niko resources ltd. (nko-t, c$8.17) · niko resources ltd. (nko-t) 6/13/13 alan knowles, cfa, cma...

Research Report – June 13, 2013

Member of the Canadian Investor Protection Fund

Please see rating structure, disclaimers, and notes on pages 9-12

Niko Resources Ltd. (NKO-T, C$8.17)

Rating Buy Alan Knowles, CFA, CMA403-509-1931 [email protected]

Target Price C$15.00 Return 84%

Analyst Certification: See page 10; Important Information and Legal Disclaimers: See page 9

Doubles 2P Reserves – Issues $64 Million Senior Notes

Overall Risk Rating Very High Event Releases reserves update and issues new senior notes.

Valuation Our target price of C$15.00 is supported by the Company’s core NAV and does not assume any value for the extensive exploration inventory. We value the planned exploration drilling over the next six to nine months at approximately $5.00 on a risked basis.

Impact – Positive The reserves update is substantial, and accompanied by similar increase in NPV10.

2P Reserves Increase 112% – 2P reserves increased 112% to 800 bcfe; proved reserves increased 159% to 550 bcfe. The NPV10, after tax, increased 93% to $1.3 billion – equivalent to $25.64 per share. The increase was driven by the filing of development plans for three previous series’ of discoveries. There were nil to slightly positive revisions to the opening Indian and Bangladeshi reserves. This update does not include the recent MJ 1 discovery.

Senior Note Issue Provides Bridge – Niko issued $63.5 million (net $58.5 million) of senior notes. Principal payments commence in August 2013 at $5.3 million per month for 12 months. We view this as a bridge financing to mitigate the exposure to a near term funding shortfall pending a review of the borrowing base following the reserves update. The asset sale deals are still “live”.

D6 Remedial Work Soon – Reliance is slated to commence remedial activity on the existing D6 producing fields in July, with first impact potentially in August. In a recent release, the Company stated it may expand the workover and potentially sidetrack plans from the original budget.

Pananda Unsuccessful, Move to Elang – In Indonesia, the Pananda 1 exploration well was abandoned after encountering a non-commercial, tight gas reservoir. The rig is moving to Elang to drill one of the larger Indonesian prospects commencing in early July.

Forecasts – Our 2014F CFPS (diluted) decreases to $0.90 from $1.18 and our 2015F CFPS (diluted) to $1.09 from $1.16. We have not yet taken into account the expected increase in the natural gas price, utilizing the $4.20 per mcf mandated by the government, which expires March 31, 2014.

Target Price, Rating – We maintain our BUY rating and target price of C$15.00.

Risks We rate the overall risk of Niko as Very High. The Company is reliant on closing a portion of the announced asset sales to fund its planned fiscal 2014 capital program. An expected Indian gas price increase effective April 2014 is waiting on formal government approval, which would materially increase that year’s cash flow from our current forecast.

Catalysts Niko is waiting on the outcome of several events for which, to a large degree, the timing is not in its control. These include formal Indian Government approval of the natural gas increase and closing on the announced asset sales that total $157 million.

Forecast Risk (Moderate) 5 Financial Risk (High) 9 Valuation Risk (High) 10 Political Risk (High) 8 Risk Profile Definitions: See page 11 52-Week High/Low C$24.02/C$5.13 YTD Performance -23% Dividend Yield 0% Shares O/S 70M (basic)/ 76M (F/D) Market Capitalization $574M Cash $44M Debt $205M Working Capital Def’y $62M Enterprise Value $797M Daily Volume 528,000 YE 2012 Cash Balance $44M Currency US$ unless noted

Company Profile Website – www.nikoresources.com CEO – Ed Sampson About the Company – Niko is an

international oil and gas exploration and development company with significant growth assets in Bangladesh, India, Indonesia, Kurdistan, Madagascar, Pakistan and Trinidad.

Estimates

Price Performance

Source: Capital IQ and Haywood Securities

2013F 2014F 2015F

Prod'n - boe/d 26,344 18,994 21,595

% Liquids 4% 4% 5%

CFPS - Dil (C$) $2.12 $0.91 $1.09

P/CF - Dil 3.9x 9.0x 7.5x

EV / DACF 4.2x 12.3x 11.2x

Cap. Ex. - US$mm 228 148 158

http://www.nikoresources.com/

Niko Resources Ltd. (NKO-T) 6/13/13

Alan Knowles, CFA, CMA403-509-1931 [email protected]

Source: Niko and Haywood Securities

Niko Resources Ltd. Ticker: NKO - T Price C $8.17 Rating: Buy

Ann'l Div/Yd : C $0.00 0.00% Implied All-in Return: 84% Target: C $15.00

Investment Highlights Capital Structure (CD$mm's) Price HistoryShares O/S % dil'n 70.2

