junior oilers 23 february

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    Junior Oilers 23 February


    More dusters, more gloom. First Mentelle then Chott Fejaz and Bosavi. Another bad week for the junior oilers. Of my 32 stocks only DLS and ROC finished the week higher than when they started. This despite abnormally high oil and gas prices.

    The market has little confidence Vindara will provide some respite for the Perth Basin oilers pushing NWE down to six cents on Friday or less than half its pre Twin Lions price. AWE and VOY marked time during the week while HDR succumbed again to selling pressure as the week wore on. There was little respite across the rest of the board.

    I suspect all of us who follow the junior oilers are sitting on large unrealised losses or have actually taken losses. There is no comfort in knowing that you are not alone in doing your dosh. I can’t see things getting better for a while so a lot of caution and discipline is required. The last thing anyone should do is try to trade one’s way out of trouble in this present market by chasing elusive short term gains. I can’t see any.

    Some stocks that have a cash flow, some funds in the bank and a 2003 drilling program might be worth accumulating for later in the year. Some stocks that fall into this category include COE, BUY (after Vindara), BPT, PPP and possibly VOY.

    Getting into capital raisings by CUE and CVN if they eventuate could also be profitable longer term plays. I am also a great favourite of PSA. KRZ at 0.7 cents and WON at 1.2-1.3 cents are highly speculative plays. AWE, ARQ and HDR are good value stocks that unfortunately may go lower before they rebound so timing an entry here is crucial. AYO seems to be doing OK on the drilling front in Turkey but is a bit close to Iraq in some people’s eyes.

    CUE/FAR

    Cue ended the week below 5 cents for the first time in a month despite Santos reporting that both Bilip and Oyong would be fast tracked. Cue’s exposure to Indonesia and PNG is a concern but an even bigger worry is how it will fund its share of the Oyong development.

    The Hotcopper thread “Far Cued again” expressed it all. Funny thing is most capital raisings of late have offered a good trading opportunity for those who participated in them. BUY’s one for three at 7.7 cents, Norwest’s share issue at 8 cents and Won’s one cent raising have all returned good profits for the not too greedy and the nimble of feet. Hopefully FAR’s issue will do the same for those who have applied for the shares at 4.5 cents though the stacking at the close on Friday didn’t look to healthy.

    But one day’s buyers and sellers don’t necessarily make tomorrow’s market. FAR advised the ASX during the week that it would survive financially if the raising failed but I can’t see this happening. I wouldn’t be surprised if the issue wasn’t closed over subscribed early in the week. Longer term I would expect to see FAR well back over 5 cents. And wouldn’t it be nice if Banjo went against the trend.

    CVN

    Carnarvon’s shares continued to slide during the week with the market anticipating that January’s production rates from the Wichian Buri field in Thailand would not be that much different from December’s rates. And the company revealed as much after the market closed on Friday. So we can expect further weakness on Monday though the company did say production rates were slowly improving and the joint venture was moving ahead with the next phase of the development program.

    CVN will probably have to come to the market with a capital raising in the near future to fund its share of this program expected to cost some $US 2 million. For the very brave, and for those who haven’t already been burned by CVN, or perhaps even for those that have, the capital raising might prove to be a cheap and profitable entry into a company down on its knees but not completely without hope.

    CVN has copped a bagging for its handling of the information flow and some of that seems deserved. One suspects also that relations with the joint venture partner, and operator, Pacific Tiger have been under a bit of strain. A detailed statement from CVN as to why the new wells haven’t lived up to expectations and why the fraccing of the old wells disappointed might help clear the air a bit. And you never know those E and G sands might yet contain a pleasant surprise.

    KRZ

    Kalrez announced this week it had received $US 1.236 million for the December uplift of Bula oil and spoke of the company having turned the financial corner. Personally I think another two or three equally successful uplifts are needed before that judgement can be made. And the company did not say what its costs of production were. Given that it takes some 830 wells producing on average less than 10 barrels a day to produce the Bula crude the economics can’t be great.

    Production of Oseil oil through the temporary facilities on Seram will also add to KRZ’s revenues but one needs to remember two things, one, KRZ interest is small 2.75% or thereabouts and two, the crude is high in sulphur so does not attract top dollar. Eventually production should be ramped up to 18,000 bopd through the main production facility due for completion in April. Given the ongoing problems between Kufpec and the construction company, Korea’s Daewoo this might slip a bit.

    All that said buying KRZ at 0.7 cents looks a fairly safe bet though given that 250 million shares changed hands at much higher prices back in January there may be a bit of a cap on the stock initially. It is still very much a target of the daytraders.

