Date : 16/12/2020

Australis Oil & Gas Limited

ASX :

ATS

Market Cap : $61 Million

Buy

52 Week Range : $0.007 - $0.10

Share Price : $0.059

A "speculative buy" for a stock with high growth potential in the oil and gas industry.

Company Analysis

Australis Oil & Gas Ltd. (ATS) is an Australia-based oil and gas company with its operations based in the USA and Portugal. ATS owns and operates the Tuscaloosa Marine Shale (TMS) and Lusitanian Basin projects. The Company holds interest in approximately 33,000 contiguous undeveloped acres under lease within the core of TMS. ATS, through a subsidiary, holds working interest in two concessions located onshore in the Lusitanian Basin, Portugal, covering an area of close to 620,000 acres.

Catalyst

ATS implements a systematic and well-established business approach

Australis exploits opportunities in the current oil and gas industry market. ATS builds a high quality oil and gas portfolio, comprising exploration, appraisal and producing assets. The company has a proven management team that has demonstrated a track record in acquiring, developing, managing, and creating value. Australis has secured its initial exploration and appraisal assets, onshore in the United States and in Portugal. These assets are considered low in terms of holding costs and development requirements, which therefore offer significant upside potential in the event of oil prices appreciation from the current level.

Market dynamics offer a favourable and timely incentive for growth

The drop in oil prices since 2015 brought a variety of impacts, including a decrease in the cash flow of oil and gas corporations. The challenging environment from oil volatility may have forced some companies in the sector to consider selling their assets. A drop in short-term asset valuations, lower the acquisition cost and reduce drilling and operational costs resulting in lower costs to evaluate and develop assets. The decrease in cost provides a conducive and well-timed opportunity for Australis to execute its strategic growth plan.

Economic and Sector review

The energy sector is one of the most impacted during the pandemic given the lack of economic activity. Crude oil has been the most volatile of all major commodities during the crisis. We even saw negative oil prices due to the excess supply in the market as economic activity fell. In the long-term, however, much of the oil prices are controlled by OPEC – an organisation in the Middle East that determines the supply levels for the commodity. This adds a lot of risk that is not diversifiable. Again, week USD does push up prices of these commodities.

The global economy and financial markets have recovered faster than expected in Q3-2020. However, the recovery rate in the coming months continues to be highly unpredictable as the rising COVID-19 case during winter could cause another round of lockdowns and further restrictions. The normalisation of the economic life relies mainly on how the pandemic progresses and when vaccinations from COVID-19 reach the general population. The return to normal is a key factor that will determine oil demands. According to Deloitte (2020), oil demand is expected to rebound firmly but may remain lower than pre-COVID-19 levels. Ultimately, the price of crude oil will heavily depend on the decisions taken by OPEC to maintain the supply and demand.

Risk Consideration

ATS may be exposed to risks arising from the company use of financial instruments to support and develop its business operations. We have recognised the following risk that can significantly impact on the performance of the company:

  • Strategic risk
  • Title, leases risk
  • Commodity price risk
  • Exploration and development risk
  • Funding risk
  • Liquidity risk
  • FX rate risk

Key Financials

Sales volume to slightly decline in FY2020

Australis sales volume accounted for 143,300 barrels, 66,000 barrels, and 170,000 barrels in 2020, Q3, Q2, and Q1, respectively. So far, 2020 registered a total sales volume of 379,300 bbl., much lower than FY2019 which reported 846,000 bbl. The decline in sales volume is due to ATS voluntarily curtailed production in Q2. Since the beginning of Q3, ATS re-established production at full rate.

Operating Expenses decreased year-over-year

Australis reported a 19% reduction of its field operating expenses costs in 2020 compared to FY2019, from US$ 12.57/bbl to US$ 12.53/bbl.

Cash balance increased by 55% in Q3-2020

The company exhibits strong revenues despite the challenging oil price environment. ATS cash balance at the end of Q3-2020 accounted for US$ 6.8M, an increase by US$ 2.4M from Q2 to Q3-2020.

ATS shows evidence of strength in its operating revenues management

ATS continues to manage its cash flow wisely, reflected by its year-over-year improvement in its operating income, up 200% since 2016. During Q3-2020, the company’s operations generated an additional US$ 2.4M of cash. Furthermore, Australis secured additional hedges taking opportunities on short-term spikes in oil prices which offer some protection and stability to the operating revenues into 2021. The certainty attributed to operating income may offset any risk regarding the company’s debt obligations.

ATS exhibits continuous growth potential

Since 2016, Australis’ assets are growing at a rate of 366%. The capital structure mix remained mostly unchanged with liabilities not more than 10% of the company’s balance sheet. The Return on Asset turned positive in FY 2019, up 126% since 2016.

Capital Structure

Technical Analysis

Trend

Australis recovered by 50% from its 2020 high after the massive COVID-19 sell-off peak. Since March, ATS rallied by more than 600% from its lows. Despite the impressive rally, ATS remained capped under the multi-year support turned resistance at the psychological 10 cents level. ATS market structure continued to stay relatively flat from April to November before volume spikes and pushed ATS above A$ 0.04 to re-test A$ 0.07. Since the end of November, the price action remained trapped in a descending triangle pattern which may suggest selling pressure that can push price lower to re-test A$ 0.05 – A$ 0.04 range.

Key price levels

As per the Fibonacci January high extension, the key level to watch is the A$ 0.04 – A$ 0.05 range which is the 2020 major resistance and support area. This level is currently 15% below the current market price and may attract buyers. The 4 to 5 cents range may be a determinant zone of consolidation before an eventual breakout toward the 10 cents level.

Volume and momentum

Volume increased since the last 200-day with the 20-day volume average surged by 15%. The price action proves to be negative in the near-term and continues to be stuck in the descending triangle.

Trade consideration

  • Since the COVID19 selloff, Australis recovered by 50% from its high with an impressive rally, up 600%.
  • Market participants might be interested to enter at key support level: A$ 0.05 and A$ 0.04
  • Primary target price at $A 0.08 and TP (2) at 10 cents
  • Consider reducing exposure below A$ 0.03
  • It is recommended exiting the trade below A$ 0.025

Recommendation

We are issuing a buy for ATS as we see in the company strong potential for growth. Australis’ assets are growing at a rate of 366% since 2016 with its capital structure mix mostly unchanged. Liabilities represents only 10% of ATS’ balance sheet. The Return on Asset turned positive in FY 2019, up 126% since 2016. ATS rallied up 600% from its March lows. We have estimated ATS to be temporarily extended, therefore, we suggest a speculative buy at 5 cents per share with a primary target at 10 cents per share.

 

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