Oilexco ( OIL ) RBC Review

Initiating coverage with a rating of Outperform, Above Average Risk and a 12-month price target of C$21.00 - based on oil at $70

Investment Opinion
Oilexco Inc. is an independent E&P company with a primary listing in Toronto and a secondary listing in London, focused on the central sector of the UK North Sea. Its strategy is to develop by building controlling stakes in target hub areas, minimize exploration risk by drilling previously discovered accumulations and retain drilling independence by securing drilling vessels under long-term contracts.

• • Valuation: On a sum-of-the-parts NAV basis we value Oilexco at C$13.54/share (677p) on a fully diluted basis. This comprises a core commercial value -defined as fields onstream and under development plus forecast 2007 FY net debt minus the company's 2008 financial commitments - of C$4.92/share (246p) plus exploration upside of C$8.62/share •
• Comparison to Peer Group: Oilexco is trading at an 11%premium to our NAV against a peer group average of 5%.
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• Upside: The company is progressing the development of a number of fields that it aims to have onstream in 2008 (Ptarmigan in Q1 and Shelley in Q3) and 2009 (Huntington, Kildare, Bugle and Black Horse). It is also exploring further in the Huntington block and the adjacent block, where it has a 72.7% equity stake and where it has identified a number of additional prospects. The unrisked upside has the potential to more than double our risked NAV.
• Timing: Oilexco has an ongoing exploration program that should yield regular newsflow. In 4Q 2007 it should drill the potentially significant Morro and Manhattan prospects, whereas in 2009 it will bring two fields onstream (Ptarmigan and Shelley). •
• Price Target Derivation: In arriving at our 12-month price target of C$21.00/share (1050p) we have taken a view on the company's year-end 2008 NAV; i.e. we have discounted the projected future cash flows from 1 January 2009 and we have taken a considered view on the potential outcome of the company's 2008 exploration/appraisal drilling campaign. In Oilexco's case a full year of increased production, and reduced debt, increases the 2009 core valuation considerably relative to that of 2008.
• Commodity Price Assumptions that are based on Brent prices. For 2008 we have used US$70.00/bbl, US$65.00/bbl in 2009 and US$60.00/bbl in 2010, increasing thereafter at 2.5% pa.

North Sea
Why concentrate on Oilexco, Antrim and Bow Valley

We have a strong preference for those stocks that offer exposure to the exploration phase, and although the risks associated with exploration can be substantial, the upside potential frequently outweighs the risks. Given the increasing size and maturity of the midcap oils in our peer group, few stocks provide leverage to drilling campaigns that could cause the stock to rise in multiples.
Given a sufficiently large equity stake and sizeable prospects (and a surging oil price), exploration success can transform even relatively large companies, and looking ahead to 2008, both Tullow and Oilexco will embark on exploration/appraisal drilling campaigns that have the potential to almost double our NAVs for these companies.
Having enjoyed any exploration-driven share price rally, shareholders should consider taking profits – not least because market valuations tend to race well ahead of asset valuations. In our opinion, investors should hold out for the development phase only when the timescales are short and the relevant fiscal and commercial terms are understood, and therefore the asset’s value is clear. For example, Oilexco has moved quickly to develop its oil discoveries in the U.K., and as a result, its share price has risen fairly steadily;

The Market gives You a Scorecard Each Day
Oilexco up .09 at $14.81
Yes, we are still waiting for the drilling results in a NR
Antrim Energy up .15 at 4.40
Bow Valley down .14 at 6.41
Sterling Res up .06 at 2.35