An oil junior set to pump
ROC Oil is an international oil company based in Australia. Its activities include oil and gas production, exploration and development, with exploration assets and activities located in the UK, Mauritania, Australia, Africa, China and NZ. (Check our scorecard here.)
Financials and Management
Named after the mythical Persian equivalent of the phoenix, ROC's share price, appropriately enough, has come back from the dead after the company produced a second consecutive net profit for FY12, even if adjusted earnings per share remained negative. While production is nonetheless down from previous years, better cost control and hopes for production from a second field in China's Beibu Gulf should support levels from here. (Check the ROC Oil estimated value chart here.)
ROC's share price has been in a bear market until recently, with significant falls before producing tangible earnings. The trailing PE ratio cannot be used as a credible valuation proxy with a short period of earnings history, nevertheless it has “bottomed” only three times recently. (Check the price/earnings ratio chart here.)
FARMs proprietary positioning system has recently upgraded from “Hold” to a “Buy Half” signal as market sentiment increases regarding a more favourable earnings outlook.
With the current price slightly below this year's estimate and well below next year's estimate of value, there is a considerable margin of safety to justify a larger 4 per cent portfolio allocation. (Check the return on equity chart/earnings per share chart here.)
Macro and Risk
Though geographically diversified in its exploration portfolio, ROC's focus is on the Beibu/Tonkin Gulf, between Vietnam and Hainan in the South China Sea. While a different area to the disputed Spratly Islands to the south, the region is not without sovereign or political risk considering China's diplomatic troubles with its neighbours, not to mention the relatively opaque nature of China's foreign investment and resource licensing systems.
ROC's focus has upside however, namely in Asia's higher-than-average oil prices and its close proximity to a burgeoning market. Experience in the Beibu Gulf also gives ROC a degree of expertise that could be leveraged in its Malaysian projects north of Sarawak and also in the South China Sea. ROC also has operations in Britain, Western Australia and Victoria. (Check the cash flow chart here.)
The bottom line
As it approaches first oil in the Beibu Gulf, ROC's share price rally looks set to continue. And while the oil price outlook remains uncertain we also believe this will produce further upside in the medium-term based on the US recovery and a period of stability following China's Politburo handover. With operations in the South China Sea, ROC is not immune from sovereign risk but this is mitigated somewhat by the company's share price discount to near and long-term value estimates. (See a snapshot of the bottom line here.)
Michael Feller is an investment analyst at Macro Investor, Australia's leading independent investment newsletter covering stocks, trades, property and trades. This week Macro Investor is doing a special edition on the future of the Australian oil and gas sector. A free 21 day trial is available.