Options 8% 5.4

Convertible Debt - out of the money (2.8mm) -

Fully Diluted 75.6

Major Shareholders:

Directors & Officers 7% 4.9

FMR 8% 5.9

Liquidity (90dMA) 528,000

Market Capitilization 72% $573.5

Net Debt - excl conv. 14% $108.6

Conv. Debt (@$11.30) 14% 115.0

28% $223.6

Enterprise Value 100% $797.1

Last Financing (Dec 12) 19.7 mm shares @ $8.50

52 wk H/L $43.68/$5.13

Areas of OperationGlobal Operations

Financial ($mm's) 2012 2013F 2014F 2015F % Chg '15/'14Revenue (net trans.) 362.8 235.3 155.9 186.8 20%

Cash Flow 234.3 130.2 64.7 79.2 22%

CFPS Basic (US$) $4.54 $2.26 $0.92 $1.13 22%

CFPS Dil - incl. conv. Debt (US$) $4.54 $2.11 $0.90 $1.09 20%

Consensus $1.73 $1.33 $1.73 30%

CFPS Basic (C$) $4.51 $2.26 $0.93 $1.13 22%

CFPS Dil - incl. conv. Debt (C$) $4.51 $2.12 $0.91 $1.09 19%

Earnings (Loss) (322.5) (212.4) (20.0) (14.8) n.m.

EPS Basic (US$) ($6.25) ($3.68) ($0.28) ($0.21) n.m.

EPS Diluted - excl. conv. Debt (US$) ($6.25) ($3.68) ($0.28) ($0.21) n.m.

Capital Expenditures - E&D 168.6 227.8 148.0 157.5 6%

Reinvestment Ratio 0.7x 1.7x 2.3x 2.0x -13%

Capital Expenditures - incl. acq/disp 439.0 202.8 133.0 157.5 18%

Net Debt (Working Capital) 211.2 62.5 310.9 400.9 29% Undeveloped Land (000's,net acres) 2009 2010 2011 2012 % of Total

Net Debt/CF 0.9x 0.5x 4.8x 5.1x 5% India 1,308 1,301 1,301 1,281 5%

Production 2012 2013F 2014F 2015F % Chg '15/'14 Bangladesh 1,117 1,117 1,124 1,117 4%

Total Gas 216.1 151.2 109.2 123.4 13% Pakistan 2,450 2,450 2,452 2,450 9%

Liquids (bbls/d) 1,911 1,145 801 1,021 27% Kurdistan 75 75 77 102 0%

Total (boe/d) 37,928 26,344 18,994 21,595 14% Madagascar 2,704 2,704 3,122 3,121 12%

Total (mmcfe/day) 227,566 158,064 113,963 129,572 14% Trinidad 0 461 1,205 1,504 6%

Indonesia 2,176 11,788 12,993 16,599 63%

% Gas 95% 96% 96% 95% -1% Total 9,830 19,897 22,274 26,174 100%

% Liquids 5% 4% 4% 5% 12%

Netbacks ($/boe) 2012 2013F 2014F 2015F % Chg '15/'14 Reserves (mmboe) 2009 2010 2011 2012 % Chg '11/'10

Revenue (net trans.) $26.14 $24.47 $22.49 $23.70 5% Independent Engineers: Ryder Scott Ryder Scott Ryder Scott Ryder Scott

Royalties + Profit Pete. $2.99 $3.85 $3.53 $3.14 -11% Proved 194 183 130 35 -73%

Operating Costs $2.90 $3.57 $4.63 $5.91 28% Probable 85 80 71 28 -61%

Net Operating Revenue $20.25 $17.06 $14.34 $14.64 2% 2P 280 264 201 63 -69%

Cash Flow $16.88 $13.54 $9.33 $10.05 8% Cont't+Prosp Resource (Best) 150 150 4,783 n/a n/a/

D&D $10.32 $13.75 $9.41 $10.28 9% Total

Earnings (Loss) ($23.24) ($22.09) ($2.88) ($1.88) -35%

Proved/2P 69.3%

Cash Flow Sensitivity CFPS % Chg CFPS CFPS % Chg CFPS

D6 Gas Price ($0.25/mmbtu) $0.38 41% $0.16 14% Res. Repl. Cost - Proved n/a

D6 Gas Production (1 mmcf/day) $0.02 2% $0.02 2% Res. Repl. Cost - P+P n/a

WTI Oil Price (US$1/bbl) $0.00 0% $0.00 0% 3-year average- Proved n/a

D6 Oil Production (100 bbls/day) $0.04 4% $0.04 4% 3-year average- P+P n/a

Valuation Parameters 2012 2013F 2014F 2015F % Chg '15/'14 Times Prod. Replaced (2P) n/a

