Zenith Energy Ltd.– Update Note
Zenith Energy Ltd. (“Zenith”) is a dual listed LSE & TSX Venture Exchange oil & gas development and production company. In 2016 the company vastly expanded its oil and gas portfolio via a substantial acquisition in Azerbaijan. Now, the team has bagged a cracking deal in Indonesia which should help to propel Zenith towards gaining a mid-cap oil company valuation.
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Sumatran oil project adds 1,050 bopd rising to 2,000 bopd in 15 months
Indonesia represents a mature oil producer with high quality oilfield services available in the capital Jakarta. Zenith looks set to acquire 2 producing oil fields with good growth opportunities. These structures are shallow & with easy geology which complements the deep and complicated environment seen in Azerbaijan & where complex workovers have tested investors’ patience.
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Funds to really unlock the value in Azerbaijan with workovers and drilling
It has not been plain sailing at the huge 642.4km2 Muradhkanli Block. Funds being raised will allow substantial value to be properly unlocked in a highly systematic fashion at the largest onshore oil/gas concession in Azerbaijan. Production of 1,000 bopd is expected in 12 months, but the potential here is far greater as previously 15,000 bopd was achieved with old Soviet technology.
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Attractive discount to E&P universe on compelling peer comparisons
Zenith shares trade on an EV/2P ratio of just 29p (US$0.39) per barrel against a peer median of £2.58 (US$3.43). This starkly illustrates the stock’s potential upside once there is further evidence of successful oil development in Azerbaijan from drilling in early 2019 and as further details emerge from the Indonesian assets over coming months.
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Heavily risked DCF analysis suggests in excess of 787% upside
Valuing the Azerbaijan, Italian and now Indonesian assets using a conservative DCF model gives a new sum-of-the-parts valuation of 34.4p per share. We remain buyers with a reiterated Conviction Buy stance.
Zenith Energy is engaged in building, owning, operating and maintaining remote power plants for the resources industry through Build, Own, Operate (BOO) model and Manage, Operate, Maintain (MOM) model. The BOO model involves building power stations on client sites, generally remote mine sites, and then selling electricity through Power Purchase Agreement on an average 5 - 10 year term. The MOM model, which is run through Zenith Pacific Pty Ltd as an operating entity, involves managing, operating and maintaining client's assets on their sites, without the purchase of the power station assets.
Align Research is a commissioned research company founded in November 2015 in order to provide the under-served smaller company space with high quality analysis. We have an initial focus on the natural resources sector, in which we see significant opportunities given the current once in a generation bear market, however all undervalued small caps (sub £100m) are considered by our team. Align was founded by industry professionals with decades of experience in the stock markets, headed up by highly qualified individuals from both fund management and analytical backgrounds.
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