After withdrawing its production guidance earlier this week, New Zealand Energy (CVE:NZ) has seen a slew of sharp downgrades from analysts, but many have retained their view of potential upside for the junior oil and gas producer.
The company has coverage from eight analysts, including Credit Suisse, Dundee Securities, Canaccord Genuity, Haywood and M Partners, among others, with revised target prices ranging from 30 cents all the way up to $1.50.
On Monday, New Zealand Energy revoked its 3,000 barrels of oil equivalent per day (boe/d) outlook for the end of the first quarter, as flow rates from producing wells have continued to decline. The company is currently producing around 335 bopd from four wells. While completion results are pending from two wells, which could add to production, the company acknowledged that 3,000 boe/d is not attainable in the near-term.
Management also announced the decision to delay further drilling to focus on the completion of its acquisition of assets from Origin Energy. The company's plans are to focus in the near-term on lower-cost exploration and production opportunities that are close to infrastructure. Indeed, the acquisition from Origin includes new petroleum licenses that are central to a network of oil and gas gathering pipelines and the full-cycle Waihapa Production Station.
New Zealand Energy's first priority, upon closing the acquisition, will be the reactivation and recompletion of existing wells that lie within the Origin upstream acreage - the rationale being that these wells offer swift tie-in opportunities for production growth at lower cost. The acquisition is still expected to close in the second quarter of 2013, albeit later than originally forecast.
Lower production has also prompted concerns about the company's financial situation. New Zealand Energy currently holds $16.8 million of net working capital, which is insufficient to complete the Origin transaction - initially announced in May of last year. The junior oil and gas play has an outstanding payment of some $35 million on the deal, and is now exploring a range of alternate financing arrangements.
As a result of the concerns, Dundee analysts' revised valuation yielded a significantly lower risked net asset value of C$1.10 per share, down from $3.16 per share previously, and hence a lower target of C$1.10 per share.
Nevertheless, analysts David Dudlyke and Jessica Lindskog, who held their "buy" rating, noted that despite the "swinging cuts" to their risked exploration upside, the revised assessment still represents triple that of the current market valuation.
They highlighted potential catalysts for the company, including completion results at the Arakamu-2 and Wairere-1A wells, as well as resolution of the current funding gap and closing of the pending Origin deal.
M Partners, while also decreasing its price target to $1.50 from $3.25, continued to rate the company a "buy" based on material growth expected out of the Taranaki over the medium term. This is combined with the potential upside offered by the East Coast Basin, where industry activity is set to begin in April and where the company is targeting its own wells in November.
Still, M Partners analysts note that barring any near-term exploration or credit-related financing success, they expect the disappointments over the last few months to weigh on the shares for some time.
New Zealand Energy holds the largest onshore exploration land package on New Zealand's North Island, with conventional opportunities in the country's main Taranaki Basin production fairway and both conventional and unconventional potential in the untapped, East Coast new frontier of the nation's oil shales.
Six exploration wells are planned for 2013 in the East Coast, of which two will be drilled by New Zealand Energy at Ranui and Castlepoint in November.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.