Price/CF (basic) 2.7x 3.6x 8.8x 7.2x -18%

Price/CF (diluted) 2.7x 3.9x 9.0x 7.5x -16% Management Directors

Target Price/CF (basic) 8.9x 6.6x 16.2x 13.3x -18% Edward Sampson - President, CEO Edward Sampson - Chairman

Target Price/CF (diluted) 8.9x 7.1x 16.5x 13.8x -16% William Hornaday - COO William Hornaday

EV/DACF 2.5x 4.2x 12.3x 11.2x -9% Glen Valk - VP Finance, CFO Jim Cummings

Target EV/DACF 8.6x 7.9x 19.7x 17.2x -13% Keith Rawlinson - VP Exploration Conrad Kathol

EV/boe/d $23,569 $30,259 $41,968 $36,912 -12% Gary Christenson - VP Indonesia Operations Wendell Robinson

Target EV/boe/d $53,232 $44,093 $61,157 $53,789 -12% Larry Fisher - VP & Country Mgr - India, Bagladesh & Pakistan

Brian Adolph - VP & Country Mgr - Caribbean, South Asia & Madagascar

Assumptions 2012 2013F 2014F 2015F % Chg '13/'12

WTI (US$/bbl) $97.24 $90.92 $90.00 $90.00 0%

Brent ($US/bbl) $113.79 $109.01 $106.50 $105.00 -1%

F/X (US/CD) $1.01 $1.00 $1.00 $1.00 0%

Analyst Ratings Potential Upside

Tgt: Rge & Avg. $7.25-$15.00 $12.65 55%

No. Analysts

Sector Outperform (Buy) 5

Sector Perform (Hold) 5

Sector Underperform (Sell) 2

Total 12

Company Website: www.nikoresources.com Analyst: Alan Knowles, CFA, CMA - [email protected], 403-509-1931

Co. Head Office: 403-262-1020

Alpha: Over the next couple of years Niko has exposure and will be drilling several very large prospects. The Company has maintained a high working interest that with success could materially increase the valuation of the Company.

Niko's recoverable resource relates to the D6 block and NEC

25. While the D6 report is current, the NEC 25 report was

prepared in 2005 (150 mmboe) and has not been updated

despite several exploration successes and new seismic

acquisition that was not taken into account in the 2005 report.

Niko has interests in multiple countries around the world

including, India, Bangladesh, Pakistan, Madagascar, Indonesia

and Trinidad.

Commencing in December 2012 Niko drilled the first well of a

continuous multi-year offshore exploration program offshore

Indonesia that will test the deep water prospects identified by the

Company and its partners. Niko is substantially carried on ten

wells on different blocks and will initially focus its efforts on the

carried blocks

Niko's Year End is March 31 - Reports in US$

• NEC 25 Discovery Yet to be Developed - On the NEC 25 block, 1.8 tcf of recoverable resource (Niko 180 bcf) was recognized

in 2005. The continuing exploration success since this estimate was prepared suggests a material increase, however a resource

report has not yet been prepared. There are now 15 discoveries on the block.

• D6 - Moving to Monetize Discoveries - BP is now a partner with Reliance and Niko on D6. While D6 production has steadily

declined in the past year development approval for some discoveries not currently on production (18 discoveries on the block)

have been received. Resolution of the future allowable gas price will likely result in remedial work commencing on the field, which

has seen viturally none since production startup in early 2009. To date, commerciality has been declared for the R Series (D34)

and 4 satellite fields to the original 2 on production have been approved for development - which in total could add 0.9 bcf/day of

production (Niko 90 mmcf/day).

• Deep Water Drilling Rig Contracted for Multi-Year Drilling Program Offshore Indonesia - Niko has contracted a drilling rig

for four years, with a one year option to extend. Niko has typically retained a 30% to 50% WI in the blocks, and is carried for the

majority of the cost of the first exploration well on most blocks.

• Debt Restructuring - Niko completed a bought deal in December 2012 to issue 12.0 million shares (13.8 million with the

overallotment) at C$8.50 per share for gross proceeds of C$100 million (C$115 million with overallotment) and concurrently issued

5.9 million shares also at C$8.50 per share for gross proceeds of C$50 million to a private party. The Company also issued C$100

million (C$110 million with the overallotment) of convertible debentures due Dec. 31/17 with a 7% coupon and C$11.30 conversion

price. The proceeds were used to repay the $310 million convertible debentures due Dec. 30/12 and for general corporate

purposes.

