niko resources ltd - resource-capital.ch · daily letter | 3 13 june 2013 figure 2 highlights...

Daily Letter | 1 13 June 2013______

Canaccord Genuity is the global capital markets group of Canaccord Financial Inc. (CF : TSX | CF. : LSE)

The recommendations and opinions expressed in this research report accurately reflect the Investment Analyst’s personal, independent

and objective views about any and all the Designated Investments and Relevant Issuers discussed herein. For important information,

please see the Important Disclosures section in the appendix of this document or visit Canaccord Genuity’s Online

Disclosure Database.

Niko Resources Ltd Christopher Brown 1.403.508.3858

[email protected]

Kimberly Thompson 1.403.508.3854

[email protected]

Colin Penner 1.403.508.3803

[email protected]

NKO : TSX : C$8.32

BUY

Target: C$13.50

COMPANY STATISTICS:

Forecast Return %: 62

52-week Range: C$5.13 - 23.17

Avg. Daily Vol. (000s): 477

Shares Out (M) basic: 70.2

Shares Out (M) fd: 72.1

Market Cap (M): C$584.2

Net Debt (M): C$193.3

Ent Value (M): C$777.5

EARNINGS SUMMARY:

FYE Mar 2012E 2013E 2014E

Oil & NGL (b/d): 1,892 1,037 784

Natural Gas

(mmcf/d): 216 152 124

Total (mmcfe/d): 227 158 129

EPS fd: US$(3.67) US$(4.08) US$(1.68)

CFPS fd: US$4.66 US$2.21 US$0.95

CF/boe: US$17.38 US$13.25 US$8.51

EV/DACF: 11.1 4.6 8.7

NAV /shr: C$35.10 C$35.85 C$42.80

CAPEX (M): US$339 US$166 US$161

SHARE PRICE PERFORMANCE:

Source: Interactive Data Corporation

COMPANY DESCRIPTION: Niko Resources Ltd. is a Canadian-based international oil

and gas company. Niko's main producing asset is the D6

block in India (10% WI) where natural gas production is

approximately 50 mmcf/d net and oil production is

approximately 1,000 bbl/d net. Niko has an immense

exploration portfolio spanning multiple countries and

targeting very large, company-making prospects.

All amounts in C$ unless otherwise noted.

Energy -- Oil and Gas, Exploration and Production

REBOUNDING ON RESOURCE

RECLASSIFICATIONS

Investment recommendation

Niko announced that its proved-plus-probable (2P) reserve value has

increased ~90% to US$1.3 billion. Associated reserve volumes increased

110% to ~800 Bcfe (and exclude the recent MJ discovery on D6). In

addition, the company notified investors of a non-commercial

exploration location offshore Indonesia, and a private placement of

US$63.5 million. The company did not provide an update on its asset

divestiture process, or on gas price decisions in India.

Investment highlights

2P reserves exclude the MJ discovery offshore India, which has best

estimate gross prospective resources of 819 Bcf and 56 million

barrels of liquids (pre-drill estimates, Niko 10% W.I.).

Elang-1 on the Cendrawasih PSC is expected to spud in early July.

Results should be available by late August or early September.

The company secured US$63.5 million through a private placement.

The August 2014 notes bear an interest rate of 7% and can be

converted to shares at the company’s discretion.

Valuation

Using a DCF model, we estimate a 2P F2013E NAV of C$13.65/share,

which forms the basis of our 12-month C$13.50 target. We maintain our

BUY recommendation.

Risks

Niko is a high-risk, high-reward investment. The company’s growth is

dependent on high-risk exploration opportunities offshore Indonesia and

development of its offshore India assets.

Daily Letter | 2 13 June 2013

BABY STEPS TO BASE GROWTH

Niko announced that its proved-plus-probable (2P) reserve value increased ~90% to

US$1.3 billion, while associated reserves increased 110% to ~800 Bcfe (excluding the

recent MJ discovery on D6). In addition, the company notified investors of a failed drill

location offshore Indonesia, and a private placement of US$63.5 million. The company did

not provide an update on its asset divestiture process, or on gas price decisions in India.

