Armour Energy Limited: It’s Time to Step on the Gas

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 in the Surat Basin in particular via specific partnering arrangements to service a more aggressive exploration strategy, without recourse to equity markets.

Lining up the partners to kick start Surat Basin growth
Armour has secured a number of partnering arrangements setting up a return to the field from mid-December. The company has entered into separate partnerships to fund work activities across the Walloon-1 and Myall Creek-2 wells and has concurrently secured a non- binding, farm-in arrangement with Gas2Grid (ASX:GGX) for work carries to the value of $12mn, covering the drilling of three new wells, frack evaluation of the Riverside-1 (or Riverside North-1) and financial underpinning of a 400km2 3D seismic programme. These deals are consistent with the company’s strategy to seek partners as a mechanism to accelerate and finance production growth opportunities. Armour will retain exposure to the any production upside without the capital cost and work will continue through 2022. The gas environment is primed for additional supply and incremental additions into existing infrastructure can maximise returns. The company’s portfolio contains transformative oil and gas potential to be chased and exploited. Initial results should be to hand across through Q1’22. A success case should flow through to production growth quite rapidly.

Valuation – the growth opportunity is there
We retain a risked valuation of $266mn (14cps) to AJQ noting the significant NAV premium to the reference share price (1.9cps), which likely reflects the discounted value of the Queensland assets and resumption of gas growth activity. Reserve metrics highlight the relative undervaluing of the company’s reserves base compared to peers. We maintain that the most attractive assets in the current market are those already in production with incremental growth opportunities. AJQ fits that template. The success case from the upcoming stimulation campaign should flow directly through the remainder of the development portfolio. We note that valuing early-phase exploration and growth assets is a subjective exercise with potentially significant change on delivery of growth targets and exploration results. 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.