James Faulkner on Ithaca Energy: Vision is within grasp

Back on the trail of the undervalued oilers, North Sea producer Ithaca Energy (IAE) could be one to keep an eye on as it prepares to carry out a number of activities across its portfolio, ahead of the eventual start-up of production from the Greater Stella Area (GSA) in summer 2015.

With energy insecurity rearing its ugly head once more on the back of political upheaval in the Ukraine and the Middle East, oil & gas producing assets which are located in close proximity to the major centres of consumption should command a premium. Ithaca Energy is a Canadian oil and gas exploration, development and production company, focused on the North Sea.

Its portfolio consists of oil assets in the Inner and Outer Moray Firth, gas and condensate assets in the Central North Sea, and gas assets in the Southern North Sea. Focused on the exploitation of existing discoveries rather than exploration, the company seeks to acquire assets that may no longer meet the investment criteria or strategy of the existing owner.

The key to seeing the shares break out of the recent trading range is bringing the GSA into production. A potentially transformational event, this could take the company’s production profile above 20,000 barrels of oil equivalent per day (boepd). The shares have been held back by past delays to the start-up schedule; but three wells have essentially de-risked the initial annualised production guidance for GSA of 30k boepd (16k boepd net to Ithaca). Meanwhile, drilling operations on a fourth well are due to conclude in October, with the drilling of a fifth well also planned, which could provide some upside to production forecasts.

In early 2012 the company piqued the interest of potential buyers, but rebutted the offers in favour of building Ithaca into a mid-cap company with production of over 20,000 boepd. It now looks like that vision is within grasp.

Barring any further setbacks, broker Westhouse sees Ithaca’s production rising from 13.1k boepd in 2014, to 21.6k boepd in 2015 and 27.5k boepd in 2016. That should be enough to get the firm noticed (again), especially given that Ithaca could be generating operating cashflow of as much as $470 million per annum (source: Canaccord Genuity) by then. With a current enterprise value just north of £700 million, there appears to be a strong value case for the shares.