ENP Newswire - 30 January 2014 Release date- 28012014 - Nido has announced a shrewd SC 63 farm-out agreement with UK -listed Dragon Oil that sees it further strengthen its balance sheet, and brings in an experienced operator to its Baragatan drilling consortium. Coupled with three wells set to drill in the coming months in Indonesia (with Lundin ), the company is entering an exciting period of intensive drill activity, but where operations are comfortably funded from available resources following the commissioning of Galoc Phase II in Q413. Exploration exposure, but without the stress Over the last six months, Nido has successfully developed its exploration portfolio, farming into drill-ready, fully funded low-risk targets in Indonesia (partnered with Lundin ), while mitigating balance sheet stress from its more costly higher impact Philippines targets. The company secured an 18-month extension of SC 58 in Q413 to mid-2015, whereas the farm-out deal with Dragon Oil for SC 63 now leaves the upcoming Baragatan well almost fully carried while Nido retains up to a 20% interest. We can now look forward to three exploration wells and an exploration sidetrack over the next six months - exciting times are clearly ahead. Galoc cash machine provides options Nido has been transformed in terms of cash-generating ability following the commissioning in Q413 of Galoc Phase II. With initial rates in excess of 12,000boe/d gross we estimate the company should be in a position to generate post-tax cash from operations in excess of A$40m in 2014. This is particularly important as Nido considers its funding options for further activities, which include the development of West Linapacan A (FID expected in the coming months) and a further exploration well at Galoc (probably now in 2015). Valuation: 2x upside to RENAV with limited downside Our RENAV continues to rise with the evolving exploration programme, moving from 6.6c to 7.1c. As such we see plenty of upside in the Nido story, which continues to be supported with sensible, balance sheet strengthening corporate deals. Nido exited 2013 with cash of A$25.4m , which when coupled with cash flow from operations comfortably covers 2014 activities. With drill catalysts aplenty in 2014, we consider now to be an opportune time to buy into the Nido story. SC 63 farm-in: Enter the Dragon Having previously focused largely on high-impact exploration, Nido has been transformed over the past two years into a more balanced E&P company with enhanced production backing a range of high- and low-impact exploration and development projects. However, the company was still somewhat overexposed to costs from its legacy high-impact exploration programme, for which asset deals were required. In its most recent announcements, Nido has made significant progress towards balancing the cost exposure and protecting its balance sheet from undue stress. Agreement with Dragon Oil Nido is planning to drill the Baragatan prospect in SC 63 around mid-2014. Before the recent farm out, the company was required to cover half the planned US$25m well costs, with state-owned partner, PNOC-EC, picking up the remaining 50%. While net costs of US$12.5m were still within Nido's financial capabilities, it was recognised that this would limit the other funding options available to the company. Securing a farm-out pre-drill was therefore desirable for all concerned. The deal will be executed in two stages. In the first stage, Dragon Oil will earn a 40% interest from Nido by covering 56% of gross well costs (ie providing a credit to Nido) along with US$2.2m of back costs for seismic. This represents a 1.4 times promote. In stage 2, subject to government approvals, both Nido and Dragon Oil will then be able to earn a further 10% each from PNOC-EC under the same terms as the initial Dragon Oil farm-in. While a 1.4 times promote is not the most impressive terms, we view the deal as largely positive for Nido and shareholders. Dragon Oil has significant experience of shallow water development from its Cheleken Contract Area in Turkmenistan and this will be of significant value to the consortium if oil is discovered in Baragatan (with Dragon having the option to become operator of the service contract after drilling the well). High-impact exploration is also not the priority for Nido with its balanced exploration, development and production approach and so covering its costs while retaining a 20% interest can be viewed as beneficial terms all round. Timing for drilling of the Baragatan well has firmed up in recent weeks, with confirmation in December that the consortium had secured the UMW Naga 5 jack-up rig from Malaysian contractor UMW Standard Drilling Sdn Bhd . This is a new-build rig that is due to be completed in the Keppel Shipyard in May 2014 . Nido expects to receive the rig in June with drilling set to begin around midyear. The Naga 5 rig is expected to be on contract for approximately six weeks. Corporate deals answer many questions While the SC 63 farm-out is significant, it is by no means the only deal that Nido has struck in recent months to balance its portfolio. In December 2013 it announced it had secured a further extension of the current Sub-Phase 3 of Service Contract 58 to July 2015 , giving it time for further technical work. Of all Nido's