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HIGH PEAK ROYALTIES LIMITED, Leveraged to Resurgent Oil and Gas Industry Activity

Breakaway Research - 05-Dec-2018

·       Key Points

o    Owns a diverse portfolio of energy royalty interests in Australia and the USA and offers s direct exposure to revenue trends, from higher production or higher prices.

o    Re-invigoration of exploration & appraisal by independent operators, and planned re-opening of shut-in fields.

o    An acquisition and rising energy prices provide a material step-up in revenue in FY2019.

o    Sufficient funds and cash flow to repay debt and invest in new ventures, and access to a $15m loan which could be used for acquisitions.

·       Exploration and development activity in HPR royalty acreage provides catalysts and value upside, specifically:

o    Development by Shell of its QGC Qld coal seam gas acreage to feed its LNG export plant on Curtis Island

o    Testing of Origin Energy’s large Burunga South has discovery below the Peat field in eastern Qld.

o    Drilling by Santos on the Dukas prospect in the Northern Territory in 1Q 2019, could unlock large resources in a vast region where HPR has royalties.

o    Re-activation of exploration activity offshore Victoria in WA’s Carnarvon Basin.

·       Our core valuation of current royalty income is 6.5 cps on a DCF basis, with risked NAV to 21 cps driven by expected value capture from significant activity in Qld cold-seam gas, WA oil exploration and drilling in NT’s Amadeus basin in 1Q 2019. Quantification of the Burunga South-2 gas appraisal in Qld provides additional value.

 

We rate High Peak Royalties Limited as a BUY

 

Breakaway Comments

 

HPR has revenue and cash flow momentum due to a recent acquisition and commodity price recovery, as well as a very large exploration & development option. There is little recognition in the market for the transformation underway. HPR’s value is underpinned by DCF of current royalty revenues but the development/exploration/appraisal upside is discounted to nil.

 

See the article for the link to the full report