Armour Energy: Unlocking Value Flash Comment 3rd March 2021 Share Details ASX Code

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 at the small end and the company’s high working interests provide options through partnering.

Demerging can support price discovery
Armour Energy is proposing to unlock the value of its asset base by demerging and separately listing its Northern basins assets into a new vehicle to be called McArthur Oil & Gas Ltd through an in-specie distribution to shareholders and IPO. Existing AJQ shareholders will receive a minimum 33.35% holding in the new company via a ‘return of capital’ and priority application for shares in the IPO.

Whilst asset diversification can be beneficial through providing meaningful growth options, in small energy companies with constrained capital resources, multiple plays can often lead to assets being effectively stranded for long periods, capping comparative valuations as the marginal investment dollar seeks leverage through cleaner and purer exposures to the desired play...in this case the northern basins including the McArthur- Beetaloo options, the cornerstone of the Federal Government’s gas led economic recovery.

The northern assets already host conventional discoveries at Glyde and Cow Lagoon, have a current portfolio of 193 leads and prospects with 4.3Tcf of Prospective Resource potential; and up to ~34Tcf and 1.2Bnb across the entire acreage spread. Demerging can also assist Armour by retiring a significant portion (or all) of its existing debt. In this case separating the parts could realise a greater sum.

Valuation
We assign a risked valuation of $131m (10cps) to AJQ. The reference share price (4.1cps) in our view reflects the discount the market is applying to the production growth strategy, likely on financing and corporate risks. 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.