    If KRZ can find someone to put up some money to help it drill some new wells in the Oseil field then a bit more interest might be shown in the stock. But in the current market and with the world going to hell in a basket politically and economically this seems unlikely in the short term.

    But there is no doubting the new management is keen to make a success of the operations in Seram and if you have faith in the management a punt at current prices could be rewarding.

    COE, BPT and STU

    Still little market interest in these three Copper/Eromanga Basin stocks which strikes me as strange because they all have drilling programs this year and all three have revenues coming from past discoveries. BPT in particular looks the goods with strong revenues to fund its exploration program. And it is the only junior oiler paying a dividend. Trouble is that most of the targets in their lease areas are small so market unlikely to get super enthused about any of them. For followers of the acturtle trading strategy COE would seem to be a good one to accumulate at these levels for a rise later in the half when it announces firm drilling plans. But it is not easy to coax out the sellers at current levels, COE failed to trade on the last three days of last week.

    HDR

    HDR’s quarterly report is a must read for anyone with an interest in this stock. With some 424 million shares on issue it is capitalised at $207 million with the share price at 49 cents. It had $42.7 million in cash at the end of the end of December half of that due to a successful capital raising at 70 cents during the quarter. All these funds are earmarked for its 2003 drilling program. And no firm dates for the African program have been announced but likely to be Q3 at the very earliest.

    The prospect of significant future cash flows from its offshore Mauritanian discoveries (Chinguetti and Banda) is what underpins the share price. Minor cash is generated from Woodada in WA and from Jingemia when it goes into production.

    I suspect that the share price will continue to drift not so much because the shares don’t represent good value, they do, but because the market stinks and there is no drilling activity planned in those exciting African leases for some months. And if some shareholders jump ship that will add to the slide. There is no doubt in my mind that the shares will pick up interest again once drilling is on people’s radar screens, But the question is how low will the share go in the meantime. My guess is the low 40’s or even into the 30’s. A Vindara duster will obviously not be helpful. Keep an eye on Yogi’s aussie oilers site for an astrological entry point.

    DLS

    Woodside announced during the week that it was acquiring a bigger interest in some leases in the Bonaparte Gulf. This suggested it is confident that more finds like Blacktip are possible. Unfortunately WPL did not announce a farm in to the leases held in the area by Drillsearch which I think most DLS holders were expecting. The two companies have been in talks. Nevertheless DLS shares have held up above 8 cents though on small volumes. With the farm in market pretty rs at the moment DLS may decide to fund some exploration on its own rather than seeking a free carry. But to do this it will need to raise some cash. This is something to watch out for for those with an interest in this one.

    PSA

    Petsec has now been in production for a month at West Cameron and the first cheque should be received this coming week. I have tried unsuccessfully to convince the management to make an announcement about this (a la Kalrez) given that it is a signal event for the company since its reconstruction last year. They do intend putting something out in mid March which will presumably be its annual accounts given that it reports on a calender year basis. But a press release announcing a huge cheque would renew interest in the company and allay some of the fears of the doubting thomases. With gas prices (April 03 contract) closing on Friday at $US 6.30, PSA must be pulling in a lot of cash. The shares have weakened this week to 32.5 cents at Fridays close from 35 cents on Monday but the bid side is starting to look a bit stronger. This is one stock that could see a bit of upside action in coming weeks.

    AWE

    AWE’s share price has been hard hit by the disappointing Perth Basin drilling and the failure to find the 700 mbo expected at Tui. At Friday’s close of 79 cents AWE’s shares are down around 20% from their pre drilling levels. Vindara is a high risk well and should not be counted on to resurrect AWE’s fortunes. Cliff Head H4 should provide more information on the extent of the reservoir but again the market is expecting no less than a success with CH 4 so any further disappointments there could see AWE shares back below 70 cents.

    Drilling activity fuels the oiler market and post Perth Basin AWE does not have a lot planned. A well may be drilled on WA 202P in Q2 but AWE’s only has a 10% interest. Additional seismic is being shot over the field housing the small find at Tui but additional exploration there would be some time away and dependent on rig availability. Jingemia will be production tested and provide some useful cash flow in the process but it seems no further development wells are planned, at least not in the immediate future. The Trefoil prospect in the Bass Strait will be drilled later in the year as part of the BassGas development drilling.

    So for the next few months AWE will be quiet on the drilling front which probably means the shares will drift sideways or lower. AWE’s attention will focus on the development of its two major projects BassGas and later Cliff Head which will involve a draw down on its cash reserves which might worry some investors as they see the money go on capex with no return until 2004/2005.

