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Amedeo Resources set for key milestone as first rig nears completion


The completion of Explorer 1 is the key near term catalyst for Amedeo's shares


Quick facts: Amedeo Resources PLC

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Market: AIM
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Amedeo Resources (LON:AMED) is approaching a key milestone in the coming months as it prepares to deliver its first oil drilling rig.

Turmoil in crude markets has naturally overshadowed what has otherwise been a key period for Amedeo, which has made significant progress in the past year.

In Tuesday’s results statement the group acknowledged the slowdown in market for new rigs, though it revealed that its Chinese ship building partner has sufficient work for their yard on the banks of the Yantze.

The company at the same time expects demand for rigs to pick up in the medium term.

Chief executive Glen Lau says although Amedeo’s progress has slowed, he expects a recovery and that it will benefit from the upturn.

Operationally, important progress continues towards the completion of Explorer 1, a mobile jack-up rig, which is due during the second half of this year. The vessel was launched into the water this April ahead of its full completion.

“The build of Explorer 1 is to quality and schedule, building the New Yard's reputation and laying firm foundations for the New Yard's future,” Lau added.

John Cummins, analyst at WH Ireland, said the Explorer 1 completion is very much the focus for investors in the short-term.

The analyst, who has set a ‘speculative buy’ recommendation for Amedeo, believes there could be much more to come from the young oil engineering services group even though the market is currently tough.

“Whilst the market backdrop has become more difficult following the decline in the oil price, and this is still a relatively early stage in the group’s development, the medium-term growth potential for Amedeo’s key investment in YZJ Offshore is significant,” Cummings said in a note.

At 0.75p per share WH Ireland’s twelve-month price target suggests some 180% upside to the current price of 0.32p.

That said, Cummings notes that it is a challenge to set a ‘fair value’ for the early stage company and there could be scope to raise the bar further in due course.

“The potential for the group is significant given the backing provided by operating partners, majority shareholder and track record of management.

“However, set against these positives, this remains an early stage investment in a Group and a key investment with a limited track record in an extremely challenging market.”

Amedeo is both well backed, with Qatar’s state investment authority owning 61% of the shares, and at the same time it is partnered with Yangzijiang Shipbuilding (YZJ), a shipbuilder worth US$4bn.

With Yangzijiang Shipbuilding, Amedeo has a 19% stake in YZJ Offshore, which owns the yard in China.

Cummings, in his note, highlights that YZJ is a powerful senior partner. “Even against the current malaise in the oil services sector, we believe that YZJ Offshore has the potential to succeed in its ambition to become a major offshore yard in Asia,” he added.

Moreover, YZJ is able to support the operation in the current market lull and, according to this week’s results, it has stepped in to provide the yard with ‘overspill’ work, for container ships.

The yard is able to build a range vessels, Lau highlighted, and investors will be hoping that Explorer 1 is the first of many.

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