2014F 2015F

0

100

200

300

400

2013F 2014F 2015F

Revenue ($mm's)

$0.00

$1.00

$2.00

$3.00

2013F 2014F 2015F

Cash Flow per Share

0

5,000

10,000

15,000

20,000

25,000

30,000

2013F 2014F 2015F

Daily Production (boe/d)

7

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2.0

$0

$5

$10

$15

$20

$25

$30

$35

$40

$45

$50

Volume

Price

50dMA



Investment Thesis

Niko’s production base is almost entirely natural gas and is currently tied to longer-term, fixed price gas sales contracts. The Company has developed a large inventory of high impact natural gas discoveries and yet to be drilled exploration prospects, which, with success, are material against the current production base. Due to the significant domestic natural gas supply shortfall India experiences, there is a ready market for any new Indian production and an expectation that gas prices will increase to a market based, versus fixed, basis. The Indonesia exploration program to be undertaken in fiscal 2014 exposes Niko to significant growth potential. The fact that Niko has only 75 million shares outstanding (fully diluted; excluding dilution from out-of-the-money convertible debentures) means that a large discovery would be meaningful on a per share basis.

Niko reports in US$. Unless otherwise noted all references are in US$.

Risks

Significant Investment Risks

The investment to which this report relates carries various risks, which are reflected in our Overall Risk Rating. We consider the following to be the most significant of these investment risks:

Niko’s expected fiscal 2014 capital expenditures exceed its cash flow by approximately $45 million. The Company has been in discussions regarding several asset transactions that total in excess of $157 million and has indicated that it expects to close on some of these in the near term. Until the Company has closed on a large portion of the expected asset transactions and can clearly fund its capital program, there is a risk that it will defer its exploration drilling in Indonesia.

Niko is waiting, and highly reliant, on the Government of India’s approval of a recommended gas price increase that would result in the gas price almost doubling to $8.00 per mmbtu from $4.20 currently (effective April 1, 2014, in Niko’s case). Timing is highly uncertain, but is expected before mid-2013. The increase in the gas price would positively impact the Company’s cash flow and result in a renewal in field activity that would increase production. The expectation of the gas price increase has prompted the operator (Reliance) of the D6 block to recommence drilling and workover operations (essentially no activity since startup of production in 2009) following two years of production decline due to an impasse on the gas price issue between the government and the operator. If the gas price is not increased, we expect the remedial work that has commenced would cease.

Growth in the Company’s value in excess of its Indian assets is reliant on exploration success primarily in Indonesia. While Niko has drilled two discoveries (one non-commercial) to date in Indonesia, there is insufficient data available to estimate their potential value. The Company has contracted a semi-submersible drilling rig to conduct a four-year drilling program. The Company is carried for a large proportion of its costs for up to eight wells, but must still provide funding for its share (especially after the carry period for certain wells) of future costs which will be at risk through internal generation in the longer term without the Indian gas price increase noted above.

Our Risk Profile Parameters ratings and Overall Risk Rating are set out on the cover page and are explained in our Rating Structure section under “Overall Risk Rating” and “Risk Profile Parameters”. These ratings are an integral part of our Report.



Valuation

Our target price of C$15.00 is supported by the Company’s core NAV and does not assume any value for the extensive exploration inventory. We value the planned exploration drilling over the next six to nine months at approximately $5.00 on a risked basis. We will revisit our valuation as the Company’s balance sheet risk, as it relates to its ability to fund the entire year’s capital program from cash flow and asset transactions, are dealt with.

Niko – Core NAV and Impact of Near-Term Catalysts – Does not include YE13 Summary Reserve Info


Source: Haywood Securities

NAV NAV/Sh

Base Valuation

2P Reserves As At March 31, 2012 India, Bangladesh NPV10 742 10.57$

Contingent Resource As At March 31, 2012 India (D6 & NEC 25) & Trinidad (5c) Risked Value 500 7.12$

Net Debt As At December 31, 2012 (224) (3.19)$

1,018 14.50$

Expected Proceeds on Announced Asset Transactions - Signing April/May 2013 157 2.24$

Expected Proceeds on Kurdistan Settlement - Closing May - July 2013 15 0.21$

1,190 16.95$

Expected 12 Month Exploration Exposure

India MJ 1 Risked, Best Case Prospective Resource 195 2.78$

Indonesia 5 Wells Risked, Best Case Prospective Resource 475 6.77$

670 9.54$

1,860 26.50$

Niko - 2014F Cash Flow Sensitivity (C$ CFPS - Basic) NKO-T

WTI ($US/bbl)

$75.00 $80.00 $85.00 $90.00 $95.00 $100.00 $105.00

$2.70 $0.58 $0.59 $0.59 $0.60 $0.60 $0.60 $0.61

$3.20 $0.69 $0.70 $0.70 $0.71 $0.71 $0.71 $0.72

$3.70 $0.81 $0.81 $0.81 $0.82 $0.82 $0.83 $0.83

$4.20 $0.92 $0.92 $0.92 $0.93 $0.93 $0.94 $0.94

$4.70 $1.03 $1.03 $1.04 $1.04 $1.04 $1.05 $1.05

$5.20 $1.14 $1.14 $1.15 $1.15 $1.15 $1.16 $1.16

$5.70 $1.25 $1.25 $1.26 $1.26 $1.27 $1.27 $1.27

D6

Ga

s P

rice

($

/mm

btu

)

