junior oilers 23 march

  1. 1,317 Posts.
    junior oilers 23 March

    It might just be wishful thinking on my part but a look back at the price and volume action among the junior oilers this past fortnight suggests to me that the sector may at last have come off its lows and started to move up again. And this appeared to be ahead of the recent market jump due to the start of hostilities with Iraq.

    Almost all the Perth Basin stocks for example have moved up from recent lows. AWE closed Friday at 75 cents having bottomed at 70 cents on 3 March (and dropped below that in intraday trade). HDR was a little later hitting its post drilling low, closing at 39.5 on 13 March. On Friday it closed at 44 cents having been as high as 45 cents mid week. ARQ closed at a low of 48.5 cents on 12 March and was already on the road back before the results from Eremia came in.

    VOY also hit its low in the second week of March closing at 14.5 cents on 13 March over 50% down from its early January highs of 31 cents. Last week VOY closed at 16 cents.

    NWE, the most savaged of the Perth Basin stocks, closed at 4.1 cents on 17 March but by week’s end have made it back to 5 cents after having closed as high as 5.2 cents on Thursday. BUY too had a resurgence albeit on small volumes. One lucky buyer took out 200,000 shares at around 7 cents on 17 March. By the end of the week the stock traded up to 8.5 cents.

    And not only the Perth Basin stocks benefited from a renewal of interest. Horizon sprang back from a close of 6.1 cents on 10 March to reach 8 cents on Friday. There seemed to be no reason for this other than the market thought the stock was oversold. Cooper Energy traded at 10 cents for the first time in two weeks and its Cooper Basin partners, BPT and STU, were showing signs of life as drilling on their leases is about to recommence. Amity Oil too had a terrific bounce from 58 cents on 11 March to 68 cents this past week.

    But there were also some laggards. Poor February production rates for the Wichian Buri field saw Carnarvon head further south to close at 3.3 cents on Friday. CUE just can’t drum up any market enthusiasm for what it has got at Oyong. PSA is trading sideways despite an avalanche of money pouring in from West Cameron gas.

    WON at 1.1 cents is stuck around its recent new issue price after promising so much more in late February when it hit 1.4 cents and looked like breaking out of its then trading range. EGO and PCL have fallen below recent issue prices, despite the former having a well coming up. LKO, after disappointment at Munga 2, and EPR after Port Fairy failed, have suffered the consequences. FAR too has struggled to move above it recent issue price even though it has Banjo coming up in two weeks time and a reasonable good drilling program following that.

    So perhaps it is a mixed picture after all. But I thought it was worth noting that those stocks that strengthened, did so ahead of the broader market gains following the start of the invasion of Iraq. This suggests that the punters thought that some junior oilers had been oversold.

    Hopefully this trend will continue and pick up momentum. The immediate future of the junior oilers depends on a number of things including the resumption of drilling activity eg. in the Carnarvon Basin this week (Cyrano 1, Crackling South and Banjo) and shortly in the Cooper/Eromanga Basin. The discovery at Eremia should also positively affect sentiment towards the onshore Perth Basin after the offshore Perth Basin disappointments. BUY, HDR and AWE could benefit from their upcoming onshore wells, Leafcutter and Red Back.

    The fate of the junior oilers depends in part too on whether the recent gains in the broader market prove to be a short lived dead cat bounce. Unfortunately I think the majority of analysts don't expect the uptick to last given the economic fundamentals in major markets. So this plus the declining oil price could temper any resurgence in the oil speccies.

    Struggling producers like CVN will feel the fall in oil prices as will the smaller participants in Jingemia like PCL.

    Gas prices are also down but are likely to stay around $US 4 to $US 5 in the important US market inthe short term as distributors restock inventories. So small Australian producers in the US like FAR, AMU and PSA should see revenues fall to more normall levels after the recent bonanza.

    Now a look at some individual stocks:


    The Eremia result is an exciting one for Arc Energy. Eric Streitberg is already describing the 15 metres oil column in excellent Dongara sands as a commercial find. The well is currently drilling a head to test deeper targets that were gas bearing in the Hovea field. Streitberg believes there are 20 other leads and prospects in ARC’s acreage in the northern part of the onshore Perth Basin and is confident of further success. ARC has up to 5 wells planned for the next exploration phase beginning in late 2003.

    There are now a number of unanswered question for ARC. What sort of capital requirement is needed to develop Eremia, eg. the number of appraisal/development wells required and what sort of production facilities? Will ARC decide to go back to shareholders for more funds, seek project funding or try to fund the Eremia development out of Hovea cash flow after the Hovea debt is paid off?