acreage, SC 58 is most affected by ongoing territorial claims between the Philippines and China , so the extension should give time for these claims to play out without Nido being embroiled in potentially controversial drilling activity. In November 2013 , Nido also announced it had reached agreement with Colossal Petroleum Corporation to sell its interests in the non-core Nido and Matinloc fields together with its participating interest in Service Contract 54A for A$3m . We previously carried Nido and Matinloc in our valuations at US$4.3m , so this comes in slightly below our expectations but removes unnecessary distraction from Nido's management, allowing it to focus on material development and exploration activities. Upcoming months set to be very busy Now that the corporate deals have been secured, Nido is set to embark on a particularly busy period of exploration drilling. This will start with the 47mmboe (gross) Balqis prospect on the Baronang PSC in Indonesia , with the 55mmboe (gross) Boni exploration sidetrack to follow. In a follow-up to our update note published on 30 September, we now have confirmation from Lundin that the well target on the Gurita PSC will be the 22mmboe (gross) Gobi-1 prospect. Having now confirmed this, we include Gurita in our valuation for the first time. We had expected drilling of the Indonesian wells to have already begun. However, bad weather in the region has stopped the Hakurya 11 rig from mobilising to the Baronang PSC contract area. Nido continues to hold an option to increase its interest in the Baronang, Cakalang and Gurita PSCs from 10% to up to 20% for an additional investment of up to US$10m . Nido has renegotiated the terms of its farm-in agreement with Lundin , such that it can elect to increase its interests in the PSCs at any point up to completion of the running of the 13 3/8' casing point for the first well to be drilled in each of the contract areas. We assume for now in our valuation models that Nido does not exercise this option, but it will evidently become clear once drilling if Nido wishes to pursue this. As previously mentioned, we are likely to see spudding of the Baragatan well around mid-2014. Meanwhile, Front End Engineering and Design (FEED) work continues in respect of the redevelopment of the 16.5mmboe (gross) 2P West Linapacan A field. Nido, with its partner RMA, had been hoping to reach final investment decision (FID) for West Linapacan-A in early 2014. However, this was an ambitious target and looks like slipping, with guidance from Nido that FID is now anticipated sometime during 2014. Finally there remains the possibility that there will be a further exploration well drilled at the Galoc field in the near future. While this could still happen during H214 we consider it likely that this will now slip into 2015. Valuation: Continues to increase, RENAV now 7.1c Our valuation continues to move up, reflecting a combination of Galoc Phase II now in production, the disposal of minority interests in the Nido and Matinloc fields, the Dragon Oil farm-in to SC 63, the addition of the Gobi-1 well in Indonesia and the impact of a weaker Australian dollar. This has increased our core NAV from 4.4c to 5.1c, with our RENAV moving from 6.6c to 7.1c (Exhibit 2). We continue to believe that Nido is significantly undervalued for the assets in its portfolio and the options it has available. The company is currently trading well below core NAV and its share price does not reflect any value for its diverse drill-ready exploration portfolio, yet alone the West Linapacan-A potential development. Financials: Strong balance sheet In its recent Q413 quarterly report, Nido reported end-year cash of A$25.4m and debt of A$31.1m . Having now completed its investment into Galoc Phase II, the company is clearly in a strong position financially to manage its ongoing work programme. We estimate Nido will generate post-tax cash from operations in excess of A$40m in 2014, further funding the forward programme. Within our capex estimate of A$29m in the coming year, we include the drilling of all three Indonesian wells (at 10% WI) plus the Baragatan well (now fully funded) on SC 63, along with initial development capex for West Linapacan-A (WLA) that we now split over 2014/15. However, we slip capex for drilling an exploration well at Galoc fully into 2015 pending confirmation of activities there. Clearly with a number of activities still to be confirmed (WLA, SC 58, Galoc exploration etc.), there remains some uncertainty over actual capital spend over 2014 and 2015. However, what is now clear is that Nido has successfully managed to shore up its balance sheet and has options aplenty available to it as it looks to continue to develop its portfolio of assets. DISCLAIMER Copyright 2014 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Nido Petroleum and prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable however we do not guarantee the accuracy or completeness of this report. 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All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Nido Petroleum Limited Contact: Nido Petroleum Limited Aquila Centre, Level 3 1 Preston Street COMO WA 6152 Tel: +61 8 9474 0000 Fax: +61 8 9474 0099 Email: email@example.com
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