Niko - 2015F Cash Flow Sensitivity (C$ CFPS - Basic) NKO-T

WTI ($US/bbl)

$75.00 $80.00 $85.00 $90.00 $95.00 $100.00 $105.00

$2.70 $0.63 $0.65 $0.67 $0.69 $0.71 $0.73 $0.75

$3.20 $0.77 $0.79 $0.81 $0.83 $0.85 $0.87 $0.89

$3.70 $0.92 $0.94 $0.96 $0.98 $1.00 $1.02 $1.04

$4.20 $1.07 $1.09 $1.11 $1.13 $1.15 $1.17 $1.19

$4.70 $1.22 $1.24 $1.26 $1.28 $1.30 $1.32 $1.34

$5.20 $1.36 $1.38 $1.40 $1.42 $1.44 $1.46 $1.48

$5.70 $1.51 $1.53 $1.55 $1.57 $1.59 $1.61 $1.63

D6

Ga

s P

rice

($

/mm

btu

)



Opportunities/Catalysts

Niko is waiting on the outcome of several events for which, to a large degree, the timing is not in its control. These include formal Indian Government approval of the natural gas increase, and closing on the announced asset sales that total $157 million.

Approximate Doubling in 2P Reserves and NPV10

Reserves Value Increases 93%

Niko’s YE13 reserves and the NPV10 of those reserves have increased materially.

Proved reserves increased 159% to 550 bcfe from 212.3 bcfe last year;

2P reserves increased 112% to 800 bcfe from 377.3 bcfe last year;

The NPV10, after tax, increased 93% to $1.3 billion from $0.67 billion last year.

Niko – Reserves Summary 2009-2013


Increase Tied to Filing of Development Plans of Existing Discoveries

Last year Niko had contingent resource of 600 bcfe related to the three projects noted below. Assuming little change in the opening reserves the addition for the year recognizes approximately two-thirds of this total suggesting there is the potential for future increases as the project development plans mature. Driving the increase was the fact that during the year development plans were filed for three series of discoveries (some of which were made several years ago), including:

The R Series and Satellite Fields on the D6 block (India; Niko 10% WI). These are two series of discoveries that will likely be on production in late 2016 and into 2017.

The NEC 25 J Series of discoveries in the southern portion of the block (India; Niko 10% WI), expected to be on production in 2017.

The 5c discoveries (Trinidad; Niko 25% WI), operated by BG. These discoveries are being tied back to the nearby existing Dolphin offshore development, which is tied into Atlantic LNG.

% Chg

2009 2010 2011 2012 2013 '13/'12

Reserves Summary (bcfe)

Proved 1,166.8 1,100.7 782.6 212.3 550.0 159%

Probable 511.3 481.2 425.0 165.1 250.0 51%

2P 1,678.1 1,581.9 1,207.6 377.3 800.0 112%

NPV10 After Tax

2P 1,848 1,832 1,827 674 1,300 93%

NPV10/mcfe $1.10 $1.16 $1.51 $1.79 $1.63 -9%



Opening Reserves Have Positive Revision

With respect to the opening reserves, the Company noted that:

With respect to the existing Indian producing fields on the D6 block in India (D1/D3 and MA; Niko 10% WI) there were virtually no revisions to the proved reserves, and there were positive revisions to the 2P reserves.

There was a material positive revision to the Bangladesh (Block 9; Niko 60% WI) proved reserves.

At YE12, the Indian 2P reserves represented 51% of the total, and Bangladesh the balance. The NPV10, however, was strongly Indian weighted at 88% (12% for Bangladesh) due to the considerably stronger netbacks. Last year’s reserve report contemplated a natural gas price increase effective April 2014, which we expect is the case for YE13 (the details have not yet been released). While the government has not yet formally approved the Rangarajan Committee recommended price formula (essentially a price of $8.00 to $8.50 per mcf) the support of the Oil Ministry and PM of India on the matter is, we believe, supportive of ultimate approval.

The May 2013 MJ 1 Discovery Would be Accretive to the YE13 Update

As discussed in our report of May 24, 2013, the MJ 1 discovery represents a value of between $225 to $700 million to Niko based on the pre-drill contingent resource range provided. Given this was a post YE13 event MJ 1 was not included in this reserves update. MJ 1 could be on production within 24 to 36 months, the earlier estimate assuming that regulatory approvals are received on a timely basis.

