Tag Archives: australia

Arckaringa Basin Shale Provides Huge Potential For Linc Energy

Summary The Arckaringa Basin is estimated to hold billions of barrels of oil. Linc Energy has almost exclusive rights to this region and its vast reserves. The company has had a difficult time recently but has huge future potential. Introduction The Arckaringa Basin is an endorheic basin – that is a closed drainage basin that does not allow the outflow of water. Located in Southern Australia, the basin used to be seen as a giant 31,000 square mile chunk of land. That was until they discovered oil. Arckaringa Basin v. Poland – Property Correspondent The Arckaringa Basin is quite huge with the above map showing a comparison to the country of Poland. More so, the basin already has some huge mining projects in place. On the bottom right of the map you see the Olympic Dam Project, which is a mining project run by BHP Billiton. The mine area contains the world’s single largest uranium deposit and fourth largest copper deposit. Oil Discovery Before we go onwards to talking about the potential of the Arckaringa Basin and its huge oil reserves, we must first talk about the discovery of oil in the region. Oil was first discovered in the region by a company known as Linc Energy (OTCQX: LNCGY ). The company first discovered oil in the region in 2010 and then underwent further analysis of the oil it found in 2011. Current estimates for the total amount of un-risked prospective resources in the basin are at 95 billion barrels of oil equivalent. On a risked basis, based on the probability of geological success, the area is expected to have roughly 3.5 billion barrels of oil on a risked basis . Oil Location and Amount Either way you slice it, this is an impressive amount of oil for a company currently trading with a market cap of less than $100 million. Should the company manage to recover only a hundred million barrels of oil – a pittance compared to the estimated reserves, the company could earn its entire market cap back earning just $1 per barrel. More realistically assuming a 10% recovery rate and $10 per barrel (roughly half of what the majors make) that would still turn out to almost $4 billion in profit for such a small company. (click to enlarge) Arckaringa Basin Licenses and Infrastructure – Linc Energy SAPEX The above map shows the current map of the area along with the different infrastructure in place along with the locations where Linc Energy has either a petroleum exploration license or is currently in the process of applying for one. One important thing to note is the company already has most of the basin covered in terms of licenses. Linc Energy Situation Now that we have talked about Linc Energy’s stake in the Arckaringa Basin along with talking about the discovery of the formation it is now time to talk about Linc Energy’s situation specifically. Linc Energy’s stock has seen a difficult time with much fluctuation. The company saw its stocks hit highs of $43.50 per barrel in 2008 before dropping down to as low as $7.36 during the crash lows. The company then saw a broader recovery in its stock price following the 2010 discovery up to a high of $30.83 in 2011. The company then saw its share price crash down to settle at around $7 for the second-half of 2012. The company then saw a spike to $29.55 in 2013. However, since then, and continuing throughout the current oil crash, the company has seen its stock price drop down over time to recent lows of $1.30 per barrel. Invest Linc Energy has been a falling knife in terms of share prices especially over the past two years where the company has lost almost 96% of its value. However, the company has a present market cap of just $79.3 million. Much of the long-term crash has been a result of the company’s delay in investing in the Arckaringa Basin. However such a delay will not last forever. Assuming the company continues working, it will eventually start producing significant amount of oils in the region which should provide a significant boost in the company’s stock price. More so, the current oil crash has helped exacerbate the trouble that the company’s current stock price is facing. That means that the company’s stock price is artificially low even based on its current troubles and as a result, the company represents a solid investment at current prices. Conclusion Linc Energy has had a difficult time recently. However, the Arckaringa Basin where it has significant shale stakes with impressive potential for future growth. The company has taken its time developing this resource but currently has all of the necessary permits in place to properly use it (with the exception of a few that are currently in process). More so, due to other major projects in the region, significant infrastructure already exists for when the project gets running and the company can start producing oil. For investors looking for a relatively risky investment with huge potential, Linc Energy represents one great choice. Editor’s Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

