China Tracker - Details for China North East Petroleum (CNEP)


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 China North East Petroleum
 Analyst Coverage
2011-06-10Rodman & RenshawUpgradeOutperform$5.50
 

Upgrading to Market Outperform on valuation. We've been on the sidelines for a while on NEP given its lack of production growth as well as overall concerns regarding the performance of Chinese stocks. And while we still have these concerns, and note that NEP has had accounting issues in the past (trading in it was suspended for a few months last year), we think the stock is just too cheap at current levels, as NEP has ~$2/share of cash on its balance sheet and is generating excess cash flow. The stock is trading at only 1.0x 2011e EBITDA, well below the peer average of 8.4x. And while we're not sure how long NEP will be jaded by Chinese-company accounting concerns, we just don't see its valuation staying this depressed over the long term. Given this, we think buying NEP makes sense for value players with a long-term time horizon. We are resuming our NAV-based target price at $5.50, which implies a 2011 EBITDA multiple of only 2.4x.

2011-05-10Rodman & RenshawReiterationMarket Performn/a
 

While we do see upside potential in the company's assets, we don't see NEP outperforming until it demonstrates that it can generate material production growth again...something we're not expecting until late this year.

2011-03-17Rodman & RenshawReiterationMarket Performn/a
 

NEP reported Q4 operating EPS of $0.15, missing our $0.23 estimate. CFPS of $0.29 was also below our $0.32 estimate. Higher-than-expected income tax expense and G&A were the primary culprits. Q4 production of 1.8 MBo/d had been pre-announced.

Focus turns to Durimu. NEP plans to shift its focus to the Durimu Field in Inner Mongolia once the acquisition is completed. The company plans to drill 20-30 test wells in the field this year. As for the company's existing assets in Jilin, NEP plans to drill 10-20 wells in order to hold production flat. We estimate this level of activity, plus the company's planned seismic acquisition, equates to a capex budget of ~$30 million for the year. NEP should have ample liquidity to fund a budget of this level.

Raising 2011 production forecast. Current production is running ~2.2 MBo/d, higher than we were expecting based on our prior discussions with management. However, given the company's shift to Durimu, we're not expecting any material growth from these levels until later this year when production from the field starts to ramp up. Despite this, the higher current run rate takes our 2011 production forecast up to 2.2 MBo/d from 1.7. For 2012, we are forecasting production of 2.5 MBo/d.

No surprises on the reserve front. NEP reported year end reserves of 5.5 MMBo, in line with our expectations. Year-end reserves were all oil and 38% PUD. For the year, NEP replaced 9% of its production at a cost of ~$18/Boe. Its year-end PV10 was ~$153 million, which implies a per-unit value roughly in line with what we were using in our NAV.

Raising estimates. Due to our higher production forecast, our 2011 EPS/CFPS estimates rise to $1.11/$1.49 from $1.01/$1.30. For 2012, our estimates rise to $1.13/$1.54 from $0.99/$1.28. While we're pleased to see production doing better than expected, we're going to maintain our Market Perform rating at this time as we see more compelling ideas elsewhere in the E&P space.

2011-02-07Rodman & RenshawReiterationMarket Performn/a
 

Q4 production shy of expectations. NEP reported Q4 production of 1.8 MBoe/d, 3% light of our forecast. As a result of the company's focus shift to its Durimu acquisition, we do not expect additional production growth until late this year. And based on the lack of new wells in Q4, we expect to see volumes fall slightly in Q1. We continue to forecast production to fall by 10%-15% y/y in 2011.

Fewer than expected drilling contracts completed in Q4. The company's drilling service subsidiary completed 35 wells in Q4, shy of the 53 wells we were forecasting (it had averaged 52 wells in the prior 3 quarters). The lower activity level was attributed to maintenance work as well as the impact of previously-reported flooding in the region. As a result, we estimate Q4 operating income for the unit to be $4.5 million, below our prior estimate of $7.1 million and down from $6.5-$7.5 million/quarter in the prior three quarters. We expect activity to return to more normal levels in Q1. As a result of the update, we are trimming our Q4 EPS/CFPS estimates to $0.23/$0.32. For 2011, our CFPS estimate falls a penny to $1.30.  Maintain Market Perform. We view the update as disappointing. While we do see significant upside potential in the company's assets, we don't see NEP outperforming until it demonstrates that it can generate material production growth again...something we're not looking for until late this year.