The pre drill Best Case estimate of MJ 1 was 1.16 tcfe, with the High Case estimate at 3.62 tcfe. Given the pay thickness, we believe the discovery will fall somewhere between the Best and the High Case, which would result in a 31% to 96% increase in the Company’s reserves compared to YE12. This could represent a value of between $225 and $700 million to Niko – or 31% to 95% of the current enterprise value (assuming the current $7.25 per share). The ultimate value could be higher given the high liquids weighting. Clearly a very large discovery for Niko and its partners.

Niko – Pre Drill Potential of MJ 1


Reliance Pre Drill Estimate of Gross Prospective Resource - MJ 1

Mesozoic synrift clastic reservoir, similar to MA, 2 km below D1/D3

Low Best High

Gross

Gas bcf 262 819 2,562

Liquids mmbbls 18 56 176

bcfe 370 1,155 3,618

mmboe 62 193 603

% Gas 71% 71% 71%

% Liquids 29% 29% 29%

Niko 10%

Gas bcf 26 82 256

Liquids mmbbls 2 6 18

bcfe 37 116 362

mmboe 6 19 60

Compare to Niko 2P Reserves YE12

bcfe 10% 31% 96%

mmboe 10% 31% 96%



Realizes $58.5 Million in Senior Unsecured Note Proceeds

Niko has issued $63.5 million in senior unsecured notes. Net proceeds were $58.5 million (costs of $5.0 million or 7.9%). The notes carry a 7% coupon and 12 equal monthly principal repayments of $5.3 million commencing August 13, 2013. These notes will rank equal to the CD$115 million senior unsecured notes issued in December 2012.

Niko has the option to make principal and interest payments in cash or common shares. If the Company opts for the common share option, the effective share price would be 94.5% of the lower of the 15 day or the 5 day volume weighted average prior to the payment date.

The $63.5 million senior note issue, given the repayment schedule, has the makings of a bridge loan. As noted below, the asset transactions are still live but the timing of receipt of proceeds is uncertain. In addition, we expect that the very positive reserve increase will ultimately lead to an increase in the borrowing base.

Likely Increase in Borrowing Base Will Follow

As a result of the $63.5 million senior note issue above, the borrowing base under the existing credit facility has been reduced to $80 million from $100 million, which had been set in September 2012. The Company currently has a three year lending facility with a $225 million revolving credit and a $25 million operating facility.

Given the material increase in the proved reserves we expect that the Company’s borrowing base will be increased, a process that will likely take well into mid to late calendar Q3/13. As with many production related loans, the current lenders are highly reliant on the proved producing reserves in determining the borrowing base. While the Company has not yet released the details of the YE13 reserves, we expect the majority of the 159% increase in the proved reserves was in the proved undeveloped category. A restructuring of the current loan facility is likely required in order to achieve a material increase in the borrowing base commensurate with the improved value of the total proved reserves.

At this point, absent formal government approval for the gas price increase, it is unlikely the lenders would move off of the $4.20 per mcf Indian gas price for future production in their evaluation. Once the gas price increase has been approved, we expect the lending syndicate would also revisit the borrowing base in a separate exercise from that related to the reserves increase.

Asset Transactions Still “Live”

Niko has not provided an update on the status of the previously announced asset transactions (which includes asset sales and potential farm-outs that would involve an up-front cash payment as opposed to a carry on a well to be drilled later). It had previously expected to finalize agreements on $157 million in asset transactions by the end of April 2013. We understand in discussions with management that all of the potential asset sale transactions are still “live”, but are waiting on final paperwork and or approvals (including regulatory), which was essentially confirmed in its second press release today regarding the private placement.

We expect that one of the assets that could be sold is its 60% WI in Block 9 in Bangladesh. In April 2013 Tullow announced the sale of its 30% WI in Block 9 to KrisEnergy Asia Holdings for $42.3 million. This transaction has not yet been approved by the regulator. We expect that due to the building collapse tragedy a significant portion of other government business has been put on hold, including perhaps these types of approvals.



Pananda Exploration Well Abandoned – Moving to Elang 1

The Pananda 1 (30% WI) exploration well drilled on the North Makassar block in western Indonesia has been abandoned. The well spud in late April and was drilled to 19,685 feet (in 7,433 feet of water) in 50 days. While an 80 foot gas column was identified, and the well drilled through over 700 feet of potential reservoir, the reservoir was poor quality and not commercial. Niko was the operator with a 30% WI, and was largely carried for its share of drilling costs for the well. Its partners are Statoil and Black Platinum (an Indonesian company).

The rig is now being mobilized to eastern Indonesia to drill the Elang 1 (70% WI) exploration well on the Cendrawasih block, which is expected to spud in early July In January, Exxon on paid Niko a penalty to back out of the farm-in agreement. Drilling is expected to take 60 to 70 days (similar to Pananda 1), which would mean TD would be reached in early September. Elang 1 is targeting an Oligocene Miocene clastic target that represents one of the largest exploration prospects in the Indonesian portfolio.

