junior oilers 12/13 july

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    Junior Oilers 11/12 July

    Oil prices were slightly stronger this past week. Closing prices from Bloomberg with those from a week ago in brackets were as follows, Nymex crude $31.28 ($30.42); Dated Brent $29.18 ($27.82). US natural gas prices on the other hand were a little weaker, Nymex Henry Hub natural gas fell to $5.15 ($5.23).

    Early in the week gas prices increased at the Henry Hub and other production-area locations following the US July 4 holiday in response supply interruptions due to tropical storm Claudette and hot weather throughout much of the US. But they fell back again at the end of the week.

    Following recent higher than normal gas storage injections, storage levels are only 15% below the five year average. As we move into peak summer months in the US natural gas prices look set to move below $5.00.

    Week in Review

    Of the 44 oil and gas stocks on my watch list 20 stocks rose this week, as against 33 the week before; 15 stocks fell compared to 6 the previous week and 9 stayed the same compared to 5 of a week ago. The sector could not maintain the broad sector wide gains of the previous week and stock specific issues have now taken over as the chief determinant of share prices.

    Among the winners were Hardman, Arc Energy, Amity Oil, and Novus. Gainers among the smaller counters, included Pan Pacific, Bounty, Cooper Energy, Eastern Group, Kalrez and Sun Resources.

    Among the few losers where ROC Oil as take over talk dissipated, and in the junior league, Cue, Norwest and Carnarvon.

    Hardman Resources

    Hardman shares jumped at the end of the week, ending Friday at 61 cents up three cents for the week. Volume built up steadily as the week progressed ending with 1.8 million shares traded on Thursday and 4.28 million shares on Friday. Similar large volumes passed through the market on Thursday and Friday of the previous week.

    Hardman shares are now a hostage to rumours and if the recent volume and price strength is any guide, rumour has it that a decision on this year¡¯s drilling program is close at hand.

    I have little doubt that the major reason for the current hold ups is disagreement among the jv partners on how to assess the political situation in Mauritania following the recent failed coup attempt. It must have increased significantly the sovereign risk assessments of Mauritania with two immediate impacts. First, it will make it that much more difficult and expensive or both for Hardman to arrange project financing and second, it could put the wind up senior Woodside executives with their large exposure sufficient to cause them to want to have minimum activity in the leases at least until the Presidential elections are over in November.

    A African President who has been at the helm for 19 years, who has taken a markedly pro Western foreign policy stance in recent years, including recognition of Israel, who has become tougher on political opposition and dissent and one who himself came to power through a military coup, is surelya likely target of further unrest.

    The failed coup attempt indicates the degree of discontent within the armed forces and among pro Islamic elements at the direction the President has taken the country. It may also portend future jockeying for positions of power in this poor country with substantial oil revenues on the horizon.

    If Ould Taya was to go, a new regime would presumably have no difficulty in repudiating any agreements the old regime may have signed with the Chinguetti joint venture. So with elections coming up in November and a period of political uncertainty and instability ahead you would think that most would-be foreign investors in the country would opt to sit on the sidelines for a few months.

    It will be interesting to see what happens in the next few weeks. The market is also waiting to see the independent consultancy firms estimate of Chinguetti reserves and to see how HDR plans to finance its percentage of Chinguetti¡¯s development costs ($A100 to $A125 million) when and if the field is declared commercial.

    The market is also awaiting details of how Hardman will finance its share of the upcoming drilling costs, particularly if the program is as extensive as Ted Ellyard outlined it could be back in March. (up to eight wells but that is now unlikely post coup attempt). HDR could need some more working capital before too long and it will be interesting to read HDR¡¯s upcoming quarterly report..

    I think the oil fields so far discovererd look to be extremely promising but you would have to think the political situation in Mauritania is very worrying for all concerned.

    Arc Energy

    ARQ shares rose three cents from 69 cents to 72 cents this week. On 11 July the company put out an investor update announcing that the Hovea Production facility had been officially opened on 3 July and confirming that it was currently producing 5,000 bopd with the capacity to produce up to 8,000 bopd and, with further expansion, 24,000 bopd.

