junior oilers 11/12 january

  1. 1,317 Posts.
    Junior Oilers 11/12 January

    Grateful to those Hotcopperites that have commented on these reports, which in fact owe a lot to those of you who post here on the oilers and know a lot more about the industry than I do. I am thinking especially of Yogi, acturtle, towie, pj, mangrove, old man river, B2, irjones, whiteyg amongst others. Many thanks. The more comments, criticisms, additions and amendments the better informed and hopefully wealthier we all will be.

    More US troops off to the Middle East this weekend and we are sending in the SAS. War seems to get closer and closer. Oil and gas prices stayed up this week, light crude holding above $31 and Feb natural gas contract above $5.10. Rising $A will put a bit of a dent in revenues from these higher prices.

    With the exception of ROC which moved up a little, all the stocks involved in the Perth Basin drilling were rather muted this week both in terms of volume and price. I have to confess I got cold feet on Friday and exited all positions I had in AWE, NWE and BUY making a small profit in the process. After losing a swag of dollars last year by holding BLO and PCL through Makino and Huinga 1B it has taken me several months to get my portfolio back in the black and I just did not want to see it smashed again by a disappointment at Cliff Head. If CH 3 meets expectations tomorrow maybe I can get a slice of the action if I am quick enough. If it doesn’t then I have kept my powder dry for the next trade. Good luck to all those who have money riding on Monday’s drilling result.

    In a post a couple of weeks back I may have been a bit too harsh on some of the supposed penny dreadfuls. The recent market interest in Kalrez (KRZ) and the accompanying rise in its share price made me think there might be other stocks at the bottom of the share price barrel that could stage a turn around. So I looked at Kalrez and three others this week.


    Might as well start with Kalrez, formerly Kalgoorlie Resources until it changed its name and direction some three years ago. Kalrez was by far the week’s outstanding performer among the junior oilers with more than 10% of its shares changing hands and the price rising from 0.006 to 0.009 cents. Some 66 million went through on Friday alone. Any one interested in doing some research into Kalrez and its partner in the Seram PSC, the Kuwaiti company Kufpec, should look no further than their excellent websites. Lots of info and good detail particularly on the Kalrez website, www.kalrez.com.au. One should also read all KRZ’s press releases since the November AGM. I haven’t seen such well written and detailed releases for a long time. KRZ’s total disclosure of its position should be an example to other junior oilers. But sadly it won’t be.
    Kalrez has 1.094 billion shares on issue and at the current share price of 0.009 cents has a market capitalisation of about $9.8 million. Kalrez has 100% interest in the Bula Field on Seram Island. Indonesia. Bula is a shallow field (less than 600 metres) which KRZ bought from Santos in April 1999. Currently some 86 wells produce around 520 bopd. There are plans to increase production from infill wells, work overs of non producing wells and new development wells. The first of two development wells to be drilled this month has come up with some potentially good finds for this field. The oil is of premium quality and attracts top dollar when shipped straight to the refinery.
    Bula essentially pays for KRZ’s overheads although in the hands of experienced oilers, with cost cutting and further field development with new technology and with new discoveries, Bula could contribute a lot more. KRZ has an additional advantage in that it owns its own drilling rig so drilling costs are low.
    The potentially more important asset, that also came with the Santos deal, is a 2.5% interest in the Oseil field (reserves at P90 are 108 mmbo), again on Seram Island, which Kufpec is developing. Three wells already drilled (Oseil 1, 2ST and 4) are being put into production, with Oseil 2ST and Oseil 4 having initial combined flow rates of 7,000 bopd. It is expected that when all three wells are fully commissioned and in production they will be capable of up to18,000 bopd. Hopefully this should happen this half year. Then Kufpec begins planning for the phase 2 development of the field with more wells that according to one analyst could result in an eventual target production as high as 45,000 bopd. (I am always wary of these sorts of predictions so I would take that one with a grain of salt. Kalrez itself says phase 2 could increase production to 30-35,000 bopd).
    Unlike the Bula oil, the Oseil oil is a low API high sulphur type which has to be treated and sold at a discount but there is a ready market for it in Singapore. Expensive production facilities ($US60 million plus) are under construction and were supposed to be ready by March though some slippage is expected. Kalrez’s periodic payments to Kufpec are to meet its share of construction costs. It is KRZ’s near default on one of these payments that almost saw the company forfeit its interest in Oseil.
    As mentioned above Kalrez also owns the only drilling rig on the Island which pulled in some $US 1.0 million last year, and owns (now 100%) a gas stripping plant and is tendering for work from Pertamina. All told, as OMR posted here last week, the sum of the parts appears to exceed the current valuation of the whole.
    I might add that the fiscal regime (Indonesia govt’s take) for this particular PSC is exceedingly generous by any standards not just Indonesian.
    But what is particularly attractive about Kalrez are the management changes that took place late November last year which saw Eddie Smith and Doug Jendry, both of Omega Oil fame, come on board as directors and Smith appointed Chairman of the company. These experienced oil men must have known what they were getting into. I spoke briefly with Smith this past week and was impressed with his “can do” attitude, with his understandingof the challenges KRZ faces, and incidentally with his knowledge and understanding of the cultural issues that have been a problem in the past between the Kuwaitis (Kufpec) and the Koreans who are building the production facilities. I was also impressed with his ability to identify a potential problem in the Gas Stripping Plant contract and with the way he moved quickly to fix it (see ASX press release on 9 Jan). I see too the board reorganisation was complete with the last remaining director from the old team being let go on 9 Jan. So far so good.
    Kalrez claims it will turn a profit in the six months to December, and appears to have its finances under control after a period of uncertainty about its ability to meet its payments to Kufpec. As this appears to be an announcement driven stock here are some likely announcements that could affect it short term:
    Announcement of a short term debt facility and payment of monies due Kufpec. (Perhaps out this coming week)
    Succesful completion of Bula development well 89-K-5 as a producer.
    Spudding of second Bula development well.
    Announcement of a company profit for December half.
    KRZ share price has already doubled since Christmas but I believe there is more to come. I bought in last week and will top up tomorrow. I am banking on an improvement in the company’s fortunes (and share price) over the next year. To me KRZ looks the best turn around stock of all the oilers. The chart doesn’t look too bad either. But it is still a highly speculative play and when the daytraders move on who knows at what price KRZ will settle.

