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Alarm Bells Go Off With Linc Energy
Tradeable, Tradeable Ideas | 05 September 2014
By: Raymond Leung
Articles (142) Profile
  1. Linc Energy recently sold its royalty to an Indian firm for a price far below estimates.
  2. The fire-sale of assets are a suggestion that Linc is in urgent need for cash due to its high gearing ratio.
  3. One possible upside catalyst is the possibility of striking shale oil in Australia. If it does discover shale oil, there could be huge upside potential for the stock.

JP Morgan's update on Linc Energy

Recently, Linc announced that it will be selling its royalty for the Carmichael Mine to Indian firm, Adani Group. Linc will be receiving a total sale consideration of A$155 million which is an A$132 million shortfall from JP Morgan Chase’s estimate of A$287 million.

The lower price is due to Linc’s high gearing ratio (need for cash) and delay in its coal asset portfolio sale. Australian coal market continues to face strong headwinds as demand for coal has slowed down. To worsen the situation, Linc has a high debt-to-equity ratio of two times and is in rush to pay off its debts.

The sale of Carmichael mine is part of its numerous sales in plan for the short- and medium-term. Currently, Linc’s management plans to consolidate its businesses and concentrate on its core assets.

One of its main concentrations will be shale exploration in South Australia that is currently in progress. Shale oil exploration is a global trend in the oil and gas industry following the weakening supply of petroleum as conflicts deepens in the Middle East. If Linc manages to discover shale oil, it will bring a huge upside to the company’s share price.

Sale of Carmichael Mine and plans for future sales might bring Linc back to profit in the coming financial year. Revenue for the firm remains relatively unchanged at A$33.8 million for 4Q14 while net loss fell to A$65.2 million.

A potential upside for Linc will come from the discovery of shale oil in South Australia. Nevertheless, analysts from JP Morgan Chase continue to maintain a “Hold” view towards Linc with a potential upside of 26.09 percent.

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Trained in fund management, Raymond is familiar with shares and various investment vehicles.

Please click here for more information about this author.


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