Ithaca Energy coverage initiated by Investec

Investec has initiated coverage of Ithaca Energy, with a buy rating and price target of 175 pence, implying approximately 33% upside.

Investec’s view is based on the following:

1. Ithaca operates in a low-risk environment.
2. Production start-up from the Greater Stella Area (expected in mid-2015) should double group production by 2016.
3. Investec’s forecast of cumulative net cash flow to equity of US$ 1.2 billion during 2014-2019, 1.3 times its market value, offering scope for growth and/or cash returns.
4. The stock is inexpensive at a 25% discount.

Highlights

• A low-risk, UK-North Sea focused alternative. Ithaca’s strategy avoids exploration risk, focusing on the development of UK production assets. It is a lower-risk alternative to Africa/Middle East exploration E&Ps generally exposed to both exploration and geopolitical risks, as evidenced by recent events.
• Greater Stella Area – the key hub. The Greater Stella Area (GSA) is the key asset. Investec estimates this is worth 105 pence/share (risked). Due onstream in mid-2015, it should double group production to 30,000 boepd in 2016. Investec estimates this highly cash-generative field will provide an incremental US$ 200-400 million of operating cash flow per year until 2020 (at US$ 100/b Brent). A six-month delay to production start would impact our valuation by only 8 pence/share.
• Strong free cash flow. After debt repayments, this leaves cumulative cash flow of US$ 1.2 billion over 2014-19, or 1.3 times Ithaca’s current market value. This should allow Ithaca both to reinvest to maintain production and consider cash returns that could yield up to 15%.
• Trading at a 25% discount to risked core+development NAV. This compares with a 10% average for its UK-listed peers and is in spite of Ithaca’s strong funding position, with over US$ 1 billion debt capacity.
• Catalysts: The sail-away of the Stella production facility in spring 2015 is the critical-path item with production scheduled from mid-2015. The Q2 results are due on 12 August.

Adapted from press release by Katie Woodward

Read the article online at: https://www.oilfieldtechnology.com/exploration/08082014/ithaca-energy-upgraded-to-buy-rating-1235/