    My own guess is that ARC will probably go for a share or rights issue given that shareholders will presumably be happy to put their hands in their pockets for more funds to prove up and bring on stream quickly this new discovery. Streitberg foreshadowed as much in his half yearly report in relation to the offshore Perth Basin drilling when he said that the drilling campaign there may result in a requirement for additional working capital requirements. Well as we all know that didn’t happen. But now he has an onshore discovery which may require extra wells and accordingly trigger the additional working capital requirement. We’ll see.

    The opportunity for people like me who don’t currently hold ARC may well be in a new capital raising. And this is the issue that may cap ARC’s share price at present levels unless ARC announces a good gas find in the deeper Eremia targets next week which could add a few cents more to the price.

    ARC is looking very solid for the longer term with Hovea set to provide good cash flow this year, Eremia to come on stream if it lives up to its initial promise and Cliff Head almost certain to be developed a little further down the track. Remains to be seen if there are more predators like TAP who think the same. The fate of successful junior oilers is unfortunately to be gobbled up by bigger oilers.


    AWE closed the week at 75 cents after bring as high as 77 cents during the past fortnight. AWE put out a presentation on 20 March which was timely reminder of AWE’s substantial assets after the disappointments of the Perth Basin drilling and Tui.

    AWE announced that the small oil field discovered in the Kapuni F sands at Tui could be producing as early as 2004 under a fast track scenario and had good follow up potential for larger reserves which could make it another cornerstone project for AWE.

    It also announced a new drilling program which includes Red Back 1 in the Perth Basin in May (AWE 33%), a well not previously foreshadowed, then further drilling at Jingemia in June and a couple of shallow wells with Apache in the Carnarvon Basin in July/August. Then it is back to New Zealand in August including drilling of Tui 2 in November. The year concludes with Trefoil 1 in Bass Strait. It is an interesting drilling program.

    However I am still a bit surprised by the strength of AWE’s share price. Its cornerstone projects are BassGas, Cliff Head and Jingemia (a recent addition to this status). But revenue from BassGas is at least 18 months away, Cliff Head is yet to be declared commercial and Jingemia is really a pretty small field.

    AWE has some good assets I don’t dispute that, but these assets are going to take some time to turn a dollar for the company. And oil investors have notoriously short time frames. AWE made $570,000 net profit in the December quarter but this was largely as a result of interest revenue. I still think AWE share price could weaken in the weeks ahead.


    Amity has had a good fortnight with its share price boosted by the announcement of its first half year profit after tax of $700,000, the imminent drilling of a new well Adatepe 1 in the same lease as Gocerler, and the fact that Tony Barton CEO has been buying more shares and options on market. War jitters don’t seem to have had an adverse affect.

    But questions still remain particularly over gas sales. The normal report on sales levels for the first two weeks of March indicates that gas sales have actually fallen slightly to 11.9 mcf gas a day (40% attributable to AYO). Part of the problem AYO has had in the past has been predicting production and sales levels that it has been unable to achieve. There is also some concern that management problems in the company may not be entirely resolved.

    The immediate future for Amity’s share price depends on its drilling program and the ability of the company markedly to lift commercial sales. It is no good having the gas in the ground if you can’t find customers for it. I expect to see some softening of the price in coming weeks. This would of course change with some drilling success.


    As Hotcopper’s chief apologist/ramper/defender/ top twenty shareholder/ for Petsec Energy I have to say it is hard to go past Petsec Energy as the best buy on the oiler boards at the moment. I am not always a fan of Quentin Cameron’s fortnightly best picks in the Oil and Gas Bulletin but for the first time ever he has had one stock, PSA, as his top buy three issue in a row. I would have to agree with him that this one is stand out value.

    PSA is currently producing and selling 23 mmcf of gas per day net to the company from its GOM assets. A Henry Hub gas price of $US4.50 (currently actually over $US 5.00) nets the company $US 4.00 per mmcf. That equates to $A1,073,333 net to PSA a week. I know of no other junior, or mid cap oiler for that matter, making a million dollars net a week. By the end of March, with the benefit of the recent higher gas prices, PSA will have netted over $A 13 million in nine weeks. And yet its market cap languishes at one third of that of AYO and one fifth of AWE.

    OK so PSA has spent $A23 million on exploration and acquisition of assets over the last two years, a “cash burn” some say reminiscent of the hi tech companies of a couple of years ago. But this is capex, not cash burn, and has been spent acquiring and developing such assets as West Cameron, Vermilion and China, just to name some of its prospects.

