Overview: AWE Ltd (“AWE”, “the Company”) is an Australian oil and gas producer with a diversified portfolio of production interests in Australia, New Zealand, and the US. Over recent years its performance has been characterised by weakening production and underwhelming exploration results. However, after undertaking a strategic review, and implementing new management, we consider AWE’s turnaround prospects?
Catalysts: For the first time in four years AWE is on track to deliver a rise in annual output, and its new management aims to more than double operating cash flow by FY16. Strategic changes should become increasingly salient as last year’s acquisition of the AAL project in Indonesia nears Final Investment Decision (‘FID’). ALL could elevate 2P reserves by 70 percent post FID, although a farm-out process is underway to reduce AWE’s capex requirements.
Hurdles: If a farm-out agreement for the AAL project does not proceed, AWE would bear sole liability for the $600m capex requirement. Earnings are significantly influenced by the performance of its BassGas project, which accounts for 50 percent of reserves, and uncontrollable oil and gas prices. Whilst AWE has approximately 10 years of reserves at current production rates, it is reliant on exploration to maintain its reserve base.
Investment View: AWE is a profitable, diversified oil and gas producer emerging from a turnaround phase. After stabilising its production profile, the focus should shift towards management’s $200m pa free cash flow target. Expecting the AAL farm out to provide near-term validation of their strategy, we initiate coverage with a ‘buy’ recommendation.
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