2011-01-31Rodman & RenshawReiterationMarket Perform$7.00
 

NEP recently announced plans to acquire Shengyuan Oil and Gas Technology Development Co. (Shengyuan) for $43.4 million ($10.6 million cash and 5.8 million shares). The acquisition gives NEP a 24-year exclusive contract to explore and develop the 175 km2 Durimu field in Inner Mongolia. To date, 3 exploration wells have been drilled on the acreage, and proved reserves are estimated at 1.5 MMBo. The asset currently has no production. PetroChina has estimated the field to have potential reserves of 143 MMBo, or 105-110 MMBo net to NEP. The deal is expected to close by the end of Q1.

Focus likely to shift to Durimu. Assuming NEP can successfully develop the field, Durimu appears to have a number of advantages over its Jilin assets. First, it provides a much bigger target in terms of reserve potential. Second, it likely generates better returns as the wells appear to have higher deliverability as well as better royalties (25%, vs. royalties on its existing leases which will increase to 40% over the next couple of years). Third, the remaining term on this license is much longer than on its existing licenses (24 years vs. ~12 years). As a result, NEP plans to shift its focus to Durimu over time. Initial plans call for a 3D seismic shoot as well as 10-20 wells over the next 12-18 months. NEP plans to move 2-3 of its drilling rigs to the field to facilitate this activity.

Acquisition appears slightly accretive to our NAV. Given the limited information available about the new asset, we are going to take a conservative approach to valuing it. We are initially risking Durimu's potential by 95%, which equates to 5-6 MMBoe. We value this at ~$55-$60 million, or ~$10.50/Boe, As a result, the acquisition appears slightly accretive to our NAV. As we get more information on the characteristics of the Durimu wells, we will reassess our estimates.

Reducing production forecast. While the company shifts its focus to Durimu, it only plans to drill 30-40 wells annually on its Jilin assets in order to hold production flat. As a result, we're not expecting to see sequential production growth this year until Q4. And given that NEP didn't drill any wells last quarter, and isn't likely to resume drilling until after the Chinese New Year, our production forecast appears too high. As a result, we're trimming our Q4'10 and 2011 production forecast to 1.8 and 1.7 MBo/d, respectively, from 1.9 and 2.0 MBo/d.

Maintain Market Perform. 2010 was a bumpy year for the company, with production having likely fallen ~20%. And given the shift in focus to Durimu, 2011 production is likely down another 10%-15%. With the falling production and lack of near-term catalysts, we don't expect the stock to be a near-term outperformer. As a result, although we see upside potential to our $7 NAV, we're maintaining our Market Perform rating at this time.

2010-10-07Rodman & RenshawReiterationMarket Performn/a
 

NEP's board has appointed Mr. Shaohui (Steven) Chen as Acting CFO, effective immediately, after its interim CFO resigned. The interim CFO had taken the post during the forensic audit period, and it appears that he resigned now that this job has been completed…allowing NEP to appoint a permanent CFO. While we need to get to know Mr. Chen, we like that he appears to have U.S. public market experience (including complying with U.S. reporting standards…which was one of NEP's key issues) and will likely be based stateside, providing investors with easier access to management. We think this is another step in the right direction for NEP. No change to our market perform rating as we currently see more upside elsewhere in the E&P space.

2010-09-22Rodman & RenshawReiterationMarket Performn/a
 

NEP announced that it has engaged Ernst & Young to assist with its efforts to comply with Section 404 of the Sarbanes-Oxley Act. Under the engagement, E&Y is expected to work with NEP to prepare a compliance program in order to more effectively manage its internal financial reporting and control systems. We view the move as a step in the right direction following the company’s accounting-related issues earlier this year. While its external financial auditor remains unchanged, we expect NEP to transition these responsibilities to a more widely-known accounting firm over the next few quarters. Maintain Market Perform rating. No change to our rating as a result. While this is a positive step, we think the company still has more work to do before investor confidence is restored. As a result, we think the stock is likely to remain at a discount to our $7 NAV in the near term.

