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Ithaca Energy Inc

Chris Oil Feature Article (LONG TERM HOLDINGS)

Ithaca Energy has come of age with excellent recent full year results so its about time i highlight this special company i hold to ValueTheMarkets readers. In my view its the safe leveraged play on the oil price combined with more the doubling net production when the Greater Stella field comes online in 2016 and oil remains flat $60 or even $70.

The bargain entry price has been caused by Petrofac delaying the floating production facility until end of first quarter 2016. Meaning the additional 16,000bopd net will be added by June 2016.I would add Finncap notes sate March 2nd “a low risk timetable has now been put in place to prevent further slippage”it goes onto say”it should be adequate to fund capital spending and bring Stella field online”.Including confirmation from the full year results of a new incentivised mechanical completion from Petrofac adding to confidence with 75% of construction work already completed.

The capex is now largely spent and peak debt $850m will be reached by Q2 the existing production is cash flow positive and sufficient to meet the scheduled repayments. From the 2P reserves from the full year report can be seen to have increased to 70.5m an increase of 22% due to the impact of Summit assets bought in 2014,  which includes positive upgrades to come from Wych Farm gaining benefit from new N.Sea tax developments straight away. I note Ithaca post webcast has no tax liabilities till 2020.

The company is making a profit of $148m in 2014 before one off impairment charges on known Athena, Beatrice and Anglia with no decommission costs on the horizon. Existing production will increase in 2015 to 12,000 bopd 95% oil and 12,500 bopd has been generated in Q1 2015. Breakeven for 2015 up to mid 2016 is $10 a barrel all in cost.

Combine with the new hedge programme extended to 8,300bopd to $91 per barrel with $60m cash gain lump sum out of $80m, together with 4,000bopd from july 2016-17 at $69 a barrel. One has to think oil right now is trading around $55 Brent so well over 70% of production is now hedged above todays prices, can you tell me another oil stock listed that has better hedged prices on most of its production?

Ekofish Stella well results were mentioned as positive with extended flow rates due April is a real catalyst for the stock.Remember this is a production well so will not have the highest flow rate in the deeper zone. However the company mentioned positive comments 60ft thick net reservoir which should add to reserves and production figures for Stella development in the short term.

There is also interesting exploration activity in 2015 both in Norway non core fully benefiting from tax arrangements on drill costs 78% refunds. These drills are Snomus well Q2 and Myrhauk well Q3 2015 close to existing field discoveries and infastructure.

Onto Ithaca strong financial position and balance sheet. With the support of the companies banking syndicate mentioning extension of reserve based lending facility to 3Q 2018. Any concerns have been reduced regarding debt with no bonds refinance due till 2019 so no heavy dilution here. Combined with expenditure 2015 $150 a cut of 60%, hoping for less mentioned in webcast and $50m in 2016 shows a vast profit margin to be gained. Debt also has room to move up to $1.010m.

Cenko state “Slippage of GSA has caused market overreaction does not adequately recognize Ithaca Energy  value and strong position in relation to its peers. Ithaca has very little decommissioning exposure and not dependent on growth from exploration. Well placed to repay debt with significant headroom allowing further acqusition opportunites as peers move into distressed situations”.

I agree with this statement, short term its all about the Stella well and Ythan production due to be online mid 2015 with Wyche Farm upgrades, while adding potential production assets from distressed companies in the North Sea all happening in 2015. Not to forget the two cost non core exploration wells. With Stella field coming online in H12016 more than doubling production with 16,000bopd net.

Another point to mention is Ithaca Energy itself being a takeover target in 2015. Because if value is not reflected whetever the reason a significant premium could be paid such as the Nautical Petroleum bid by Cairn Energy, we all know for example Premier Oil has stated its looking for North Sea production assets in H2 2015. I expect a big increase in M&A during the second half which will in the worse case push Ithaca Energy value up. However i am hoping the company makes it to Mid 2016 with a return to £1.95 based on the charts and a conservative oil price forcast for 2016.

Until the next time more ramblings from the castle can be seen @chrisoil or on the blog www.chrisoil.blogspot.co.uk

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