junior oilers 28/29 june

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    Junior Oilers 28/29 June


    Oil and gas prices were a little weaker this past fortnight after several weeks of consistent rises. Closing prices with those from two weeks ago in brackets were as follows. Nymex crude $29.27 ($30.65), Dated Brent $27.25 (27.26) and Nymex Henry Hub natural gas which fell to $5.36 ($5.68).

    Major factors influencing the continued relative strength in energy prices include the slow resumption of Iraqi production, US government oil purchases for the Strategic Petroleum Reserve and restocking of US natural gas inventories.

    Of the 44 oil and gas stocks on my expanded watch list 18 rose this week, the same number as rose the week before; twenty two stocks fell compared to eighteen the previous week and four stayed the same compared to eight of a week ago . Being the last week of June, tax loss selling may have been a factor in the slight bias to the sell side though having looked pretty closely at the charts I couldn¡¯t identify that many stocks that I thought were being sold off for tax reasons.

    The Week¡¯s Winners

    AYO

    Amity Oil recorded one of the biggest gains for the week up 7.5% or 8 cents from 1.08 cents to 1.16 in anticipation of a positive result from Yesiltepe 1. By week¡¯s end they had drilled to 69 metres when they lost drilling fluid circulation and had to cement off the offending basalt intersection. Once the cement is dry it is on to the surface casing point at about 280 metres.

    Amity is right now a gamble on a wild cat well, a duster and AYO¡¯s is certainly back below a dollar, a success and the sky¡¯s the limit given the numbers prognosed. According to the company¡¯s Friday drilling report the P50 or ¡°most likely case¡±, if oil and or gas are present, is for Yesiltepe to yield potential recoverable reserves of 270 billion cubic feet of gas, or 140 million barrels of oil. I suppose on those figures it is worth the punt but not for me, been there done that ¡¦..and lost my dough.

    PPP

    Pan Pacific Petroleum was another winner this week gaining 10% or 0.7 cents up from 7.0 cents to 7.7 cents. This was a stock that spent most of May below 6.5 cents following the company¡¯s April decision to raise more cash through a share purchase plan at six cents. Pan Pacific has a number of wells coming up including Taunton 3 which will appraise the Taunton 2 oil discovery in TL/2 , Hyssop 1 in TP/7 and Montgomery 1 to be drilled by Apache in WA 149P. All three wells are in the offshore Carnarvon Basin.

    And later in the year the Tui joint venture (AWE, NZO and PPP) will drill again in PEP 38460 in the Taranaki Basin in the hope of proving the commerciality of last year¡¯s small Tui discovery. The joint venture was recently awarded an extension of the permit which brought the Pukeko and Hector prospects fully within the lease. The jv has run 3D seismic over the Tui discovery and will extend it to the Pukeko prospect this coming summer.

    It is possible PPP will see further strength as drilling nears. There is unlikely to be any further capital raising this year. Volume of shares traded has been on the increase and PPP was Quentin Cameron¡¯s top bargain of his June 17 issue of the Oil and Gas Bulletin. PPP could be a rewarding trade in coming months, it has proved so in the past.

    BPT

    Beach Petroleum at long last showed some strengthening as its Cooper/Eromanga Basin drilling progam got under way. BPT was up some 5% or 1.5 cents. Not a particularly large gain but significant in that it took the stock on good volume through resistance at 32 cents. BPT closed Friday at 33.5 cents having traded up to 34 cents late in the week.

    I think BPT is another stock likely to reward its patient shareholders in the year ahead though its extensive drilling program could make it a roller coaster ride with its likely mixture of success and failure reflected in share price volatility. The good cash flow Beach enjoys from its currently producing assets underpins its exploration effort so it has no need to raise capital. This is one to buy for the longer term and less for trading between wells.

    Unfortunately BPT¡¯strength has yet to spillover to BPT¡¯s partners Stuart Petroleum ad Cooper Energy.