    Arc also announced that its Perth Basin drilling program for this year had commenced with a development well Hovea 8 spudding on 18 July. The announcement confirmed that its exploration program, ie drilling of new prospects, would not begin until later in the year. It is this latter program which has the potential to ignite Arc¡¯s share price.

    The company confirmed it had no net debt following the sale of its interests in the Cliff Head discovery

    For investors wanting a small to mid tier energy stock with little downside risk and reasonable upside potential then it is hard to look past Arc. It has already been the target off an unsuccessful takeover bid so industry peers also have a good opinion of its worth. It is one to buy for both capital appreciation and eventually dividends.

    Amity Oil

    Amity Oil¡¯s media machine was hard at it again this week with a barrage of Yesiltepe 1 drilling reports and announcements on the impending development of the Adatepe and Cayidere gas finds and the drilling of Which Range 5 in September. These followed on the heels of a shareholder update distributed on 30 June.

    The shares ended Friday at 1.20 up three cents for the week.

    I still think the AYO share price is now very much dependent on the outcome of the drilling of Yesiltepe 1, a duster here and its back below a dollar, a success and it¡¯s not inconceivable that the shares could double.

    The company is no doubt conscious of the 38 million options exercisable at $1.00 in September and the impact a high conversion rate would have on its cash balance. Fortunate then that it has managed to persuade ODE to source a rig from Indonesia to drill Which Range in September.

    As far as I understand, despite its gas revenues, AYO is still gas flow negative.The next quarterly report should verify that. The big challenge ahead for Amity is selling the gas that it has already discovered and thus far you would have to say the company has promised more than it has delivered.

    I am in two minds as to the value of AYO¡¯s concerted public relations effort. As a former spokesman for a large government department I know media relations can be all about emphasising the positive and ignoring the negative. I am not sure that I want that in an oiler. If you build up expectations that you fail to deliver on then the shares will eventually be punished. Question you have to ask yourself about Amity is how much true value is reflected in the share price and how much hype.

    Beach Petroleum and Cooper Energy

    Great to see BPT and COE have a success with their very first well in the current campaign. Christies 1 is not a big find but it proves up the potential of the Cooper Basin areas targeted by the two companies. Predictably the shares of the two companies rose on the announcement of the drilling success then retreated. The size of the reservoir is just too small to excite the market greatly. But that said Coopers has recorded a 30% plus increase in its share price over three months so that is not to be sneezed at.

    Sun Resources

    By weeks end Sun Resources Kilauea 1 well in the offshore Carnarvon Basin was nearing target depth and hopefully is about to put a big smile on miningnut¡¯s face. The well should penetrate its primary target next week. The shares have strengthened in the last couple of weeks but on such small volume that there really is no market in them. Kilauea is a company making prospect for Sun.

    The company was one of the first to release a quarterly report which shows the quite wide range of interests this sometimes overlooked company has, particularly in the Carnarvon Basin. Unfortunately the report contained no information about its current financial situation, though as far as I know it has considerable cash on hand.


    Australian Worldwide Exploration issued an updated investor presentation this week. AWE has three projects under commercial development , Bass Gas, (offshore Victoria); Jingemia (onshore Perth Basin) and Cliff Head (offshore Perth Basin). Each are what AWE calls cornerstone projects, or in other words the foundations on which AWE will build the company. All three are good projects, solid cash earners rather than spectacular money spinners. The first one to come into full production will be the biggest development of the three, Bass Gas in Q3 2004, not that far away. Each project has the potential for AWE to expand reserves with further drilling success.

    AWE also has an active if not particularly exciting drilling program coming up which will see six wells drilled in as many months including a follow up to Jingemia in September, Bluff 1 (with TAP) in onshore New Zealand in October and two wells in the offshore NZ lease PEP 38460 including a follow up well to the Tui discovery earlier this year. AWE also has a large swag of interests in the Perth Basin separate to Jingemia and will drill Red Back 1 on one of these, EP 320, in October. It also has a well coming up this year in its off shore Carnarvon leases WA 202 P.

    AWE currently is experiencing a decline in cash held as development capex eats into cash balances. A small revenue flow from gas assets in Argentina (Las Bases), South Australia (Katnook/Ladbroke Grove fields) and Western Australia (Beharra Springs) and from the production testing of Jingemia, is obviously not sufficient to meet capex commitments going forward. But AWE is quick to point out that it has funds in place through project financing, to meet these eg the high cost Bass Gas commitment (AWE $135 million).