The company’s successful reclassification of resources to reserves was an anticipated

event. However, we believe there was still significant investor apprehension surrounding

exactly what would be recognized. In our view, the news is a positive initial step toward

regaining shareholder confidence in the fundamental base value of the company. We

expect this will help restore some lost market share.

Reclassification of contingent resources into reserves offshore India is a positive event for

Niko. The proved-plus-probable reserve additions predominantly related to Block 5(c) in

Trinidad, the D6 R-series and satellite area development projects shown in Figure 1, and

the NEC-25 development area outlined in Figure 2.

Figure 1: D6 block development plan

Source: Company reports

The satellite area and R1 cluster are expected to add approximately 100 mmcf/d of

incremental production. We note that as of publication, the detailed reserve report has not

been released on SEDAR. We will confirm reserve auditor production forecasts and

allocations once the information becomes available.


Figure 2 highlights Niko’s proximity map for the NEC-25 block offshore India. Following

the submission of a field development plan, resources in this area have been reclassified as

reserves. Again, the full reserve report should provide better guidance surrounding

anticipated production levels, capital requirements and economics.

Figure 2: NEC-25 block


MJ discovery review

On May 24, 2013, Niko announced a significant gas/condensate discovery with its MJ-1

well on the D6 block offshore India. The well tested a restricted rate of 30.6 mmcf/d, with

associated liquids of approximately 2,100 b/d. The company’s pre-drill gross prospective

resource estimates ranged between 262 Bcf and 2,562 Bcf with additional liquids of 18-

176 million barrels.

Subsequent to the discovery, CEO Edward Sampson has stated that Niko believes the

discovery is likely toward the upper end of the pre-drill resource range. Although the

government will require additional appraisals before MJ can be converted into reserves,

this appears to be a good start for future reserve growth.


Figure 3: MJ-1 exploration well depth map


Potential sale and farm-out process (Bangladesh and Trinidad - our best guess)

Niko did not provide an update on its asset divestitures and farm-out processes.

Notwithstanding, we suspect that the company is in the process of selling its Bangladesh

asset and farming out its offshore Trinidad blocks.

Tullow Oil plc (TLW-LN) is currently awaiting government approvals for its sale of Block 9

in Bangladesh, and it is our best guess that Niko is in a waiting game. Tullow sold its

assets for US$42 million with a potential read-through to Niko’s interest at approximately

US$90 million. Niko may have negotiated a higher value for its interest but this would be

our best guess in terms of potential proceeds. We expect an official announcement from

the company in the coming months.


Figure 4: Bangladesh assets


In its most recent presentation, Niko indicated that the NCMA-2 Primrose-1 exploration

location offshore Trinidad is scheduled for 2014. Previously, the company indicated that

the well would spud in July 2013; we suspect that Niko may have postponed drilling in

order to reduce its working interest ahead of drilling, given the substantial capital

requirements associated with the block. We suspect there has been interest on the block

given gas-in-place estimates of nearly 0.5 Tcf per prospect. However, we believe that a

potential partner would likely approach the opportunity cautiously as development capital

pending success would be significant.

Figure 5: Trinidad NCMA-2 and NCMA-3 blocks



Indonesia – Elang-1 location

Niko announced that its Pananda-1 exploration location in the North Makassar block

(offshore Indonesia) was non-commercial. The rig will now be mobilized to the

Cendrawasih block, where Niko will spud the Elang-1 well in early July. Drilling will likely

take approximately 60-70 days. As a result of a farm-out to Repsol, Niko will operate the

location with a 70% working interest (subject to Government approval of the farm-out).

Figure 6: Indonesia – Cendrawasih block Elang-1 prospect


VALUATION

In the following figure, we outline our updated F2013E NAV for Niko. We have broken out

our 2P reserve value, discovered resource value (including MJ-1) and risked upside value.

Each value is burdened with potential legal liabilities that are currently pending. Our target

generally aligns with our revised 2P NAV of C$13.65, which has increased ~190% from

C$4.70. Including the MJ-1 best-case resource scenario, we estimate a NAV of C$16.80,

while on a fully risked basis, we believe the company could potentially be worth upwards

of C$35.85/share.


With increased reserve volumes expected to support lending facilities, Niko’s liquidity

should continue to improve over the coming months. As such, we believe investors will

begin redirecting focus on Niko’s upcoming exploration campaign in Indonesia, along with

development work underway in India. As such, we maintain our BUY recommendation.