    QGC

    The Queensland Gas Company also rose this week with the announcement on Friday that CS Energy would become a joint venture partner, investing up to $5 million to earn a 50% interest in the two key blocks of ATP 632P including the Berwyndale South gas field. In a second agreement, CS Energy and BHPB have entered into an MOU whereby BHPB may step in as the joint venture partner with QGC with responsibility for technical development and gas marketing.

    QGC was up 15% or 2.5 cents from last week¡¯s close of 16 cents to 18.5 cents this past Friday.

    I have to admit I am not a great fan of the CSM/CBM explorers and producers but Queensland Gas seems to be enjoying a measure of success that has escaped some of the other players in this area. The chart however looks pretty grim and the stock has fallen from 32.5 cents a year ago, ie. virtually halved. But the calibre of its new partners can¡¯t be faulted.


    VOY

    Voyager was also up this week rising 2 cents or 12.5% to end the week at 18 cents, its best close for several months. I mentioned in these reports a few weeks ago some unexplained interest in VOY but just as quickly as it appeared, it seemed to evaporate. Now interest has returned. VOY issued a business activity statement during the week updating the the Jingemia extended production test and announcing that it had marginally increased its interest in the Jingemia lease (EP 413) to 6.27%. VOY said it was still in the process of negotiating the sale of its Nockatunga assets.

    I can¡¯t see anything in these announcement which would sustain a further rise in VOY but I may be wrong. I wouldn¡¯t be surprised if VOY went after a larger slice still of EP 413 when it has some cash or when it can persuade some of the other partners to sell.

    NWE

    The recent rise in Norwest Energy¡¯s shares was explained by an announcement this week that it was giving ROC Oil an option over its 7.5% interest in WA 226P (Morangie lease). NEW said that drilling in the deep waters of the lease was a bit too expensive. If ROC exercises the option after a review of recent seismic the funds that will flow to NWE will be used for working capital. The market didn¡¯t seem to be impressed with the deal marking NWE¡¯s shares down on Friday¡¯s close.

    The Losers

    ARQ, SUR, ICN, CVN, ECU, AOE and CVI were among the losers this week, though with the exception of AOE, CVI and ICN the losses were not substantial.

    CBM explorer, Arrow Energy seems to have been the victim of a bout of tax loss selling on Friday when its shares closed at 6 cents, a drop of 31% or 2.5 cents from its previous week¡¯s close of 8.5 cents. There was no special news in the market to spark the sell off.

    City View on the other hand lost ground as it seemed its Telaga #1 well in West Madura was likely to disappoint.

    Icon Energy was another to be hit by tax loss sellers on Friday when the shares closed at 3.1 cents down from 4 cents the previous day. Icon is still negotiating funding to restart its Bayou Choctaw drilling program and is now well beyond the date by which the company had hoped to complete negotiations with Canadian financiers. Carnarvon too seems to have been a victim of tax loss selling.

    Other Stocks




    PSA

    Petsec Energy had a roller coaster ride this week finishing down 2 cents on the week at 77 cents after having been as high as 87 cents and as low as 72 cents. PSA has done this before , run hard for a week then taken a bit of a breather before running again. Each time it records higher highs and higher lows which is a good chart pattern. Action in the stock was presumably a combination of Rennie¡¯s ¡°third time lucky¡±article in the BRW, the realisation that PSA stands to benefit substantially from the natural gas shortage being experienced in the United States and the market¡¯s appreciation of PSA¡¯s growing cash balances.

    After the market closed on Friday Petsec made public a 90 page report to the American Exchange on its activities over the past three years. In it the company noted that it had cash balance of $US 8.9 million ($A13.34 million) as at the 31 May. The report also included PSA¡¯s own discounted cash flow estimate of $US 26.6 million which I assume is from current production from West Cameron and Ship Shoal. It also fessed up to having only $A600,000 in cash at the end of December 2002. Those West Cameron wells came into production just in time.

