strong MACD. The indicators suggest, in other words, that investors believe the well will push Centurion's production well above the company's official forecast.
Another notable point: At the company's annual meeting last spring, CEO Said Arrata gave a presentation on the company that included forecasts for the year. His per share cash flow forecast was $0.25--very similar to the estimate in the back-of-the-envelope estimate above. However, that estimate reflected the company's existing projects. While this included an estimate of the first Al Manzah well, which the company understood from long-term production tests, it didn't make allowances for production from Al Manzah #2, which still had not been drilled. Furthermore, Centurion's estimate was based on Brent crude oil prices of US$19 per barrel—at least $10 less than they are likely to average this year.
The evidence isn't all in yet, but this company appears to be seriously undervalued. At present, no oil and gas analysts follow the stock. That, too, is likely to change.
Ronald (Macker the Hacker :-)) |