2010-09-08Rodman & RenshawDowngradeMarket Performn/a
 

NEP finally updated its YTD results, which look quite disappointing from a production standpoint. Production trended down in Q1 and Q2, and only averaged 2.2 MBo/d in Q2, 24% below our forecast and down 12% y/y. The production decline was due to the absence of new wells drilled to date in 2010, which the company attributed to bad weather (a snowstorm in Q1 and flooding in Q2). We do need additional color on this as the company's drilling unit remained active drilling for 3rd parties. It doesn't sound like any new wells have been drilled in Q3 either, so production is likely still in decline. Given the lack of drilling, our old 2010 production forecast of 3.0 MBo/d was too aggressive; we are reducing this to 2.2 MBo/d as a result.

Future drilling program is a question mark. Our former expectations were based upon a drilling program of ~60-70 wells in 2010 and ~100 wells per year after that. While our 2010 forecast was too aggressive, the company was unable to provide guidance on when its drilling program would resume or what the drilling pace would be once it resumes. Given this, we are going to take a much more conservative view of NEP's future production growth, and lower our 2011 production forecast to ~2.2 MBo/d from 3.6. Given the lower production forecast for 2010 and 2011, our CFPS estimates fall to $1.64 and $1.63 from $1.75 and $2.06, respectively.

Valuation breakdown. After adjusting our numbers for NEP's updated financials, our NAV falls to $7 from $9. The breakdown is ~$3/share for the company's year-end 2010e proved reserves (valued at ~$20.50/Bbl), ~$2/share for its drilling unit (valued at 2.5x EBITDA), and ~$2/share of net cash. The decline in our NAV resulted primarily from removing upside reserve potential from our valuation (which was ~$2-$3/share). This impact was partially offset by a higher valuation for the drilling unit and a higher cash balance.

Downgrading to Market Perform. While we do see upside to our NAV from current levels, we think NEP is likely to trade at a discount until it can restore investor confidence, which could take some time. Additionally, its declining production profile probably creates an added headwind (and as the company could not provide color on its future drilling program, we can't accurately forecast when growth will resume). These issues likely keep the stock from outperforming in the near-term.

2010-05-28Rodman & RenshawDowngradeUnder Reviewn/a
 

Due to the company's failure to stay current on its financial reports (it has yet to file its most recent 10-K and 10-Q), the AMEX has suspended trading in NEP. Trading is not expected to resume until the company’s financials are up to date, which we think is likely to be July at the earliest (NEP is still conducting a forensic audit, which isn’t likely to be completed for another 2-3 weeks). Additionally, the company has until July 14 to bring its financial statements up to date or it risks being delisted from the AMEX. And based on our talks with the company, we think there is a risk the company could miss the July 14 deadline. Based on our discussions with the company, it sounds like our $9 NAV won't materially change as a result of the financial restatements. However, given the uncertainty and lack of updated numbers, we can't be as confident about that as we’d like. Based on this, plus the potential that NEP could be delisted, we're placing our rating under review until we are able evaluate the company's updated financial statements.

2010-04-16Rodman & RenshawReiterationOutperform$11.00
 

While there is still a large degree of uncertainty, it does sound like the company’s operations remain on track, so we don’t think there will be a material impact to our $11 target price.

2010-03-09Rodman & RenshawReiterationOutperform$11.00
2009-12-28Rodman & RenshawReiterationOutperform$11.00
2009-11-16Rodman & RenshawReiterationOutperform$7.00
2009-11-04Rodman & RenshawInitiationOutperform$7.00
CNEP
Oil & Gas
SCORE
-1
UNDER REVIEW
READ: Score Cards Explained
SAFETY/RISK SCORE
EXTREME RISK
DETAILS: Safety/Risk Model for CNEP
Current Price:  n/a
F10k Day (2004-09-17): -100.00%$0.80
2009 Close: -100.00%$9.25
2010 Close: -100.00%$5.76
2011 Close: -100.00%$2.05
High (2012-02-22): -100.00%$3.68
Low (2012-10-02): -100.00%$0.20
Exchange:
Market Capitalization: n/a
Total Shares: 31.36 mill
Float: n/a
Avg Volume: n/a
Last Quarter: 2011-03-31
Revenue (MRQ): 21.75 mill
Net Income (MRQ): 6.91 mill
Op. Cash Flow (MRQ): 13.55 mill
all financial data provided without warranty