    Some point out that reserves at West Cameron are not remarkable at 25 bcf (though the Oil and Gas Bulletin has suggested that true reserves in the field are closer to 100bcf) but these will hopefully be increased with further development wells mid year. Others say gas prices could drop below $US4.00 this northern summer and the field will show some natural decline. But all oilers face this possibility.

    PSA has two additional prospects to drill at West Cameron in June targetting 16 bcf of gas. These prospects are more like development wells than wildcats based as they are on information gathered from the currently producing wells and in the same lease as one of the wells. They will be drilled from the same platform as the current wells were drilled.

    Then there is the new Vermilion leases in the Gulf which PSA believes host gas reserves significantly larger than those at West Cameron. It will probably farm out these leases in order to share the higher risk associated with deeper targets. This indicates clearly to me that the company has learned its lesson from the past. The company might have explained what it was targetting here,the size of the prospects and what infrastructure if any is available in its recent press release but unfortunately didn’t. (If PSA was to put out a presentation like AWE recently put out there is no doubt in my mind there would be more interest in the stock)

    And on top of all this there is China which according to ROC is likely to generate positive cash flows well before Cliff Head, perhaps as early as H2 next year. We are overdue for some news from ROC on China but here again is another company not known for its media relations skills.


    It is beginning to look like WON is not going to rise much if at all ahead of the drilling of Crackling South in a week or so. This is a prospect which as one poster noted last week is less of a wild cat than one might think given the oil shows in Crackling 1. But it is another one of those shallow Carnarvon Basin drills which have not been too successful of late. Crackling South is targetting 30 mbo and would be a real plus for WON if it came in.There is probably enough activity on the WON agenda for the rest of this year to justify holding WON through the drilling of this well but you might have some white knuckles by the end of it.


    FAR has a busy year ahead of it according to the presentation on the website beginning in Australia with Banjo in early April. Although the recent capital raising was successful, FAR shares have languished at 13 year lows and are finding it difficult to break above the issue price of 4.5 cents.

    I still think we should see some upside before the drilling of Banjo though not as much as might have been the case had the markets not been so bearish. This is another one to hold through the drilling of the well given that FAR has a number of other wells coming up this year, has the cash to finance its forward commitments and the bear market can’t last for ever. I think FAR will be well above current levels before the year is out.

    One of the things that confuses me about the FAR presentation on the website is that it is almost impossible to get any idea of the relevant contribution the different current projects make to FAR’s ongoing revenue stream. So trying to work out where FAR gets most of its cash from is well nigh impossible. If anyone has sorted it out can they let me know.


    CUE put out an update during the past week on the Oyong development which indicated inter alia that CUE was seeking bank interest for its $A 25 million of development costs for a project that would net CUE $1 million a month when it was up and running in 2004. The JV will also be drilling again in the Sampang PSC later this year targeting some large prospects identified by recent seismic.

    The announcement did absolutely nothing for CUE shares which I guess reflects the state of the current market and the concern that CUE might have to go back to the market for some of this money. But it did give reassure long suffering shareholders that CUE is pressing ahead with its Indonesian exploration and development program. At 4.5 cents CUE has a market cap of just $15 million which IMO significantly undervalues the assets CUE now has on its books.


    Carnarvon is obviously having awful trouble getting the oil out of the ground in Wichian Buri as the announcement this week showed that production rates had fallen yet again in February. One of the problems the Oil and Gas Bulletin referred to is the fact that the oil solidified at night!!! But apparently this problem has been addressed and resolved.

    It would really help the market understand what is going on in Thailand if the company came clean with a full explanation of the engineering problems it is facing and how it intends to deal with them. It appears to me as though there are a number of disagreements with the operator and joint venture partner Pacific Tiger. But even that is just reading between the lines of media statements and posts on bulletin boards from people who have been in touch with the company

    I tend to agree with Yogi that some good news would revive interest in CVN shares which have slumped to the low three cent level but the market now seems to have little faith in anything the company says. I think CVN will overcome its present difficulties eventually but like many others am not prepared to buy in until there is more information available. I am particularly interested in how the company plans to fund the next phases of drilling as I think it will have to go back to shareholders for more money and that looks like being at 2 cents with attached free options if it is to have any chance of success. Just my opinion, I have not been in touch with the company recently.

    Keeping in touch with media announcements is a must for all of us who follow the junior oilers. The ASX is obviously one source but Yogi has also made it a lot easier for us by putting the oilers announcements on his website. If you haven't become a member of his Aussie Oilers yet you should. Can highly recommend it.

    Disclosure: I hold BUY, COE, CUE, FAR, FAROA, GBG, PSA, ICN and WON. As usual consult an expert before spending your hard earned.

arrow-down-2 Created with Sketch. arrow-down-2 Created with Sketch.