AusNet Should Not Be Bought By Conservative Investors

Summary AusNet has been a steady dividend payer but it actually cannot afford the dividend as in the past two financial years it had to borrow cash to cover the dividend. Despite considering half of the capex as ‘growth’ capex, there won’t be a clear revenue increase further down the road. I consider my investment profile to be a bit too conservative to invest in AusNet right now as it isn’t self-funding the dividend (if you include growth capex). Introduction AusNet Services ( OTCPK:SAUNF ) operates a gas and electricity distribution network in Melbourne and Victoria (Australia) as well as high voltage power lines supplying Victoria. The company is known for its relatively generous dividend payments, but in this article I will discuss whether or not these dividends are sustainable. AusNet is an Australian company and you should trade in AusNet shares on the Australian Stock Exchange for liquidity reasons as the average daily dollar volume is almost $4M. The stock’s ticker symbol in Australia is AST . Is AusNet spending too much cash on dividends? In order to answer this question, we obviously need to have a closer look at the company’s financial situation, so we will focus on the results of its financial year 2015 (the most recent numbers available to the general public). Source: press release At first sight, AusNet had a pretty decent year as its revenue increased by 1.9%, resulting in a 2.9% increase in its EBITDA to just over A$1B. You immediately notice the strong EBITDA conversion as in FY 2015, no less than 57% of the company’s revenue was converted into EBITDA, which is pretty strong! However, this trend was discontinued at the bottom line as AusNet’s (adjusted) net profit decreased by approximately 2.5%. But of course, net profits and net losses don’t have any importance when you’re trying to find out whether or not a company can afford its dividend policy and that’s why I will switch to the company’s cash flow statements. AusNet generated an operating cash flow of A$768M (a very nice increase compared to the A$730M last year), but unfortunately the company had to spend A$800M in capital expenditures resulting in a negative free cash flow of almost A$40M (US$30M). So there wasn’t any free cash flow, but AusNet decided to spend A$180M (US$135M) in dividend distributions anyway. That’s not a good sign. Source: financial statements But okay, maybe this was a one-time bump in the road, so let’s pull the 2014 numbers as well. In the previous financial year, AusNet generated A$730M in operating cash flow but spent A$925M on capital expenditures, so AusNet hasn’t had a positive free cash flow in two financial years, but nevertheless decided to reward its stakeholders by paying out cash dividends to the tune of US$330M (keep in mind this does NOT include the additional dilution caused by shareholders accepting their dividend in new shares. If everybody would have elected a cash payment, the cash outflow would even be $100M higher!). This cash shortfall was compensated by issuing more debt. Why I’m not interested in buying AusNet at the current valuation I’m obviously not narrow-minded nor short-sighted (at least, I try not to be), and it does look like AusNet’s future will improve a bit as its capital expenditures are coming down. This should be the last year of heavy capex investments (estimated at A$900M), but from FY 2017 on the capital expenditures should be reduced to A$725M per year. Taking an expanding operating cash flow into consideration, this means I would expect AusNet to generate a positive free cash flow but his will be insufficient to cover the current 6% dividend yield. There’s an additional reason why I’m not very keen on adding AusNet to my portfolio. It’s quite common for utilities companies to have a lot of debt on its balance sheet and AusNet isn’t any different. As of at the end of March it had A$5.8B in net debt. That shouldn’t be a huge problem given the strong operating cash flows and EBITDA (and as said, it’s very normal for a company in this segment to have an above-average net debt). However, if you’d look at the cost of this debt, you’d be surprised at how this leverage could kill this company. AusNet paid A$326M in finance costs, so let’s now assume its average interest rate it has to pay is approximately 5%. If the average cost of debt would increase by 1%, AusNet’s bill would increase by A$50M and this will have a further negative impact on its ability to generate a positive free cash flow. But I don’t want to be too negative I always get a little bit nervous when I see a company telling its shareholders ‘the dividend is fully backed by the operating cash flow’. Whilst this is essentially true, I prefer to look at the free cash flow/dividend ratio. Whilst this is ratio is negative in AusNet’s case, there is also something working in its favor. (click to enlarge) Source: company presentation Of the A$800M it spent on capex in FY 2015, only A$380M was maintenance capex whilst the remaining A$420M capex was spent on projects to ensure further growth. However, looking at the average analyst estimates , there’s no clearly visible increase in the revenue expected within the next few years so even though A$420M is being spent on ‘growth’, I’m cautious until I indeed see a revenue increase. Investment thesis AusNet is paying a handsome dividend – which it promises to increase once again this year – but it’s only able to afford the dividend by raising additional cash through issuing more debt and that’s a dangerous game to play. I’m fine with AusNet spending A$420M on ‘growth’, but it’s a bit disappointing the company hasn’t released updated revenue growth targets for the next few years so it’s difficult to check if the ‘growth capex’ is really paying off. Don’t get me wrong, I’m not saying AusNet is a bad company, not at all. But I personally wouldn’t feel comfortable with a continuously increasing net debt profile which has the potential to erode the majority of the future free cash flow should the interest rates increase (which isn’t really unlikely). Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.