Niko has again farmed out the Cendrawasih block, this time to Repsol, which will earn 30% by funding a portion of Niko’s drilling costs for the Elang 1 well. We estimate that between the Exxon payment and the Repsol farm-in, that Niko’s share of the drilling costs have been funded.

India – Producing Fields Update

Gas production on the D6 block (includes D1/D3 and MA) averaged 560 mmcf/day during the first week of April, and declined 6% by the end of May to 526 mmcf/day. As well as the expected decline due to increased water production (finite water handling capability means as water production increases gas production must be curtailed) and the fact Reliance shut in one more well in order to conduct several tests prior to commencing the planned workovers.

Reliance has also stated in public discussions that it will likely increase the planned number of D1/D3 workovers from five to eight. Remedial work on the producing fields, which will start in July, includes several workovers, at least one sidetrack (but with two other candidates), one new well on the MA field, increased compression and of course increased water handling capability. The early results from these efforts should start to become noticeable through arrested declines and ultimately production increases as early as August.

Update to Our Forecast

We have updated our forecast to take into account the issuance of the senior notes and the production update noted above. The production change has a greater impact on fiscal 2014, but substantially less for 2015 as we expect remedial work to follow the relatively same timeline.

Our 2014F production decreases to 114.0 mmcfe from 125.8 mmcfe previously, and 2015F to 129.6 mmcfe from 132.0 mmcfe.

Our 2014F CFPS (diluted) decreases to $0.90 from $1.18 and our 2015F CFPS (diluted) to $1.09 from $1.16. We have not yet taken into account the expected increase in the natural gas price, utilizing the $4.20 per mcf mandated by the government, which expires March 31, 2014.



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Analyst Certification I, Al Knowles, hereby certify that the views expressed in this report (which includes the rating assigned to the issuer’s shares as well as the analytical substance and tone of the report) accurately reflect my/our personal views about the subject securities and the issuer. No part of my/our compensation was, is, or will be directly or indirectly related to the specific recommendations.

Important Disclosures Of the companies included in the report the following Important Disclosures apply:

The Analyst(s) preparing this report (or a member of the Analysts' households) have a financial interest in Niko Resources Ltd. (NKO-T).

As of the end of the month immediately preceding this publication either Haywood Securities, Inc., one of its subsidiaries, its officers or directors beneficially owned 1% or more of Niko Resources Ltd. (NKO-T).

Haywood Securities, Inc. has reviewed lead projects of Niko Resources Ltd. (NKO-T) and a portion of the expenses for this travel have been reimbursed by the issuer.

Haywood Securities Inc. or one of its subsidiaries has managed or co-managed or participated as selling group in a public offering of securities for Niko Resources Ltd. (NKO-T) in the last 12 months.

Other material conflict of interest of the research analyst of which the research analyst or Haywood Securities Inc. knows or has reason to know at the time of publication or at the time of public appearance:

n/a

Rating Structure Each company within an analyst’s universe, or group of companies covered, is assigned: (i) a recommendation or rating, usually BUY, HOLD, or SELL; (ii) a 12 month target price, which represents an analyst’s current assessment of a company’s potential stock price over the next year; (iii) an overall risk rating which represents an analyst’s assessment of the company’s overall investment risk; and (iv) specific risk ratings or risk profile parameters which in their aggregate support an analyst’s overall risk rating. These ratings are more fully explained below. Before acting on our recommendation we caution you to confer with your Haywood investment advisor to determine the suitability of our recommendation for your specific investment objectives, risk tolerance and investment time horizon.

Recommendation Rating BUY – The analyst believes that the security will outperform other companies in their sector on a risk adjusted basis or for the reasons stated in the research report the analyst believes that the security is deserving of a (continued) BUY rating.

HOLD – The analyst believes that the security is expected to perform in line with other companies in their sector on a risk adjusted basis or for the reasons stated in the research report the analyst believes that the security is deserving of a (continued) HOLD rating.

SELL – Investors are advised to sell the security or hold alternative securities within the sector. Stocks in is expected to under-perform other companies on a risk adjusted basis or for the reasons stated in the research report the analyst believes that the security is deserving of a (continued) SELL rating.

TENDER – The analyst is recommending that investors tender to a specific offering for the company’s stock.

RESEARCH COMMENT – An analyst comment about an issuer event that does not include a rating or recommendation.



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Overall Risk Rating Very High Risk: Venture type companies or more established micro, small, mid or large cap companies whose risk profile parameters and/or lack of liquidity warrant such a designation. These companies are only appropriate for investors who have a very high tolerance for risk and volatility and who are capable of incurring temporary or permanent loss of a very significant portion of their investment capital.