Figure 7: F2013E NAV

Source: Canaccord Genuity estimates


APPENDIX I: FINANCIAL STATEMENTS

Figure 8: Niko’s income statement (US$000s)

March 31 Y/E 2012A 2013E 2014E

Oil and natural gas 362,784 235,814 169,257

Royalties (15,470) (9,418) (5,989)

Petroleum profit (26,003) (28,600) (26,276)

Net Revenue 321,311 197,796 136,991

Operating, production and pipeline 40,196 34,558 29,646

Depletion, depreciation and accretion 274,681 206,475 89,959

Pre development exploration expense 232,965 174,333 126,963

General and administration 8,774 6,458 5,877

Stock-based compensation 35,516 9,174 5,270

Other 25,710 530 -

Operating Expense 617,842 431,529 257,715

Operating Profit (296,531) (233,733) (120,724)

Finance revenue (4,302) (1,018) -

Interest and financing Expense 34,750 32,861 29,500

Foreign exchange loss (gain) 14,366 2,569 -

Net Finance Expense 44,814 34,412 29,500

Income (Loss) Before Income Taxes (341,345) (268,144) (150,224)

Current Income Tax 15,025 4,865 5,340

Future Income Tax (recovery) (33,742) (38,005) (37,667)

Income Taxes (18,717) (33,141) (32,327)

Net Income Reported (322,628) (235,004) (117,896)

Non-continuing items 133,415 - -

Net Income From Continuing Operations (189,213) (235,004) (117,896)

EPS - Fully Diluted, Continuing (3.67) (4.08) (1.68)

Source: Company reports, Canaccord Genuity estimates


Figure 9: Niko’s cash flow statement (US$000s)

March 31 Y/E 2012A 2013E 2014E

Net Income (322,628) (235,004) (117,896)

Depletion, depreciation and accretion 278,009 206,475 89,959

Pre development exploration expense - reclassification 232,965 174,333 126,963

Accretion on convertible debentures 7,612 6,689 -

Other 28,819 559 -

Deferred income taxes (33,742) (39,290) (37,667)

Foreign exchange loss (gain) 6,095 (1,427) -

Stock-based compensation 43,358 15,024 5,270

Cash From Operations 240,488 127,359 66,628

Changes in non-cash working capital 28,293 6,390 -

Cash Flow From Operations 268,781 133,749 66,628

CFPS - Fully Diluted 4.66 2.21 0.95

Proceeds from issuance of shares 6,832 152,752 -

Proceeds from issuance of convertible debt (Dec. 2017 maturity) - 110,892 58,300

Long-term debt 25,000 65,000 (10,000)

Repayment of long term debt - (312,106) -

Dividends paid (12,506) (3,017) -

Other (4,804) (5,413) (5,413)

Cash From Financing Activities 14,522 8,108 42,887

Additions to property and equipment (25,089) (17,802) (20,000)

Additions to exploration & evaluation assets (incl. reclassification) (324,049) (232,872) (140,963)

Restricted cash contributions (9,500) (2,388) -

Restricted cash returned 8,550 5,419 -

Change in non-cash working capital 13,009 34,514 -

Other, including farm out proceeds 10,325 85,103 -

Cash From Investing Activities (326,754) (128,026) (160,963)

Foreign exchange loss effect (396) 5 -

Increase/(Decrease) in Cash (43,847) 13,836 (51,448)

Cash - Open 108,342 64,495 78,331

Cash - Close 64,495 78,331 26,884



Figure 10: Niko’s balance sheet (US$000s)

