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Broker Roundup: Cairn, Dana, Premier oil, Tullow, Regal Petroleum, Noventa, Tertiary Minerals, Sylvania Resources

23rd Aug 2010, 2:58 pm Broker Roundup: Cairn, Dana, Premier oil, Tullow, Regal Petroleum, Noventa, Tertiary Minerals, Sylvania Resources

In its ‘Thought for the day’ Evolution Securities mulled over the disparity between analyst valuations and commercial valuations among oil and gas E&P companies. In the note called “Have we all got it wrong?” Evo highlighted that recent deals - involving BP (LON:BP), Dana Petroleum (LON:DNX) and Cairn Energy (LON:CNE) - have been priced ahead of analyst expectations.

“Is this companies 'overpaying' or is it more fundamental?” the broker pondered. “Either way, the empirical evidence suggests that it is cheaper buying barrels on the stock market than it is exploring”.

“If the companies are more bullish than the stock market on valuations for 2P reserves in production the obvious candidates for a re-rating are those companies with "real" reserves such as Premier Oil, Salamander and Enquest”, Evolution stated.

Given the re-emergence of M&A activity, and the upcoming interims for the major oil and gas stocks, many analysts have published a lot of coverage in recent weeks. Today, Deutsche Bank looked ahead to some of the first half results.

In reference to Cairn Energy - who recently agreed a major divestment to Vedanta Resources (LON:VED) - the German investment bank said that the deal would expand Cairn’s “downside protection”. The analyst also looked ahead to the pending exploration results in Greenland.

“Cairn's Greenland drilling update is one of the most hotly anticipated events in UK E&P ... Although a clear commercial success would be transformational; Cairn sets as its base FY-10 goal to define a working hydrocarbon system.”

Cairn’s H1 interim results are scheduled for Tuesday 24th August, and Deutsche Bank is forecasting ‘clean net income’ of $1.6m.

Deutsche also previewed this week’s results from Premier Oil (LON:PMO) and Tullow Oil (LON:TLW), forecasting clean net incomes of $38m and $58m respectively.

In recent months, the Dana Petroleum / KNOC story has perhaps been one of the most avidly followed M&A sagas. On Friday, the Korea National Oil Corporation went ‘hostile’ with its approach, tabling a 1800p per share bid which values the company at £1.7bn, or $12 for every barrel of crude in the ground.

In a research note, CitiGroup said that the “decision to go hostile highlights the demand from Asian resource-hungry organizations”. Furthermore, the major US institutional investor identified Tullow Oil (LON:TLW) as the “most likely beneficiary of positive sector read-across”. CitiGroup also looked ahead to Tullow’s interims forecasting a $60m profit on earnings of $119m.

Morgan Stanley also looked at Dana Petroleum and its most immediate peers. “We expect share price performance in the immediate future to be driven by M&A scenarios ... In the context of the wider E&P group, we see a more attractive risk-reward at Tullow, SOCO International (LON:SIA) and Afren (LON:AFR),” the analyst stated.

Among the junior oil and gas stocks, Regal Petroleum (LON:RPT) was one of the few to receive any meaningful analyst coverage, after the company spudded on the wholly-owned Barlad Concession in Romania.

Seymour Pierce highlighted that shallow depth gas targets – like those targeted in E-1 Sagna - are “typically quite modest in terms of reserves” but discoveries are “comparatively high-value given that they can be tied into existing infrastructure quickly”.

“Whilst Ukraine remains Regal's primary focus, Romania does offer potential additional upside in terms of reserves and production.”

Elsewhere in the mid and small-cap market, analysts mainly focused on the mining sector. Collins Stewart commented on Mozambique-focused tantalum producer, after the company announced its first concentrate shipment since the company restarted mining operations and expanded its distribution channels.

“The shipment of 8,000kg of concentrate has been loaded and is destined for key customers with a second shipment scheduled for October ... While no indications have been given about costs the news that the mine is producing above forecast will be welcomed by investors.”

Collins Stewart also noted that the two shipments will test and confirm the logistics pathways for the future.

In a research note headed “Dark Horse”, Seymour Pierce highlighted that Tertiary Minerals (LON:TYM) has the “potential to become Europe’s largest fluorspar producer”.  The broker said that as China evolves from being a large net exporter to a potential net importer, new sources of this crucial raw material ... must be found.

Seymour Pierce noted that Tertiary has around 3.5Mt of fluorspar and it is trading at a fraction of its potential resource-based valuation, the broker said “the market should take note and respond accordingly”.

Evolution also looked at Sylvania Resources (LON:SLV) noting that the company “appears to be making solid headway rolling out its Samancor dump operations”.

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