Three Stocks from the Resource Sector- SEA, PEA & LPI

In this article, we would discuss three stocks from the Resource Sector with their latest updates. On 22 July 2019, the S&P/ASX 200 index was at 6697.2, down by 3.3 points (at AEST 12:56 PM)). The three stocks below are engaged with the activities related to oil & gas, electricity and lithium, respectively.

Sundance Energy Australia Limited (ASX: SEA)

On 19 July 2019, SEA released Investor Presentation. Accordingly, the company intends to operate within cash flow, and it is committed towards growing production and EBITDA. Also, SEA sold from 8 wells in the calendar year, and 4 PDNP wells and 4 DUC wells were created, respectively.

Quarterly Summary & FY2019 Guidance: Reportedly, SEA achieved the first quarter guidance for sales and EBITDAX and surpassed guidance for cash operating costs. Also, 1Q19 development CapEx was US$41.3 MM due to better than expected drilling, and incurred incremental capital costs of approximately $11 MM, which would reduce 2H 2019 capital expenditure. Besides, the company had formulated a plan for 2019, taking the oil price deck of $50/bbl, and any increases in price would be utilised towards paying the debt, returning capital or further development activities.

Liquidity & Capitalisation : As per the release, the company has a solid balance sheet and liquidity. The cash flow is beyond the satisfactory level to service SUN’s peak debt through maturity. Besides, there would be no debt maturities until 4Q 2022. Also, the borrowing base redetermination resulted in increased capacity of RBL by $47.5 MM to $170 MM during May 2019; this represents the creditworthiness of Sundance along with ongoing lender support with two new bank additions to the credit facility. Besides, Sundance has sufficient liquidity to fund development through free cash flow; the proceeds from Dimmit sale presents an upside along with strong organic cash flow. During the 1Q2019, the total debt to expected EBITDAX was ~2x, current ratio and interest coverage ratio were 1.1x and 4.4x, respectively.

Debt Maturity & Service Schedule: Reportedly, the cash flows are more than adequate to service Sundance’s peak debt through maturity. Also, the company expects that cash flows would service the current debt levels as evinced by elevated Debt Service Coverage Ratio in the below figure:

Debt Maturity (Source: Company’s Investor Presentation)

Improved Liquidity and Valuation: Reportedly, the company is exploring opportunities for improving liquidity and valuation, which includes the possibility of moving the place of incorporation from Australia to the USA. Also, the incorporation change to the USA would align better with the company’s corporate structure, as all of the assets and management is based in the USA.

Besides, the re-domiciliation would move the company’s primary listing to NASDAQ to improve trading liquidity and valuations; the company believes that this would bring the valuations of the company consistent with US-based Eagle Ford peers. Importantly, a re-domiciliation would be dependent on conditions including shareholder approval, and no assurance can be made while the certainty of the expected benefits cannot be guaranteed as well.

Valuation Discount Vs Peers (Source: Company’s Investor Presentation)

Summary: As per the release, the company remains with a high-quality asset base, and above 17 years of highly attractive tier 1 drilling inventory with $1,110MM of 1P PV10 as at year end 2018. Also, full-cycle break even cost of ~$30 per boe allows production and EBITDA growth under different oil price scenarios. Besides, 23 wells were brought online in 2018, while 24 wells were planned for 2019. Further, 2019 development plan would be driven by a focus on capital discipline and operate within cash flow. Importantly, the company expects to be self-funded and the cash flow neutral or positive by EOY 2019.

On 22 July 2019, SEA’s stock was trading at A$0.215, up by 2.381 per cent (at AEST 12:44 PM). Over the past one month, the stock has given a negative return of 17.65 per cent.

Pacific Energy Limited (ASX: PEA)

On 19 July 2019, Pacific Energy announced that its wholly owned KPS subsidiary secured a new contract to deliver electricity to the Jaguar copper/zinc mine, which is owned and operated by Round Oak Minerals Pty Limited.

Reportedly, the mine is located approximately 250kms north of Kalgoorlie in Western Australia. Also, the mine was first brought to production in 2007. In 2018, Round Oak acquired the mine along with existing power station.

Multi-Year Project (Source: HY19 Results Presentation)

Under the contract, KPS would acquire the existing 12.9MW power station (10.5MW gas and 2.4MW diesel) from Round Oak for a price of $2.5 million, and the company would immediately assume the responsibility for the operation of the power station. In addition, a range of optimisation, enhancement work to improve the fuel efficiency to an agreed target range, optimisation of control systems and reaching the agreed KPI’s for station reliability within the stipulated time period of five months.

Reportedly, the contract is expected to commence after the settlement in August 2019, with an initial term of four years, and an option for Round Oak to extend for an additional term.

Managing Director of Pacific Energy, James Cullen, stated that the company is grateful for the assurance depicted by Round Oak in KPS to control the power supply to the jaguar site. He said that the key driver to secure the contract was to realise operating efficiencies, and the company would demonstrate its skills in gas and diesel fuelled technology to achieve this.

On 22 July 2019, PEA’s stock last traded at A$0.715, up by 3.623 per cent (at AEST 12:43 PM). Over the past one year, the return of the stock has been +21.82 per cent.

Lithium Power International Limited (ASX: LPI)

On 19 July 2019, Lithium Power International Limited released a presentation for the Noosa Mining Conference. Accordingly, the company has provided a detailed insight into the Maricunga Lithium Brine Project, Chile.

As per the presentation, Maricunga is the country’s highest grade and most advanced project outside the Salar de Atacma, and 2019 Definitive Feasibility Study (DFS) by WorleyParsons supports 20,000 tonnes per annum production of LCE over 20 years. Also, the company has forecasted the capex of US$563 million inclusive of direct development costs of US$456 million, indirect costs of US$45 million and contingencies of US$63 million.

Besides, the maiden ore reserve estimate of 742,000 tonnes LCE exceeds 20-year mine life production needs and meets JORC and NI 43-101 standards. Further, Maricunga Environmental Impact Assessment (EIA) is being assessed by the Chilean Government and is expected to be concluded in 2019, while approval was received for the use of electricity infrastructure, and water supply has been secured. Moreover, the first battery-grade Li₂CO₃ samples, meeting commercial high-quality battery-grade specifications were produced during 2018 using Maricunga's brine from test evaporation ponds, and 99.4% purity Li₂CO₃ was clocked.

Outstanding Economics (Source: Company’s Presentation)

Maricunga Drilling Results: As per the release, an extensive sonic and RC drilling totalling more than 4,700m and over 1,000 brine samples were taken, including more than 300 core samples analysed for drainable porosity. Also, the 360m Deeper drilling would be a game-changer for expanding the resource if needed in the future. Besides, a deep hole S19 encountered a continuation of the lower brine aquifer with lithium concentrations above 900mg/l Li. Subsequently, an exploration target was defined below the base of the current resource to a depth up to 400m, and the exploration target provides significant potential for resource expansion. Importantly, the results from the drilling program averaged 1,167 mg/l Li and 8,500 mg/l K.

On 22 June 2019, LP’s stock was trading at A$0.345, down by 1.429 per cent (at AEST 12:53 PM). Over the past one year, the return of the stock has been of +20.69 per cent.

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