    If you are looking for an investment in the energy sector but you haven¡¯t got time to monitor your stock on a regular basis then AWE is the one for you. Like ARQ AWE is one I think can be safely bought and put away in the bottom drawer. It is a stock which 13 independent brokers have valued at prices higher than those obtaining this week. It¡¯s one whose inherent value will be better reflected in the stock price in twelve months time.

    CUE Energy

    CUE was sold off on Friday with a million and a half shares going through the market. This not a lot of shares in value terms and it may be that holders of the stock are just becoming impatient and selling CUE to put funds into more immediate plays such as HDR. CUE is usually the first junior oiler to issue its quarterly report but not this time around. I presume CUE is hoping to have its Oyong financing arrangements bedded down before it reports.


    On 27 June Petsec released to the ASX its annual report in the form of USA SEC Form 20-F. It is a most detailed account of PSA¡¯s financial position covering the last three years, including the period in which the company was fighting to survive as a commercial entity. It is all there warts and all. Anybody who still has concerns about the company¡¯s bona fides would be well advised to read this report carefully.

    Petsec had a quiet week this week with all the action in the last hours of trading on Friday when the price was pushed up to 82 cents on the close, a cent off the previous weeks 83 cent close. There was no volume in the shares. Interest will return when the company releases its June quarter activity statement at the end of July and commences drilling at West Cameron.

    I am expecting PSA to report a healthy $A 15 million cash balance at the end of June. I include in that figure revenues generated by June sales but not received until July. With Henry Hub gas prices holding up above $US5.00, Petsec is likely to net an average of $A2.5 to $A3 million a month in the September quarter.


    Drillsearch has done nothing of late but disappoint its patient shareholders and there was further bad news this week. A former Vice President of Circumpacific Energy, a Drillsearch subsidiary and a number of other persons have instituted court proceedings against the company alleging that the affairs of Circumpacific have been conducted in a manner that is oppressive and unfairly prejudicial to the interest of the minority shareholders. Whether true or not the action will tie up Drillsearch management¡¯s time and some money. The shares are languishing at 5.1 cents after being as high as 8.5 cents back in February.

    Horizon Oil

    RISC announced this week its long awwaited assessment of HZN¡¯s two main assets, its 10 % interest in the Maari oil discovery offshore New Zealand and 30 % interest in the Beibu field offshore China. It did little for HZN¡¯s share price, probably because of the financing challenges development of the two fields could cause HZN.

    As I commented earlier in the week one interesting thing about the RISC assessment of the Beibu Field offshore China is that it does not make any allowance for a discovery at 12-7 which is a prospect between 12-8-1 and the producing field Wei 12-1.

    ROC announced also this week that one of the two firm wells the joint venture will drill this year will be an exploration well on this quite large target. A success here could change the economics dramatically. The other firm well will be an appraisal well of the 12-8 discovery.

    Even without any new discoveries the Beibu field looks like being a quite good money earner for the joint venture with P90 recoverable reserves assessed at 25 million barrels. But privately the joint venture participants are very upbeat about the potential to add to known reserves.

    The RISC report estimates development costs to be on the large size, from $US127 to $US 306 million over 12 years and even with its free carry this year and its small interest, ie 2.5% after CNNOC backs in, its a big ask for FAR. And its an even bigger one for Horizon. It is possible I suppose as someone suggested this week that ROC could buy out at least FAR, but I hope that doesn¡¯t happen. I hold FAR!

    Bounty Oil and Gas

    With Leafcutter now announced as a firm August drill in the Perth Basin some interest is being shown in Bounty. Although the price has not risen markedly there is clearly greater strength and depth on the bid side which I expect to grow as spud date nears.

    As usual the foregoing is intended to stimulate discussion and provoke an exchange of ideas. I don¡¯t try to cover all the week¡¯s events just those that I think might be of general interest. Best you consult an expert before investing in speculative shares. They can deliver excellent gains and provide a lot of fun in the process but they can also rip the shirt off your back if you are not careful.

    Disclosure: I hold BUY, BUYO, FAR, FAROA, and PSA

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