Somewhere OVer the Rainbow by Gus Cosio

6:43 pm Friday 2 March 2012 With Philippine stocks rallying strongly, some of us may be quite skeptical in adding positions to issues that have gone up substantially.  What normally follows a large cap rally as we have seen is a rotation to mid-cap and small-cap shares – the so called second and third liners.  Here is something to chew on over the weekend.  This is a research note I received from my favorite stockbroker which I would like to share for whatever it is worth. The analyst says: “We believe that OV is currently undervalued. We see that the success of drilling and operations in Galoc Phase 2, Nido 1X1, as well as West Linapacan should support medium to long-term growth.  We initiate coverage with an OVERWEIGHT rating and a target price of P0.081 per share.  This presents a 65% upside to its current share price.  The target price is based on blended values computed using DCF, relative valuation, and the dividend discount model.” “Developments in the upstream oil industry should bode well for participants.” “While a small player in the global oil spectrum, the Philippines, with estimated total resources of 3,628 million barrels of oil, provides incentives for investments into the industry. Currently, there are only 28 existing petroleum (i.e. both oil and natural gas) service contracts in the country and we expect this to increase in the next decade, given that petroleum is still a basic necessity. The government has been actively encouraging investments and participation through initiatives such as the Philippine Energy Contracting Rounds which showcase contracts that would be up for bidding. “Benefiting from higher oil prices moving forward.” “Higher oil prices translate to higher top-line.  The upward trajectory of oil prices bodes well for revenue growth.  After looking at OV’s financials, we believe that the company also has relatively strong cost management in place.  We foresee a healthy growth in bottom line moving forward.  However, note that there exist downside risk if the assumption of elevated oil prices will be unrealized.   Actual future prices may vary from our estimates.” These are the salient points of a research report sent to me just this morning.  According to the analyst that wrote it, much of her impressions were formed by verifying company information with available data from the Philippine Department of energy.  With oil prices skyrocketing, the economics of oil is shifting such that accessible oil fields would be promising better profitability.  As an old doughnut advertisement used to say – “it’s worth the trip.”