Armour Energy Limited: A Spin-Out Returns the Focus to Armour
Armour Energy Limited
A spin-out returns the focus to Armour
Armour Energy Limited (AJQ.ASX) is a junior energy producer and explorer with assets across northern, southern and eastern Australia. Pending the successful demerger and IPO of its Northern Basins’ assets via McArthur Oil & Gas (‘MOG’), AJQ will benefit from a restructured balance sheet after the injection of up to $40mn (asset transaction proceeds) and stronger focus on its Surat and Cooper basins programmes on an independently funded basis. The gas operating environment points to a persisting supply squeeze and higher prices and AJQ remains well positioned to benefit from planned work programmes over the next 12 months. The company is continuing to evaluate and build what will likely be a multi-year prospect portfolio with drill-ready opportunities. We would note that AJQ will look like a significantly different company post the demerger.
Business model
Armour Energy is a junior oil and gas company holding a production base with expansion options; and an extensive exploration portfolio across three Australian states. The portfolio consists of exploration and development plays, reflecting a mix of moderate risk and early exploration stage prospects with significant, success case growth potential. The company is looking to leverage its production expansion plan at Kincora to service a more aggressive exploration strategy, without recourse to equity markets.
Back to the future...
With material progress being made on the McArthur Oil & Gas spinout, AJQ will concentrate its spend and activity on production growth and exploration opportunities across the remainder of its portfolio, particularly around Kincora and the Cooper Basin where there remains transformative oil and gas potential to be chased. We would also highlight the Newstead gas storage play – in a tightening gas supply market, midstream assets (storage in particular) are likely to become increasingly important and valuable. After the 1Q’21 equity capital raising the company appears well-funded for anticipated work campaigns with added working capital to be garnered post a successful MOG IPO.
Valuation – ‘fluid’ but growing
Our NAV is based on risk-weighted development scenarios and typical unit NPV values across a range of industry outcomes. Where appropriate we apply discretionary probability weightings and scaling to pricing, volume and success factors, which we believe are reasonable given the commercial operating environment and available data. Our NAV (pre MOG IPO) has significantly increased based on look-through adjustments related to third party (NT) asset transactions and more favourable commodity prices. We assign a risked valuation of $260m (16cps) to AJQ (previously $149mn/9cps) noting AJQ shareholders could retain a 33.3% interest in the Northern Basins assets via an in-specie distribution as proposed. The value of the NT assets will be determined in the short-term by the capitalisation of MOG pending a successful IPO. We compare valuation scenarios within the body of this report but highlight the premium to the reference share price (3.2cps) under all scenarios. The share price likely reflects the discounted value of the Queensland assets and Kincora growth strategy only. The debt refinancing resulting from a successful IPO should provide the company with a strong platform to deliver the embedded asset value within the growth portfolio. Valuing early phase exploration and growth assets is a subjective exercise and subject to potentially significant change on delivery of growth targets and exploration results.
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- Armour Energy Limited: A Spin-Out Returns the Focus to Armour13 Sep 2021