    The Year in Review

    Given that it is the end of the financial year I thought it might be instructive to look back and assess how some of our junior oilers have faired over the past twelve months. It has been a bad year generally for the market and a particularly bad year for small cap resource stocks. And that is amply demonstrated by the following figures. Of the 44 junior oilers I follow only 10 rose year on year while 32 fell and 2 finished the year where they started.

    The fall in sentiment for the junior oilers is reflected in the price movement of such stocks as ROC, TAP, Novus, Stuart Petroleum and Mosaic Oil. All five finished the year well down on where they started but if anything, on fundamentals, all five appear to me to be better ie, financially stronger, 12 months on. Of the five I think ROC, TAP and NVS are the most likely to be rerated in the coming year

    The big winners for the year were Petsec Energy, Interoil Corporation, Eastern Corporation and Amity Oil. Australian Worldwide Exploration, Beach Petroleum, Molopo and Sydney Gas Company ended slightly ahead for the year.

    The biggest losers among stocks with good fundamentals were those mentioned above, ROS, TAP, NVS, STU and MOS. The small stocks smashed beyond recovery were WON and EGO. FAR has been knocked down to 18 year lows. There were lots of other stocks that exceeded their 28 June 2002 closing price during the year such as those involved in the offshore Perth Basin drilling, including NWE, VOY, and BUY but who by year¡¯s end where struggling. CVN and CUE also fell into that category.

    The change in sentiment towards the oilers is also reflected in the changing pattern of price movements. It used to be that a stock would rise ahead of the start of a drilling program and one could depend on this movement to make quite good returns. In the past year we saw that happen with the offshore Perth Basin stocks ahead of the drilling of Cliff Head, Twin Lions etc; with NZO, AWE and PPP ahead of Tui and of course with Hardman ahead of the drilling offshore Mauritania. But that pattern seems to be less evident now.

    The Cooper Basin stocks BPT, COE and STU have done very little ahead of the resumption of drilling in their leases. This maybe because the targets are generally very small and therefore don¡¯t excite much interest even though, as Beach has demonstrated, drilling success can be the saviour of these small counters. Bounty has done nothing ahead of the drilling of Leafcutter in the onshore Perth Basin. Even Arc Energy and Hardman Resources are yet to rise in anticipation their exciting second half drilling programs. So the strategy of buy early and sell before spud is not likely to help us much in the year ahead.

    To make money in the next twelve months one reasonably safe bet is to invest in stocks who have proven resources which will come on stream in the next twelve to eighteen months for example AWE (BassGas) and CUE (Oyong) others. In my opinion the market has yet to factor in to the share price of these companies the revenues they will begin receiving in 2004/2005. Another strategy would be to invest in companies that are overdue for a rerating because of increasing oil and gas revenues. TAP, Novus, ROC Oil, Beach Petroleum, Petsec Energy, Arc Energy and Amity Oil all fall into this category. Furthermore these stocks also have the potential to add to their asset base through successful drilling programs.

    Perhaps it might be of interest over the next few reports to fast forward to June 2004 and try and picture for ourselves what the junior oiler situation might be like at that time for various companies. It may give us a guide as to where to place funds in coming months.

    But before that some comments on oil and gas prices. My own view is that oil prices will stay above $25 over the next twelve months and that we are unlikely to experience a major softening in the market as a result of Iraq resuming production. We have already seen that restoring law and order to Iraq and repairing destroyed and damaged infrastructure is likely to be a far more difficult and drawn out process than originally envisaged. Political problems in other major producers such as Nigeria and Venezuala are also unlikely to go away.

    And according to all the analysis I have seen natural gas prices in the United States seem likely to remain at abnormally high levels over the summer months with the possibility of even much higher prices this coming winter.

    AWE Twelve months ahead.

    In June 2004, if all goes according to plan, the BassGas project will be in the commissioning phase and for such a complicated engineering project will be on time and on budget. First gas will flow in the following quarter. As the achievement of the various milestones on the way to the project¡¯s completion have been announced in the preceding twelve months, shares in Australia Worldwide Exploration (AWE) will have gradually strengthened climbing to over $1.50 by the end of June. The reality of a significant annual cash flow for AWE in the order of $30 million from BassGas has at last won recognition from the market. Also by the end of June the joint venture had announced plans to drill the satellite prospects White Ibis. Trefoil had been drilled inconclusively the previous December.

