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Kalkine IPO Report

Should You Subscribe for the IPO of Finder Energy Holdings Limited?

Mar 10, 2022

The Offering

Company Overview

Finder Energy Holdings Limited, founded in 2004, is an oil and gas exploration company based in Perth, Western Australia. The company has a significant acreage portfolio in North West Shelf (NWS), a region abundantly rich in hydrocarbons in Australia. Recently, the company has expanded into the UK’s North Sea with exploration permits and licenses for proven oil and gas. The firm holds a renowned position as a successful explorer in the industry with a proven track record of identifying hydrocarbons with the help of large seismic databases and leading geoscience technologies.

Corporate Structure of the Company

Source: IPO Prospectus

Business Model

The business model of Finder Energy Holdings Limited encompasses value creation in the exploration stage of oil and gas assets. The following are the critical aspects of the company's business model:

  • Seismic data and Geoscience Technological capabilities:  The company has access to substantial seismic databases in the NWS and the North Sea region, including 3D seismic data, 2D seismic data, and private seismic data. The organization was able to attain this level of accessibility by collaboration with many oil and gas technology companies.
  • Acreage capture: The company's extensive and advanced seismic databases, along with technical services, provide it with a competitive advantage in identifying and seizing fresh exploration possibilities in the NWS and the North Sea regions. The company usually purchases land through competitive acreage bidding processes held by the Australian and UK governments. The corporation has a track record of outbidding its competitors, and presently has ten exploration licenses in its portfolio.
  • Farmout Transactions: The company is farming out land to top industry partners to introduce experienced operators to projects, cut operating and drilling costs, and achieve a faster return on exploratory property.

Key Highlights

  • Harnessing New Opportunities: The company is continually looking for new exploration opportunities with the help of 3D seismic data and has expanded its existing portfolio by reinvesting in new drilling permits and licenses. Also, to maintain consistent activity throughout the exploration cycle, the organization is constantly analyzing new growth options and streamlining its portfolio.
  • Use of Proceeds: The company estimates that the gross proceeds from this offering will be approximately AU$15.00 million, assuming an initial public offering price of AU$0.20 per common share. The company intends to use these proceeds primarily for the planned exploration activities, improve financial flexibility, pay for the offer cost, and provide working capital.
  • Dividend Policy: The dividend payment policy of the company is entirely determined by its profitability and other considerations, such as the business's capital and operating spending requirements. The organization will not pay dividends in the near future since it focuses on reinvesting all cash flow into the business to maximize growth.
  • Kanga-1 Exploration: The drilling of the Kanga-1 exploration well, contracted by permit operator SapuraOMV, will begin on May 1, 2022. The company owns a 15% stake in Kanga, and SapuraOMV pays a promotional part of the well's cost. Kanga-1 is looking for considerable resource potential in the heart of the Northern Carnarvon Basin and will provide investors with near-term upside potential if drilling goes well.
  • Rising Uncertainty in the Oil Sector: The short-term perspective is clouded by a high level of uncertainty caused by several variables such as Russia's invasion of Ukraine, the production decision of OPEC+ and the increasing drilling rate for oil and natural gas producers. The amount to which sanctions on Russia are implemented will significantly impact the short-term oil prices.

Financial Highlights:

Source: IPO Prospectus 

Below is an analysis of the main factors which affected the company’s operations and relative financial performance:

  • EBITDA: During FY21, the company reported a higher EBITDA loss of AU$ 2.68 million as compared to EBITDA loss of AU$ 1.825 million in FY 20. The higher EBIDA loss for FY 21 is primarily due to an increase in exploration and evaluation expenditure to AU$ 2.68 million compared to AU$ 1.825 million in FY20.
  • Net Profit after Tax: For FY21, net losses for the company expanded to AU$ 2.00 million as compared to loss of AU$ 1.33 million in FY20.
  • Cash flow from operations: During FY21, the company reported higher cash flow from operations to AU$ 0.25 million as compared to cash used AU$ 0.37 million in FY 20. The cash flow from operation mainly improved by higher non-cash expenses of AU$ 2.86 million versus AU$ 2.13 million in FY20.

Key Management Highlights

Associated Risk (High)

An investment in the IPO of "FDR" is exposed to a variety of risks such as:

  • Oil and Gas Price: The price at which the company sells its oil and gas can influence its financial success and permit value. Any significant drop in realized oil and gas price might cause delays in transactions and exploration programs, as well as a reduction in the company's booked reserves.
  • Estimating Hydrocarbon Reserves: Estimating hydrocarbon reserves and resources is accustomed to uncertainties regarding technical data and the interpretation of that data. Hence, with the varying estimates, development and production plans may differ, and any downward revision of reserves and resources estimates may adversely impact the firm's financial performance.
  • Regulatory Risk: The company's operations are subject to Australian and UK regulatory requirements. Any changes to these requirements may affect or restrict its right to conduct its business of exploration and development activities.
  • Other Risks: The company's other risks include the cost of drilling, exploration costs, equipping and developing operating wells. Hence, a surge in these costs may adversely impact the company's viability.

Conclusion

Finder Energy Holdings Limited is primarily engaged in the oil & gas exploration business and has no revenues to date. Furthermore, increased exploration and evaluation costs have hampered the firm's profitability and earnings. Additionally, the management plans to reinvest the entire cash flow to expand its business without distributing any dividend to its shareholders in the near to medium term. The business intends to utilize the proceeds from this offering to cover the escalating expenses of drilling, seismic, and geoscience and explore new drilling possibilities for expansion.

Therefore, based on the above rationales, we have assignedthe IPO of Finder Energy Holdings Limited with a “Neutral” rating, which implies that the attractiveness of this IPO appears to be low given the associated risks and the current market scenario and this might only be suitable forinvestors with a high-risk appetite [basis further evaluation]. 

*Please note that an IPO can be postponed or put on Hold at the discretion of the company or regulatory authority.


Disclaimer-

Kalkine Equities LLC provides general information about companies and their securities. The information contained in the reports, including any recommendations regarding the value of or transactions in any securities, does not take into account any of your investment objectives, financial situation or needs. Kalkine Equities LLC is not registered as an investment adviser in the U.S. with either the federal or state government. Before you make a decision about whether to invest in any securities, you should take into account your own objectives, financial situation and needs and seek independent financial advice. All information in our reports represents our views as at the date of publication and may change without notice.

Kalkine Media LLC, an affiliate of Kalkine Equities LLC, may have received, or be entitled to receive, financial consideration in connection with providing information about certain entity(s) covered on its website.