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High Peak Royalties Ltd, Leveraged to Resurgent Oil & Gas Industry Activity

Stephen Bartrop - Breakaway Research - 05-Dec-2018

Key Points

  • High Peak Royalty is a small but growing energy royalty owner that has recently completed an acquisition that will increase revenue and cash flow. It is exposed to movements in oil & gas prices. It is positively geared to re-activation of exploration and development activity in key permits. These are no-cost options on successful drilling outcomes and would drive the value and share price higher.
  • Key points:
    • Owns a diverse portfolio of energy royalty interests in Australian and the USA and offers a direct exposure to revenue trends, from higher production or higher prices.
    • Re-invigoration of exploration & appraisal by independent operators, and planned re-opening of shut-in fields
    • An acquisition and rising energy prices provide a material step-up in revenue in FY2019
    • 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:
      • Development by Shell of its QGC Qld coal seam gas acreage to feed its LNG export plant on Curtis Island
      • Testing of Origin Energy’s large Burunga South has discovery below the Peat field in eastern Qld.
      • 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.
      • Re-activation of exploration activity offshore Victoria and 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 coal-seam gas, WA oil exploration and drilling in NT’s Amadeus basic in 1Q 2019. Quantification of the Burunga South-2 gas appraisal in Qld provides additional value.

HPR has revenue and cash flow momentum due to 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. We assign a price target of 21 cps.

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