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Craig Stranger, Austock Securities

BUY RECOMMENDATION

Linc Energy (LNC)

Austock securities analyst Craig Stranger currently has a buy on Linc Energy, an energy company that focusses on clean coal technology. LNC uses the two main techniques of Underground Coal Gasification (UCG) and Gas to Liquids (GTL).

Stranger notes that LNC has recently bought 80% net revenue interest in an Alaskan oil field for US$50m and is planning to spend several hundred million on infrastructure and drilling to produce 50,000bpd of oil within 5yrs. Stranger highlights that Santos has a market cap of $12bn and produces 60,000bpd, so this is no small thing.

“As you would expect purchase cost at US$0.25/ bbl 3P is low, and target field is very large 1,000mboe,” says Stranger. “This is a “long term, high risk” stgelopment opportunity that relies on extrapolating results from existing oil producing wells (British Petroleum) 140km away, Alaskan Government building infrastructure (road), working with other emerging oil produces (pipeline) and weather.”

Stranger also points out that one key risk – stgelopment within the National Petroleum Reserve – was recently approved by US Government.

Investment View

Austock retains its buy on LNC, with a price target of $4.44 a share during early stages of stgelopment – a 50% premium to yesterday’s closing price. “We suggest investors look at this as an attractive long term option bought at a reasonable price relative to 31 December cash reserves of ~$1,100m – with Teresa and Adani royalty sale and US Oil purchases – and LNC’s market capital…US$50m is just 10c/share,” said Stranger in a research note. “The key drivers to LNC’s share price in short term are the sale of Teresa Coal (approximately $500m), and generating enough cash flow from US Gulf oil producing assets to be breakeven while spending $70m pa on energy stgelopment across the group,” he added.

 

Chart: Share price over the year to 21/06/2011 versus ASX200 (XJO)

Stock code: LNC

Charts: Linc Energy Limited

More news: Linc Energy Limited

 

Paul Jensz, Austock Securities

BUY RECOMMENDATION

Emeco (EHL)

Emeco (EHL) has a frontrunning position in the earthmoving rental equipment market, making the bulk of its earnings from the booming mining industry. It operates primarily in Australia, but it also has a slice of the market in Indonesia and Canada.

Paul Jensz, an analyst with Austock Securities, notes that EHL seem to be savvier these days because they didn’t provide the market with a best case guidance – something they have done in previous years. “A wise decision given how regularly wet weather can impact companies such as EHL,” states Jensz. Indeed the second half of 2011 has been a wet one, with the floods in Queensland, wet weather in Canada and a relocation of Indonesian fleet all having a negative impact on earnings. As such Austock has reduced its earnings estimate for FY’12 NPAT to $58.4m. “Given recent buying sprees in large equipment from the likes of NRW and ASL – and strong demand for this gear – we believe the capex forecasts in FY’11 ($165-$185m) and FY’12 ($180m-$200m) are base case.”

EHL earnings are on the rise, reporting NPAT of $24.11m for the half-year ended 31 December 2010, with revenue of $264.4m, up 26.8% from last year. Furthermore EPS was 3.94 cents compared to -0.10 cents last year and net cash flow was $105.19m, up from $66.03m the previous year.

Risks

As with any buy recommendation, it comes with caveats. Austock notes that there are three risk factors to EHL:

1) whether they have an available fleet to grow the business at full capacity;

2) nearly half of its business is in the coal industry;

3) Miners may fund more capital upfront under MRRT.

Investment View

Despite the aforementioned risks, Austock has a buy on EHL. “We like the relatively safe exposure to coal and gold production volumes…Australia is short large, new equipment and EHL is long,” notes Jensz.

 

Chart: Share price over the year to 21/06/2011 versus ASX200 (XJO)

Stock code: EHL

Charts: Emeco Limited

More news: Emeco Limited

 

These recommendations first appeared in Austock Securities weekly newsletter on 20/06/2011, visit www.austock.com.au to subscribe.  Please note that TheBull.com.au simply includes broker recommendations on this page. The inclusion of these recommendations does not in any way constitute a recommendation on the part of TheBull.com.au. You should seek professional advice before making any investment decisions.

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