SINGAPORE (Dec 17): SAC Capital is maintaining its “buy” call on oil explorer and producer Interra Resources with a target price of 8.9 cents, representing an upside potential of some 71% for the stock.
In a Thursday report, analyst Terence Chua opines that Interra is at a “key inflexion point”, noting that the group has exceeded the brokerage’s FY18 forecasts.
“Firmer oil prices and contract extensions have led to a turnaround in profitability which we have already seen in their last two quarters,” says Chua. For 3QFY19 ended September, Interra clawed back into the black with a profit of US$0.4 million ($0.5 million), reversing from a loss of US$2.13 million in 2Q19.
Although the group reported a lower revenue of US$3.63 million from US$4.3 million in 3Q18, Chua terms this as “largely expected” given the reduced crude oil prices.
However, the analyst remains bullish on an uptick in shareable oil production.
In addition, Chua hones in on the group’s strengthened cash position. Despite recording lower operating cash flows of US$1.1 million compared to US$1.3 million in 3Q18, he acknowledges that Interra’s net cash position has continued to improve, increasing to US$6.5 million from US$6.3 million in 2Q19.
“We also saw a slight dip in the q-o-q shareable oil production in Myanmar by 2% to 76,280 barrels in Q319 from 77,522 barrels in Q219,” shares Chua. “Going forward, we see these maintaining as management continue to place an emphasis on workover and reactivation of existing wells in this quarter as well as contribution from the water flooding project,” he adds.
On Dec 11, Interra had also announced the drilling and testing results of its first well in the Kuala Pambuang Block onshore southern Central Kalimantan, Indonesia.
“The company has determined that the drilling and testing results are positive,” said Interra in a regulatory filing. “Further analysis of the data, including electric wireline logging, lithology and crude analysis, is ongoing.”
The group added that live oil shows over several zones were recorded while drilling in the primary reservoir targets by borehole cuttings analysis.
While optimistic, Chua remains cautious on the lack of contribution from the well in the near term. In addition, he notes that the cost of drilling of the exploration well is expected to be funded internally, although the group is also likely to explore alternative funding options.
“The group had previously announced that the local authority has approved the well location and related expenditure, and preparations are underway towards spudding the exploration well later in the year,” adds Chua.
In addition, Chua highlights how the variabilities in crude oil prices and final shareable oil production pose some risk to the stock.
Yet, on the whole, the brokerage envisions a turnaround for the stock, which is currently trading at 0.4 times its book value. Chua also believes that the stock’s target price would translate into a 50% discount compared to the industry average.
As at 12.31pm, shares in Interra Resources are trading two cents lower, or 3.1% down, at 6.3 cents. This translates into a price-to-earnings (P/E) ratio of 30.5 times for FY19E, according to SAC valuations.