    Victoria Petroleum

    Victoria Petroleum must be one of the great battlers of the junior oil boards along with West Oil. It keeps on coming back for more, drilling failure after drilling failure. (Most recently Argos and Ceres). Like Kalrez it has a good website at www.vicpet.com.au so again, anyone interested in the stock should visit the site for the detail it contains on its activites. And active it is with a wide range of interests (critics say too wide) in Australia (Perth, Surat, Cooper and Carnarvon Basins) and the West Coast of the United States. It plans to be involved in no less than 12 wells over the next 7 months.
    VPE has some 900 million shares on issue (current market cap of $16.2 million at a share price of 0.018 cents) and only some $386,000 cash in the bank at the end of the September quarter. But since then it has raised $2.0 million in a share issue and received some $US450,000 in settlement of some legal claims over the drilling of Eagle 1 in the Eagle Oil Pool Development Project in the San Joaquin Basin in California. And most importantly it has participated in the Jingemia discovery in the Perth Basin and should receive more than $1.0 million annually from its 5.78% production interest.
    If VPE can prove up the San Antonio discovery in California where Trio Pet, the operator, is doing a second fracture stimulation this month to see if it can get the well to produce, then VPE will be off to a good start in 2003. It has firm wells coming up in the next few months in the San Joaquin Basin (Hyena and later Vallecitos) and in the Surat Basin (North Giligul, Rookwood, Cherwondah, Don Juan and CSM-4). The first wells are scheduled for March. There are also the Sage and Eagle 1 discoveries to be followed up in the second half of the year. There will be no instant recovery but at least VPE is possibly in better shape than it has been for a while. Management seems competent but just a bit unlucky. Like KRZ the large number of shares on issue and the possibility/inevitability of a share consolidation at some point is a risk but this probably won’t happen until both companies are in a stronger financial situation than they are today. I am keeping an eye on VPE whose shares reached what appeared to be an all time low of 0.016 cents on 10 December and currently trade around 0.018 cents. If the fracture stimulation of San Antonio fails it might provide an entry opportunity for later wells. That said its chart looks pretty bloody awful.


    Unlike VPE, ICN really only has the one major asset that could be a company maker and that is its interest in leases at Bayou Choctaw in Louisiana where it is in partnership with Horizon Oil. The two leases are the Bayou Choctaw oil field (Wilberts) and the Victory Financial leases. The best recent description of these leases was in the Horizon slide presentation at its last AGM but I don’t know if they are still on the Horizon website. But there is no doubt that these leases are potentially very profitable once they are in development given the area’s proven production history, the ready markets available, good prices for gas and oil and the established infrastructure. I am told for example that there has been no drilling on the leases below 9,000 feet when good layered sands have been prognosed all the way to 20,000 feet.
    I covered Bayou Choctaw last week noting that ICN was attempting a capital raising in the USA for the financing of up to 30 development wells and said that some in the industry were sceptical that Ray James could pull it off. ICN rang me back this week and James is definitely confident he can put the financing together within the next couple of months. We shall see. If a small Australian company capitalised at $7.3 million aussie (184 million shares at 4 cents) is able to raise $US 30 million to develop the field it certainly would be major coup and make the market sit up and take notice. James has put his money were his mouth buying 8 million ICN shares at 4 cents not so long ago.
    ICN has no revenue producing assets and sold part of its interests in CBM leases in Queensland last year to raise $1.5 million. It had $708,000 cash in the bank at the end of the September quarter.
    The complicating factor at Bayou Choctaw maybe Horizon. Horizon’s former passion for Bayou Choctaw seems to have cooled a little and in an asset disposing mood, it is quite possible that these Horizon interests could be up for sale not just farm in as mentioned last week. Horizon has some costly commitments coming up (eg. 20% of Bosavi alone is $US1.8 million) and I suspect not a lot of money left in the kitty to finance them. If Horizon was to sell its Bayou Choctaw interests ICN would have a new partner to deal with. But presumably any newcomer would want to see an early move towards resumption of drilling on these highly prospective leases. I bought a small parcel of ICN just on spec.
    I got out of Horizon this week just as quickly as I got in given that the market was unimpressed with its Tunisian drilling and showing no signs of interest in Bosavi. And on reflection a share price around 10 cents values Horizon at $38 million which seems awfully generous to me. Others may disagree. Of course if it hits pay dirt at Chott Fejaz then the valuation will look vastly different.