    AWE share price has also benefited from a drilling program at Tui in New Zealand over Christmas 2003/2004 which proved up a small commercial oil field and by the decision to proceed with the development of the Cliff Head discovery in the offshore Perth Basin. Furthermore AWE¡¯s extensive assets in the onshore Perth Basin were starting to look particularly attractive as the Jingemia development came into permanent production.

    By June 2004 then AWE was likely to be closer to its goal of becoming a more substantial participant in the Australian Energy scene. By June 2004 I think there is a good chance that AWE¡¯s share price will have doubled from where it is today.

    Petsec Energy

    Twelve months ago, in June 2002, PSA was a junior explorer emerging from a near death experience. It had a substantial cash balance of $17.2 million, no debt and 105 million shares on issue. It had acquired interests in leases at West Cameron in the Gulf of Mexico which were to be successfully drilled in October/November and become the springboard for PSA¡¯s resurrection. The shares closed the 2002 financial year at 20.5 cents.

    What interested me about the stock was its experience in the Gulf including an extensive data base built up over ten years, the CEO¡¯s large stake in the company¡¯s resuscitation, and the company¡¯s healthy cash balance. What surprised me was the markets non reaction to the successful drilling of three wells in quick succession in Q4 2002.

    Here was a company that had just proved up a possible 25bcf worth $US125 million and the shares actually fell. When I convinced myself that my figures were correct I started buying PSA in early January when the shares were still only 25 cents and have been adding to them ever since. The shares look like ending 2003 FY at around 80 cents, a 400% gain for the year.

    If we fast forward to June 2004 this is what I think will have happened to PSA. First it will have increased its reserves at West Cameron by a minimum of 10 bcf with two successful wells drilled in August 2003. It will also have proved up a new gas development at Vermilion with recoverable reserves in the vicinity of 40 bcf. The company will be in the process of building production platforms to bring Vermilion into operation in H2 2004. In China the joint venture will have successfully drilled not one but two appraisal wells proving up a 100 million barrels recoverable from the field.

    PSA shares will have risen to $1.50 on the back of the extra reserves at West Cameron, then to $2.50 on the success of the Vermilion wells. The success at Beibu, offshore China will push the shares over $3.00. Don¡¯t believe me? Would you have believed me if I said last year that PSA would be 80 cents in twelve months time? We had a 400% gain last year and I believe we will do it again in 2003/4. For me it clearly has the best potential among all the oilers big or small.

    Offshore China Beibu Field

    I came across some figures the other day on the earlier drilling on the Beibu field offshore China. I think the wells were drilled by Total. The wells were drilled on five different prospects on the lease as follows

    1992 Wei 12-8-4 flowed 2,355 bopd from miocene sands
    1993 Wei 12-8-1 flowed 1,296 bopd from miocene sands
    1993 Wei 12-2-1 flowed 3,224 bopd from eocene sands
    1994 Wei 12-8-4 flowed 2,355 bopd from miocene sands
    2002 Wei 12-6-1 not flow tested but plugged and abandoned as a sub commercial oil discovery.

    In late 2002 the joint venture (ROC operator, HZN, FAR and PSA) ran 3D seismic over the entire field to firm up prospects for follow up drilling in late 2003. Last I heard no firm decision had been made but that it seemed likely the first well would be drilled on the Wei 12-8-2 prospect. For me this has got to be one of the most exciting drilling programs coming up in the next twelve months on a par with the resumption of drilling in the Perth Basin. With those figures above you just have to believe that the Aussie joint venture is onto a nice little money maker and perhaps a company maker for FAR and HZN.

    And speaking of Horizon, the report it commissioned from Resource Investment Strategy Consultants (RISC) on its two assets, Beibu and Maari (NZ) is overdue. It will make intereseting reading when released and could have implications f or the valuations not only of HZN but also FAR and PSA.