High Risk: Typically micro or small cap companies which have an above average investment risk relative to more established or mid to large cap companies. These companies will generally not form part of the broad senior stock market indices and often will have less liquidity than more established mid and large cap companies. These companies are only appropriate for investors who have a high tolerance for risk and volatility and who are capable of incurring a temporary or permanent loss of a significant loss of their investment capital.

Medium-High Risk: Typically mid to large cap companies that have a medium to high investment risk. These companies will often form part of the broader senior stock market indices or sector specific indices. These companies are only appropriate for investors who have a medium to high tolerance for risk and volatility and who are prepared to accept general stock market risk including the risk of a temporary or permanent loss of some of their investment capital

Moderate Risk: Large to very large cap companies with established earnings who have a track record of lower volatility when compared against the broad senior stock market indices. These companies are only appropriate for investors who have a medium tolerance for risk and volatility and who are prepared to accept general stock market risk including the risk of a temporary or permanent loss of some of their investment capital.

Risk Profile Parameters – Oil and Gas Sector Forecast Risk: High (7-10) – The company has a history of missing targets and/or Haywood expects guidance to be lowered. Limited hedging increases commodity risk beyond peers. Higher commodity prices or production is ahead of guidance is required to raise expectations. The company is in the earlier stages of exploration drilling and/or asset delineation whereby type curves and/or production profiles are not yet reliably established. Properties are located in an area(s) with limited access or require infrastructure. Moderate (4-6) – Haywood forecasts are generally in line with guidance. The Company has a history of meeting or exceeding guidance. Forecasts are consistent with current commodity pricing and production guidance. Hedging practices are in line with peers. The company has taken steps to de-risk its main producing or soon to be producing assets and has reasonably reliable type curves and production profiles. Properties are located in an area(s) with access and some infrastructure. Low (1-3) – Haywood forecasts exceed guidance. The Company has a history of meeting or exceeding guidance. Forecasts allow for modestly lower commodity pricing or production levels. Commodity hedging lowers volatility relative to peers. The company has de-risked the majority of its main producing properties and has established reliable type curve and production profiles. Properties are located in accessible areas with available infrastructure.

Financial Risk: High (7-10) – The capital expenditure program in the current year or the next forecast year is not fully funded with a combination of existing debt facilities, cash on hand and/or cash flow and execution of the program depends in part on equity financing. Existing and/or forecast levels of leverage are above average relative to their peers. Moderate (4-6) – The capital expenditure program in the current year or the next forecast year is fully funded with a combination of available debt facilities, cash on hand and/or cash flow. Existing and/or forecast levels of leverage are in-line with peers. Low (1-3) – The capital expenditure program in the current year or the next forecast year is fully funded with a combination of cash flow and/or cash on hand. Existing and/or forecast levels of leverage are below the peer group.



Political Risk: High (7-10) – An environment unfriendly to the industry makes obtaining permits to drill or produce hydrocarbons challenging. Significant government or local opposition exists. Important oil and gas production sharing agreements or exploration permits are not in hand there is at least some uncertainty regarding their issuance. The region or country has had a history of regulatory instability. Moderate (4-6) – An environment friendly to the industry makes obtaining permits relatively straightforward. All levels of government are considered indifferent to hydrocarbon activity. Import oil and gas production sharing agreements or exploration permits are not in hand but there is reasonably certainty that they will issue in the ordinary course. The region or country has historically had a reasonably stable regulatory environment. Low (1-3) – Proper Oil and gas production sharing agreements or exploration permits are in hand. Governments of all levels support the sector. The region or country has historically had regulatory stability.

Valuation Risk: High (7-10) – The current valuation is at a premium to peers. The valuation reflects continued above average production growth and/or continuing strong commodity prices for further appreciation. Moderate (4-6) – The current valuation is generally consistent with peers. The valuation reflects reasonable production growth and/or commodity price appreciation. Low (1-3) – The current valuation is at the low end of historic ranges and/or at a discount to peer valuations. The valuation reflects limited production growth and/or commodity price appreciation.

Distribution of Ratings (as of June 13, 2013) Distribution of Ratings IB Clients

% # (TTM)

Buy 47.6% 68 58.3%

Hold 11.9% 17 8.3%

Sell 0.0% 0 0.0%

Tender 0.0% 0 0.0%

UR (Buy) 18.2% 26 33.3%

UR (Hold) 1.4% 2 0.0%

UR (Sell) 0.7% 1 0.0%

dropped (TTM) 20.3% 29 0.0%

Price Chart, Rating and Target Price History (as of June 13, 2013)

B: Buy; H: Hold; S: Sell; T: Tender; UR: Under Review Source: Capital IQ and Haywood Securities

niko resources ltd. (nko-t, c$8.17) · niko resources ltd. (nko-t) 6/13/13 alan knowles, cfa, cma...

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