Dragon Oil (DGO.L), Kinder Morgan Complex, Sasol Ltd (SOLJ.J), Valero Energy Corp (VLO),
Russian OFS Newsletter,
Dragon Oil (DGO.L) — Positive 1H14 Update, 2H Looks Promising,
Buy Reiterated
15 July 2014 ¦ 8 pages ir.citi.com
Dragon oil published its quarterly trading statement today, which was strong and
supportive to the share price, in our view. In particular: 1) the share of entitlement
production jumped up to 57% in 2Q14, the highest figure in two years, supporting
2014 earnings expectations, 2) daily oil production finally took off and averaged
78.3kbpd on July 13th (+6.7% vs. 1H14 avg. of 73.4kbpd) and DGO’s
management reiterated the expectation to hit 87-90kbpd by the end of the year,
and 3) net cash position remained strong at $1.86mn despite seasonal tax
payments in March, dividends distributions increased capex and inventory build-
up in 2Q14. In our view, the second half of the year looks promising on the
anticipation of accelerated production growth and potential reversal of the
inventory/underlift position. Buy reiterated.
Alexander Bespalov, CFA | Ronald Paul Smith
Kinder Morgan Complex — Kinder 2Q Earnings Preview, EPB Downgraded To Neutral
14 July 2014 ¦ 21 pages ir.citi.com
We rate KMI a Buy and $42 target price as Kinder remains well positioned to
supply increasing nat gas demand domestically, as well as abroad via LNG
exports and growing exports into Mexico. We remain Neutral on KMP with a $79
target price as we believe units are fairly valued providing only limited principal
appreciation at this time. We are downgrading EPB to Neutral from Buy as units
have reached our target price of $36 and have limited near-term upside clarity at
this point.
Faisel Khan, CFA
Sasol Ltd (SOLJ.J)
A Grow(ing) Predicament – Downgrade to Neutral*
15 July 2014 ¦ 36 pages ir.citi.com
‘Sasol wants to grow’, nods Integrated Oils analyst Johann Steyn, ‘and plans to
embark on $16-21bn mega projects in the US, 53% of its current market
capitalisation and 149% of equity value... the $5-7bn US ethane cracker is in
construction, the $11-14bn GTL project is in FEED stage... but starting from a
top-down strategic creed can be risky... we have learned from studying other
resources sectors that this more often than not leads to value destruction... a
growth strategy often turns into an unintended ‘growth at all costs’ strategy... while
we are supportive of the ethane cracker, we have our reservations about Sasol’s
US GTL plans... we estimate a base case NPV of –R43bn (-$4bn) but our
assumptions could deteriorate substantially if our LT oil to gas price ratio of 17:1
weakened to lower levels... at spot oil to gas ratios, we estimate –R$246bn (-
$23bn) value on the project, with a 24:1 ratio needed to be NPV neutral... we
downgrade Sasol from Buy to Neutral’.
Valero Energy Corp (VLO) — VLO’s 2Q’ 2014 Earnings Interim Update
14 July 2014 ¦ 10 pages ir.citi.com
In its interim update, VLO stated that it expects 2Q’14 adjusted EPS to be
between $1.10 and $1.25. The mid-point of this estimate is ~20% lower than
consensus of $1.40 p/s and ~9% lower than our estimate of $1.29 p/s. The
guidance is adjusted for a ~$0.12 p/s non-cash charge related to an asset
retirement obligation for the Aruba
Russian OFS Newsletter — Rosneft-Weatherford OFS deal, EDC’s
June drilling stats, Supportive currency dynamics; Buy CAToil, Neutral EDCL
15 July 2014 ¦ 9 pages ir.citi.com
The three news items, which we discuss in this two-page note, are: 1) Rosneft’s
acquisition of Weatherford’s drilling and workover assets in Russia will not
change the industry’s landscape, but it does highlight the industry’s growth areas;
2) EDCL’s June 2014 operating statistics point to a slowdown in volumes
recovery, and 3) Current RUB dynamics adds credibility and suggests upside risk
to the 2014 guidance. We reiterate our preference of CAToil over EDCL.
Alexander Bespalov, CFA | Ronald Paul Smith |