March 31 Y/E 2012A 2013E 2014E

Cash and cash equivalents 64,495 78,331 26,884

Accounts receivable 61,247 85,212 85,212

Inventory 9,961 11,375 11,375

Prepaid Expenses - - -

Other Current Assets 7,538 1,525 1,525

Current Assets 143,241 176,443 124,996

Restricted cash 11,283 13,270 13,270

Long-term accounts receivable 2,202 1,294 1,294

Exploration and Evaluation Assets 856,880 764,088 778,088

Property and Equipment 509,091 387,883 317,924

Income tax receivable 34,724 26,203 26,203

Other + FTA 61,066 64,745 64,745

Total Assets 1,618,487 1,433,926 1,326,519

Accounts payable and accrued liabilities 101,660 156,453 156,453

Current portion of long-term debt 306,052 - -

Current portion of capital lease obligation 4,804 4,804 4,804

Income taxes and royalties payable 1,220 1,283 1,283

Other current liabilities - - -

Current Liabilities 413,736 162,540 162,540

Decommissioning obligation 40,017 41,944 41,944

Finance lease obligation 43,671 38,258 32,845

Future income tax liability 195,515 167,368 129,700

Long Term debt 25,000 90,000 80,000

Convertible debt - 80,730 139,030

Total Liabilities 717,939 580,840 586,059

Share capital 1,171,439 1,324,234 1,324,234

Contributed surplus 104,964 135,548 140,818

Equity component of convertible bonds 14,765 23,232 23,232

Accumulated other comprehensive income (2,094) (3,380) (3,380)

Retained earnings/deficit (388,526) (626,548) (744,444)

Subtotal Equity (Shareholders Equity) 900,548 853,087 740,460

Total Liabilities and Shareholder Equity 1,618,487 1,433,926 1,326,519



Investment risks

Potential risks to our investment thesis and target price valuation methodology include, but

are not limited to:

Niko recently became a higher-risk, higher-reward investment. In the past, its valuation

was primarily based on its offshore D6 block in India. However, since its initial

development phase, D6 has fallen significantly short of expectations, thereby reducing its

value to Niko. We believe we have mitigated the valuation risk on D6, but there are no

assurances we have been conservative enough in our forecast. As Niko holds a minor

interest on D6, the company is not consulted on technical matters and thus Niko

shareholders will not be made aware of ongoing issues prior to an official announcement

by Reliance (or the Indian government).

In June 2011, the company pleaded guilty to bribing a government official in a foreign

jurisdiction. While the company has given verbal assurances such actions will not be

repeated, there is no means to police the company's activities.

Niko's future growth relies heavily on high-risk, high-reward offshore drilling in Indonesia.

Even with a 10% chance of success on its program, there is no guarantee that the company

will be successful after drilling ten locations.

Finally, self-financing of the company's multi-year drilling campaign is unlikely. We

forecast that the company's cash flow will not keep pace with its future capital

requirements. The type of financing is unknown but there is a high chance it will be

dilutive to shareholders.


APPENDIX: IMPORTANT DISCLOSURES

Analyst Certification: Each authoring analyst of Canaccord Genuity whose name appears on the front page of this research hereby

certifies that (i) the recommendations and opinions expressed in this research accurately reflect the authoring analyst’s personal, independent and objective views about any and all of the designated investments or relevant issuers discussed herein that are within such authoring analyst’s coverage universe and (ii) no part of the authoring analyst’s compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed by the authoring analyst in the research.

Site Visit: An analyst has not visited Niko's material operations.

Price Chart:*

Distribution of Ratings:

Global Stock Ratings (as of 28 March 2013)

Coverage Universe IB Clients Rating # % % Buy 583 58.2% 34.0% Speculative Buy 60 6.0% 55.0%

Hold 308 30.8% 13.0% Sell 50 5.0% 6.0%

1004* 100.0% *Total includes stocks that are Under Review

Canaccord Genuity

Ratings System:

BUY: The stock is expected to generate risk-adjusted returns of over 10% during the next 12 months. HOLD: The stock is expected to generate risk-adjusted returns of 0-10% during the next 12 months. SELL: The stock is expected to generate negative risk-adjusted returns during the next 12 months. NOT RATED: Canaccord Genuity does not provide research coverage of the relevant issuer. “Risk-adjusted return” refers to the expected return in relation to the amount of risk associated with the designated investment or the relevant issuer.

Risk Qualifier: SPECULATIVE: Stocks bear significantly higher risk that typically cannot be valued by normal fundamental criteria. Investments in the stock may result in material loss.


Canaccord Genuity Research Disclosures as of 13 June 2013

Company Disclosure Niko Resources Ltd 1A, 2, 7

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niko resources ltd - resource-capital.ch · daily letter | 3 13 june 2013 figure 2 highlights...

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