getting the house in order, page-15

Subject: Amadeus Energy Ltd (AMU) - Increase in Oil Price, Value for Thought - Buy





cid:839470803@08012009-24D3

Quick Note Hartleys Research


AMU.asx

Recommendation: Buy



What happened?

The oil and gas sector is currently getting a long overdue lift with the current rise in oil price (long overdue as the sector should be driven by expectation of oil price not the oil price on the day).



The companies that should benefit most from this are those that are producing and have high leverage to any increase in oil price, such as Amadeus.



AMU, however, has not experienced an uplift at all and in fact its share price is much lower now, in a much higher oil price environment, than it was months ago.



What does it mean?

We consider that this is related to sentiment and not operational performance or underlying value, and as such may turn very quickly when the value proposition becomes too good to ignore. Our view is that this time is fast approaching, if it is not here already.



The chart below shows the relative value of producing companies, with only STO cheaper than AMU (and this is because most of STO reserves are low margin CSG and not in production, in our view). AMU has 80% of its revenue from oil with ~1,100 bopd of production that should continue to produce at or above this rate for 10+ years.



The AMU reserves used below also do not take into account the recent TNT acquisition (that should add ~0.5mmbbl) or the increase in oil price (which increases the amount of economically recoverable oil). The Enterprise Value used for AMU does not take into account the likely reduction in debt by mid 2010, once AMU on sells a portion of the assets acquired as part of the TNT transaction.





Hartleys Initial View



Amadeus has several catalysts due soon:



Restructuring of its debt, which is currently attracting a blended rate of interest of 8.5%. The restructure should reduce this to 4.5% and decrease interest costs by US$2.5m per annum.



Exploration and development drilling is also expected to increase as the operatorship gained from acquiring TNT allows the Company to take control of its destiny. We anticipate that the Company should be able to increase both production and reserves by up to 15% by the end of the year.



Apart from these specific catalysts, the increase in oil price is the most persuasive catalyst for investing in AMU as its value is highly leveraged to the commodity (AMU only has a small amount of hedging at ~US$70 - 1/3 of production - so this will not significantly cap any upside in cashflow).



We rate AMU as a Buy with a 12 month price target of 50cps.





15 Apr 2010


Share Price:


$0.220


12mth Price Target:


$0.50














Brief Business Description:


Oil producer with long lived assets located onshore USA.



Hartleys Brief Investment Conclusion


Low cost producer with strong track record of increasing production and reserves.



Managing Director & President, USA:


Geoffrey Towner (Managing Director)


Betty Dieter (President, Amadeus USA)


Mitchell Wells (COO)


Top Shareholders:


WYLLIE GROUP PTY LTD (11.0%)


SPINIFEX / G TOWNER (5.9%)



Company Address:


Level 11, 225 St. George's Tce


Perth, WA, 6000



Valuation:


$0.67


Issued Capital:


304.0m


- fully diluted


304.0m


Market Cap:


$66.9m


- fully diluted


$66.9m


Debt (est March 10):


-$47m


Cash (est March 10):


$5m



FY09a


FY10e


FY11e


Prodn (mmboe)


0.725


0.675


0.668


Op Cash Flw


$29.6m


$21.0m


$29.6m


Free Cash Flw


$6.3m


$2.0m


$12.9m


NPAT (A$m)


$7.1m


$4.5m


$12.7m


EPS ($, bas)


3.6x


1.5x


4.1x


P/E (basic)*


6.2x


14.8x


5.3x


EV / EBITDA


3.9x


4.4x


3.4x


DPS ($)


-


-


-


Franking


100%


100%


100%


Dividend Yield


0.0%


0.0%


0.0%


N.D. / equity


74%


37%


28%


Chg in Cash


-16.9


6.3


11.8


- per share


Net Cash End


-$68.0m


-$34.2m


-$11.1m


2P Reserve (mmboe)


12.40


EV / 2P Reserve ($/boe)


$9.16






Source: Hartleys Research


Hartleys has provided corporate advice within the past 12 months and continues to provide corporate advice to Amadeus Energy Limited.