Niko Resources Ltd (TSE:NKO) posted that the Government of India cut the price of natural gas by 8% to $5.18/mmBtu from $5.61/mmBtu, which comes in below our base estimates of $5.25-$5.50/mmBtu. We continue to see the revenues from the updated price as insufficient for Niko to demonstrate any material positive net asset value value and forecast the firm requires a price of greater than $8/mmBtu long term relative to its heavy debt load, which stands at $308 million.
Under our updated price guidance and assuming capital expenditures of $40 million and $60 million in fiscal 2016 and fiscal 2017, correspondingly, we estimate operating cash flow of $1.3 million and -$8.5 million. Niko should remain fully funded through calendar 2015 although we continue to see additional asset sales as crucial for the firm to maintain its cash position to fulfill recent expenditure obligations.
At D6, Niko and its partners will continue to receive $4.20/mmBtu until the legal dispute between the Government of India and the partners is resolved although we are cautious on the timing of the outcome given the delays already encountered while setting up the arbitration panel. Overall, we continue to see a challenging road ahead for Niko because of the uncertainty on future natural gas prices in India and the outcome of the legal dispute continuing to act as an overhang.
Under our updated price guidance and assuming capital expenditures of $40 million and $60 million in fiscal 2016 and fiscal 2017, correspondingly, we forecast operating cash flow of $1.3 million and -$8.5 million. Niko should remain fully funded through calendar 2015 in the context of cash on hand of $74 million and restricted cash of $61 million, with by and large net working capital now at -$413 million as of year-end 2014. That said, we continue to see additional asset sales as crucial for the firm to reiterate its cash position to fulfill recent expenditure obligations at its blocks in India and Bangladesh although we see an outright corporate sale as difficult to achieve given the uncertainties on future natural gas pricing and the continued legal battle with the Government of India.
In net asset value Impact, 10% dilutive to our 2P net asset value per share. Our base forecast assumes a gas price of $5.18/mmBtu effective April 1 and expectations that the price for the period commencing November 1, 2015 could decrease further as the higher NYMEX, AECO, and National Balance Point prices experienced in the first half of 202014 roll off while consumption gains somewhat negated the price effects. (See Exhibit 1 for a vis-vis comparison of prices at each delivery point.)
Our updated 2P net asset value per share forecast of $0.35 assumes a gas price of $4.44/mmBtu in F2015 estimate, $4.61/mmBtu in F2016 estimate and $6.24/mmBtu in F2017 estimate. Longer term we have assumed $8.10/mmBtu. We continue to see consumption growth from North America as a core driver to the price with demand anticipated to boost in the industrial and electric power sectors in 2015 and beyond. That said, Europe consumption perseveres to lag on a more or less poorer economic recovery and poor competitiveness of gas in the power sector as wholesale gas prices would need to drop further to trigger additional coal-to-gas switching.
We reiterate our “Sector Underperform” rating on Niko Resources and our 12 months target price to $0.40, derived from our updated net asset value per share forecast of $0.34 (vs. $0.38). Our target price demonstrate negative return today and shows our perspective that the stock could continue to demonstrate massive volatility depending on announcements around gas price arbitration and as it perseveres to draw down its cash balance. Our risk assessment remains “Speculative”.