    In hindsight the part sale of equity in BassGas to Mitsui was a smart deal providing a capital injection and a significant capital saving on BassGas. But it means the eventual returns, once BassGas is in production, will be commensurately smaller.

    If I am right and AWE shares begin to move into the 60 cent range over the next few months they would represent value buying just on the assets they hold now. Most brokers valuations put a price on AWE greater than a dollar. I think AWE shares may struggle to get back to a dollar this year but as a longer term investment they are worth looking at particularly if, as I believe, the shares are going to go out of favour for a while.

    AWE’s Bruce Philips has said that the Mitsui deal gave AWE the capability to look at capital acquisitions but he gave no hint as to who might be the target. Perhaps AWE’s Perth Basin partners might have had the ruler run over them if the drilling had been more succesful. Other wise ARQ is the only current candidate for AWE attention that I can think of. Take over bids usually benefit the target company not the bidder, at least initially. And AWE would have to raise more money and probably need to fight off others if it launched a bid for ARQ. That could be damaging for the share price so any predatory moves by AWE would need to be watched carefully.

    ARQ

    Arc Energy has 160 million shares on issue giving it a market capitalisation of $97 million at a share price of 61 cents. The question is is it worth that much? According to ARC, at an after tax net present value of $15 per barrel, its 50% interest in Hovea’s P50 oil reserves of 9.4 mmbls is worth $70 million. That leaves ARQ’s other assets the Dongara Gas fields currently virtually shut in; its 7.5% interest in Cliff Head (valued by Euroz at $17 million to ARQ) and its interest in L1/L2 Perth Basin exploration leases to account for the remaining $27 million.

    A valuation from Euroz Securities in November last year put a valuation on Hovea alone of $68 million. And as mentioned above Euroz valued Cliff Head at $17 million to ARQ or an additional 10 cps. Add in Dongara and Hovea gas and Euroz comes up with a total valuation for ARQ at 15% dcf of around $96 million

    In short ARQ is probably fully valued in the 60-70 cents range though that does not necessarily mean that the market will pay any attention to these prices. But if we accept that ARQ’s share price fairly represents its current assets the upside in the ARQ share price is dependent on further drilling success and in particular the next well on the Hovea lease Eremia due to spud in the first week of March . If Eremia turned up another Hovea then in theory at least you could almost double ARQ’s price.

    But there are a couple of niggling things in ARQ’s latest quarterly which one needs to be aware of. Development and exploration costs have forced ARQ to go into debt to the tune of some $8 million. It also has a $5 million revolving working capital facility. ARQ hoped these financial arrangements would mean it would not have to go back to shareholders for more cash but capex expenditures on Hovea are running over budget as a result of drilling problems with Hovea 5 as are the production facilities at Hovea designed to produce 5,000 bopd. Add in exploration expenditure and you have Eric Streitberg concluding his quarterly with the comment that “ the number and cost of wells to be drilled and tested as part of the current offshore Perth Basin drilling program may also result in additional working capital requirements” In other words a capital raising may be a possibility in coming months. Although the drilling failures have meant there was less testing than anticpated, it seems to me the program overall has probably taken a bit longer than originally budgeted for.

    So while ARQ looks to have a bright future ahead of it with possible revenues of $37 million a year once Hovea is in full production there might be some hiccups in the interim which investors need to consider. If Eremia was successful and the shares went to 90 cents say then ARQ could well be tempted to go back to the market say at 80 cents. If Eremia is not successful it still might have to raise more cash but this would be at a discount to an already lower share price as a result of an Eremia duster.

    All a bit convoluted I’m sorry but for those that buy and hold there may be some disconcerting gyrations in the share price in coming months. For those that trade ARQ the shares might be worth buying on a duster at Vindara and before CH 4 and Eremia but the lead times are short and the pre drill gains might not be worth while. ARC closed a tad stronger on Friday on reasonable volume on the back of a successful Hovea 7 and in anticipation of the drilling of Eremia.

    I’ll look at ARQ in a month or so when the current round of drilling is over and when Hovea production of 5000 bopd is confirmed and the cash is flowing into ARQ’s coffers. Then will be the time to see whether the share price offers a buying opportunity or not. In the meantime I would certainly take advantage of any capital raising if ARC were to go back to shareholders for more cash.

    And a weaker ARQ price and it becomes a more attractive takeover target.

    As usual the above is designed to stimulate discussion and an exchange of views. Do your own research before investing your hard earned.

    Disclosure: I have taken losses on CVN, NWE, WON (which I now regret selling) and a small profit on CPN. I currently hold BUY, CUE, COE, FAR, ICN, GBG (an interim drilling report must be due shortly) and PSA.



 
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