    Lakes Oil

    On its website, Lakes Oil rather bravely has a history of the company since its establishment in 1946. I say bravely because the story is one of unmitigated disaster. Lakes seems to have gone from disappointment to disappointment both before it became part of Woodside and after it was resurrected in the 1980s by current Chairman Robert Annels. It is probably the oldest established oil explorer on the boards today but it still has not transformed itself into a producer with a revenue stream. It is a wonder it has any supporters left but curiously enough it appears to have a loyal band of perhaps older shareholders who continue to kick in when capital has to be raised. And Lakes has had to raise cash reasonably often. It now has 800 million shares on issue and at 2.2 cents has a market cap of $17.6 million. It had $2.28 million in cash at the end of the September quarter but that was before the drilling of Bunga Creek.
    Lakes has significant interests in the onshore Gippsland Basin (its leases cover virtually the whole of the Basin), the Otway and Eromanga Basins and in the United States (San Joaquin Basin, California). Disappointing wells in the last year or so have included Eagle1, and Kingfisher 1 (California), Port Fairy 1, and Bunga Creek 1 (Victoria). The latter well was a particular disappointment as the target had been chosen with the help of BHP’s state of the art Falcon technology.
    But Lakes did find gas in two Gippsland Basin wells, Trifon 1 and Gangell 1 though both finds were in tight reservoirs. Lakes engaged Haliburton of the US to advise it on the value of fracturing the reservoirs to stimulate flow but subsequently discovered from further core holes that the reservoir (Strzlecki Formation) may be better than originally thought. Lake subsequently entered into an agreement with an unlisted public company AusAm for the latter to farm into the relevant lease by spending $10 million on two additional wells Trifon 2 and 3. AusAm intends to use specialist US technology to drill and exploit the tight formations. Only trouble is AusAm appears to be having problems raising the cash. It had until 31 December to come up with the funds but there have been no reports since the deadline advising that they had done so.
    And that is basically where it stands with Lakes. The shares have been as low as 1.8 cents this year and as high as 2.8 cents as recently as October for reasons that escape me. Bunga Creek didn’t spud until November. Perhaps the announcement of the AusAm arrangement sparked some interest. Lakes is one to watch but not an investment option for me at least. If the AusAm deal falls through then it is back to square one for Lakes in so far as the development of its Gippsland Basin gas finds are concerned.

    Other news

    Santos and Bilip1

    Spoke to Santos Investor Relations manager this week and asked about Bilip 1. It seems the well is definitely regarded as a producer with the question being whether to leave it as a stand alone well like Saunders nearby or whether to develop the area further. I was told that the Bilip 1 reservoir was of excellent quality. Problem for Cue is that Santos will determine the future work at Bilip according to its own priorities which may or may not accord with Cue’s desire to get the well into commercial production asap. You would think there would be a bit more info in the market about this well given the attention it got at the time of drilling. Santos also confirmed that a gas sales agreement for Oyong was nearing completion though obviously not ready for an announcement this past week as Cue had hoped.

    Cooper Energy

    Spoke to Cooper Energy about Beach Petroleum’s plans to drill six new wells this first half year and had it confirmed that Cooper would have an interest in two if them. Details have yet to be released and actual prospects to be drilled have yet to be firmed up after interpretation of some seismic. Coopers said in essence they intend to drill one well a quarter in 2003 so that should provide some trading opportunities. There has not been much interest in the Cooper/Eromanga Basin players of late with COE shares falling to 12.5 cents following the failure of Karbine 1, Stuart Petroleum also down to 35 cents from 45 cents mid December and Beach having sat for a long time around the 32 to 33 cent mark. Interest should pick up when a firm drilling program is announced so I topped up my COE holding and bought into BPT fps.

    As usual the above is to stimulate discussion only. Do your own research before spending your hard earned.

    Disclosure: I hold BPT, BPTOA, FAR, CUE, COE, GBG, ICN, KRZ, PPP, and PSA (Petsec volumes as well as price up this week)
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