    Mosaic Oil

    I have never been a big fan of junior oilers chasing gas plays in Australia. The reasons are simple. As John Ellice-Flint said at the Santos AGM, margins on gas are small compared to oil. The price of gas in Australia is low by international standards, producers inevitably have to fund infrastructure including production facilities and pipelines, and then market the product. And there is a lot of competition for customers. I like my junior oilers to be explorers and producers not wholesalers and retailers.

    So for me, in Australia, gas is better left to the bigger guys with the fat check books and competitive muscle. But there are a number of junior oilers who persist with gas, both natural and coal bed/seam methane, and so to be fair to our coverage of the juniors we ought to report on them from time to time.

    Sydney based Mosaic Oil is one company that has recently enjoyed some success with natural gas. Mosaic was first established in 1989 and really didn¡¯t achieve much until it found gas in the Surat Basin in Queensland.

    Mosaic has a large 343 million shares on issue and this is perhaps one reason why there appears to be a bit of a cap on the shares. At its recent price of around 13 cents Mosaic is capitalised at $44.6 million. At the end of March it had some $6 million in cash and no debt. Mosaic has revenue producing oil and gas assets and gross receipts for the quarter was $1.9 million but the company said that this did not include March quarter sales.

    This is a bit disingenuous as presumably the figure included revenues from December sales. The fact is that revenues have been declining in recent years as production from established assets has declined. However this is all about to change.

    But lets back up a bit. Mosaic has had a fairly chequered history chasing oil and gas in Australia including the Timor Sea and Queensland and in Papua New Guinea. After listing in 1989 the shares did little for some eight years or so range trading between four cents and ten cents with a short lived spike to twenty cents at the end of 1994.

    The shares took off in 1997 on the back of a gas discovery rising from 15 cents at the beginning of the year to a high of 40 cents mid year. They then slide back over the next three years revisiting ten cents in mid 2000. More drilling success in Queensland on the Churchie field saw them back at 30 cents in 2001 but have slid to present levels since then despite what seems to be a positive change in the fortunes of the company.

    Mosaic decided a few years ago to focus its exploration for gas and oil in the seemingly exhausted Surat Basin and cut back exploration in the Timor Sea and PNG. Mosaic saw untapped potential in the in the sandstones of the Permian Tinowon formation. Mosaic believed that these sandstones lying at depths of 1,800 to 2,500 metres had been overlooked by previous explorers and were prospective for oil and wet gas.

    Mosaic initial drilling program had a modicum of success but flow rates from the reservoirs were disappointing. Mosaic engineers suggested that normal wet drilling muds resulted in an expansion of the formation clays restricting oil and gas flows. The company switched to American nitrogen drilling technology to drill Churchie 3 with excellent results. Churchie 3 flow tested at 20mmcf per day.

    The Churchie gas field is in fact the company¡¯s newest producing asset and came on stream in March. Other assets include the declining Silver Springs gas field bought from Santos and Petroz in 2000, the Downlands gas field first discovered in 1997 and some small oil producing assets

    Mosaic¡¯s upcoming drilling program will target the company¡¯s Waggamba prospect using nitrogen technology. It is a prospect Bridge Oil drilled some years ago producing gas from the Permian Tinowon formation. The program has been put back to the second half of the year following an accident which destroyed the rig it was to use. It is looking for a replacement but rigs seem to be in scarce supply in Australia at the moment.

    Although Mosaic is pleased with its Churchie success the company has recently indicated that it would in future focus its attention more on oil for the obvious reason that margins are far greater, Australia follows world parity pricing and there are essentially no marketing problems.

    Mosaic is predicting a return to profitability this financial year after a loss of some $700,000 last year. Mosaic has a loyal band of supporters but I personally can¡¯t see much scope for a significant increase in the share price without further substantial drilling success.

    As usual the foregoing is intended to stimulate discussion and provoke an exchange of ideas. 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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