This coming week, Macro Investor is doing a special edition on the future of Australia’s oil and gas sector. A free 21 day trial is available – but find below a recent detailed evaluation of a junior oil company. Macro Investor provides detailed and timely scans of over 400 Australian stocks using the FARM investment program, as well as producing three to four detailed articles on stocks each week.
ROC Oil Company Ltd (ASX:ROC) is an international oil company based in Australia. Its activities include oil and gas production, exploration and development, with exploration assets and activities located in the UK, Mauritania, Australia, Africa, China and NZ.
Financials and Management
Named after the mythical Persian equivalent of the phoenix, ROC’s share price, appropriately enough, has come back from the dead after the company produced a second consecutive net profit for FY12, even if adjusted EPS remained negative. While production is nonetheless down from previous years, better cost control and hopes for production from a second field in China’s Beibu Gulf should support levels from here.
Allocation
ROC’s share price has been in a bear market until recently, with significant falls before producing tangible earnings. The trailing PE ratio cannot be used as a credible valuation proxy with a short period of earnings history, nevertheless it has “bottomed” only three times recently.
FARMs proprietary positioning system has recently upgraded from “Hold” to a “Buy Half” signal as market sentiment increases regarding a more favourable earnings outlook.
With the current price slightly below this year’s estimate and well below next year’s estimate of value, there is a considerable margin of safety to justify a larger 4% portfolio allocation.
Macro and Risk
Though geographically diversified in its exploration portfolio, ROC’s focus is on the Beibu/Tonkin Gulf, between Vietnam and Hainan in the South China Sea. While a different area to the disputed Spratly Islands to the south, the region is not without sovereign or political risk considering China’s diplomatic troubles with its neighbours, not to mention the relatively opaque nature of China’s foreign investment and resource licensing systems.
ROC’s focus has upside however, namely in Asia’s higher than average oil prices and its close proximity to a burgeoning market. Experience in the Beibu Gulf also gives ROC a degree of expertise that could be leveraged in its Malaysian projects north of Sarawak and also in the South China Sea. ROC also has operations in Britain, Western Australia and Victoria.
The bottom line: As it approaches first oil in the Beibu Gulf, ROC’s share price rally looks set to continue. And while the oil price outlook remains uncertain we also believe this will produce further upside in the medium-term based on the US recovery and a period of stability following China’s Politburo handover. With operations in the South China Sea, ROC is not immune from sovereign risk but this is mitigated somewhat by the company’s share price discount to near and long-term value estimates..
Michael Feller is an investment analyst at Macro Investor (http://macroinvestor.com.au/)