Armour Energy Limited: Kincora Steadily Progressing

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, dominantly focussed on exploring for gas. The portfolio consists of exploration plays, reflecting a mix of moderate risk and early exploration stage with transformational potential. The company is looking to leverage its production growth plan at Kincora to repair its balance sheet and service a more aggressive exploration strategy, without recourse to equity markets. Financing is always a concern at the small end and the company’s high working interests provide options through partnering.

Surat well activity is progressing, rationalising exploration assets adds working capital (that’s a good thing)
COVID issues continue to impact the industry, in this case the timing of the Surat Basin production enhancement activity. As recently reported the work programme is approaching completion, albeit activity has spilt over into the early part of 2021. Two wells have been connected and are beginning to be evidenced in daily gas output data, whilst installations on the Myall Creek wells should be in the commissioning phase. We expect to see continuing improvement in gas production although the target rate of up to 20TJd by may take longer to deliver due to these outside factors. The company has monetised its farm-out deal with Santos over a suite of South Nicholson Basin permits. Transferring its nominal (remaining) 30% interest in the portfolio for $12.25mn including the ATP 1087 area which contains the Egilabria gas discovery, whilst retaining adjacent ATP 1107 application area. Armour continues to hold a significant acreage position in Northern Australia through the Northern Territory.

Valuation – increased overall but reduced on a per share basis
Valuing early phase exploration and even production growth assets is a subjective exercise. We base our indicative valuation on risk-weighted development scenarios and typical unit NPV values across a range of prices and resource outcomes. Where appropriate we apply discretionary probability weightings to pricing, volume and success factors, which we believe are reasonable given the commercial operating environment and available data. On asset value and issued capital adjustments, we have made minor adjustments to our NAV and assign a risked valuation of $131m (10cps) to AJQ (previously $118mn/13cps). The reference share price (5.5cps) would suggest the market is continuing to discount the production growth and transformational gas opportunities, likely on financing and corporate risks which should be somewhat alleviated by the Santos deal. The company has a number of deliverable outcomes, particularly pertaining to Kincora production expansion that have the potential to re-rate market sentiment and crystallise asset values as ascribed.