London, UK, 23 August 2018
Edison issues outlook on Elk Petroleum (ELK)
Elk Petroleum (ELK) has completed a period of material inorganic growth with the acquisition of equity in the Madden gas field and assumption of operatorship at the Aneth CO2 enhanced oil recovery (EOR) project. ELK's engineering review of Aneth has uncovered numerous near-term development opportunities that offer IRRs ranging from 22% to 87% at US$60/bbl WTI, at an average cost of US$6.8/boe. Projects are low technical risk asset enhancements, however, contingent on ELK's re-financing expected in H2 CY18. ELK's partner in Aneth, Navajo Nation Oil and Gas company (NNOGC), gained access to a US$80m debt facility in June 2018 to fund its share of Aneth development capex. Our risked valuation increases from A$0.12 per share to A$0.19 per share (61%) driven by the inclusion of near-term development potential, as well as higher short-term oil prices that we base on EIA forecasts (in the long term we remain at US$70/bbl). Funding of identified growth projects and refinancing of the company's complex capital structure are key management objectives for CY18.
Our equity valuation remains highly levered to underlying commodity prices, despite ELK's hedge position, as well as cost of capital. Our risked valuation of A$0.19 per share is based on current EIA short-term WTI price projections rising to US$70/bbl by 2022. A US$10/bbl decrease in our long-term price assumption reduces the valuation to A$0.12/share while a US$10/bbl increase drives a valuation of A$0.26/share.
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