junior oilers 29/30 march

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    junior oilers 29/30 March

    An interesting week for the junior oilers, some drilling activity, a farm in and a number of activity updates. The price of oil regained some of the losses of the previous week as the markets realised the war in Iraq would likely drag on for some time. Henry Hub gas prices ended the week at $US 5.12

    Of the 33 oilers I follow 12 rose week on week, 15 fell and 6 stayed the same. The best gainers were Petsec Energy (PSA) up 13% and BPT up 5%. CVN and SUR both ended the week substantially higher but on insignificant volumes.

    PSA was up on small volume of 768,000 shares suggesting that some serious buying might see even bigger gains in the weeks ahead. It is worth recalling that PSA traded 4.5 million shares and jumped 9 cents at the end of January when the company announced the commencement of production from its West Cameron gas field in the GOM. PSA should present its final report in the second week of April at which time it may also announce March quarter net revenues estimated to be around $14 to $A15 million. Managing Director and largest shareholder Terrence Fern was promoting the company with selected brokers during the week.

    After some months in the doldrums Beach Petroleum attracted renewed interest particularly towards the end of the week. BPT is about to start an 11 well drilling program with the first well probably in the Sellicks lease. Resumption of drilling in the Cooper/Eromanga Basin did nothing for BPT’s partners COE and STU. Cooper Energy fell 10% on the week and Stuart Petroleum didn’t trade at all!. BPT strikes me as a good longer term investment, COE probably offers best leverage in the short run. Hopefully it will reappear on radar screens when details of the first well is announced. And that should be soon.

    The losers were Drillsearch (DLS) down 22.5%, COE down 10%, AMU down 8% and Norwest down 6%. But again with the exception of DLS, volumes were so small as to give no guide to future price movements.

    DLS traded on the unusual volume of 1.25 million shares compared to 40 thousand the week before. The company announced that it had identified a significant prospect in its Bonaparte leases but the market was obviously unimpressed with it being gas when oil was expected. DLS had earlier reported a $14,000 loss for the first half and had only 327,000 in cash at the end of December. Total group sales for the half were $3 million equally spread between Australia and Canada.

    AWE, ARQ and AYO were all down a couple of cents while Hardman traded all week around 44 cents. It looks like HDR has found good support at this level. The drilling of Leafcutter in L1 in the onshore Perth Basin in May could attract some interest for HDR and partner BUY in coming weeks particularly after the success of Eremia.

    AYO has three wells coming up in the next couple of months which should make it an interesting ride for AYO supporters. Company needs to demonstrate that it can substantially increase gas sales which are languishing in the 11-13 mmcf per day range with only 40% of that attributable to Amity. Not much good having huge reserves of the gas in the ground if you can’t sell it. An oil discovery in the Adana region with the Yesiltepe well would give the company a real shot on the arm but a
    duster could see a repeat of Beyazkoy a year or so ago when a poor result clipped 20 cents off the shares.


    ARQ’s presentation this week to the Securities Exchange was a bit disappointing. There was no detailed information on Eremia, no indication of when Hovea production would reach the promised 5,000 bopd and no capex expenditure estimates on either. Streitberg indicated that ARQ would drill as many exploration prospects as possible to replace and increases reserves and hoped the 5 wells planned at the end of the year would result in one additional Hovea worth another 50 cents to the company.

    I am sure ARQ has a bright future but the lack of some important financial info detracted from the presentation. For example it would have been useful to know if more wells and production facilities are planned at Eremia. The company predicted annual net cash flow of $30 million at a target production rate of 5,000 bopd but said nothing about likely production from the new discovery or anything about Dongara gas which seems to be shut in for the duration. Its all a bit curious.

    And I would still not discount the possibility of a capital raising on the back of the success at Eremia. However I note that at the end of the week Rothchilds took up its option to convert a $2 million note into shares at 60 cents increasing shares on issue by some 3 million. I guess Rothchilds would not have done that if a capital raising was in the wings.


    ROC’s presentation to the same commission on Cliff Head was full of all the sort of information anyone with an interest in the discovery could want. The one disappointment being that we will have to wait till later in the year to find out whether the field will be commercial or not.

    There is not much point in repeating here what is available on ROC’s website or the ASX suffice to say that Roc’s reserve estimate of oil in place at Cliff Head ranges from 66 to 99 mmb with a recovery factor of 30%. If I am not mistaken these figures are a bit lower than those that have been used by ROC’s joint venture partners. The potential cost of developing a field with 30 mmb recoverable is about $US 100 million. So a company like NWE would have to find $US 5 million. The recent five well drilling program cost an estimated $US 13 million.

    Of interest for those with a stake in Bounty Oil was the ROC presentation slide showing the Permian Play Fairway in the Perth Basin extending northwards 250 kms from Cliff Head through adjoining Bounty leases 325 and 327. Expect to hear more about drilling in these leases but probably not until next year. Apache has shot 2D over 325 and will now shoot 3D over the best prospects.


    At the end of the week, in fact about 10 minutes before the market closed on Friday, TAP and WON announced that there were hydrocarbon shows while drilling Crackling South and that these would be evaluated by wireline logs. I guess those holding through the well would have preferred to hear that they had intersected an oil column in a good quality reservoir but that was not to be. Hydrocarbon shows while drilling doesn’t exactly sound that positive – remember Huinga 1B- but I guess we will know one way or the other early next week. The market was unmoved by the announcement with a small number of shares going through at pre announcement prices in the short time that was left for trading.


    The Ensco 53 jack up rig now moves on to Banjo in which FAR has a 33.3% interest. The well is expected to spud on 1 April (Tuesday) and one can only hope the date is not a portent of the well’s likely success. FAR’s decision late last year to raise capital with a share issue pitched at pitiful prices put paid to any pre drill rise in the share price. The free options were some compensation for those that subscribed to the float but as of Friday the shares were trading below issue price and a duster here will presumably see them below 4 cents.

    Normally that would worry me. But FAR has already paid for the well, has been a going concern for more than 18 years, has producing assets in the United States and more inexpensive work overs coming up on these leases. Moreover it has enough cash to see it through until the end of the year. So I have reasonable expectations that FAR could recover from a duster at Banjo. And if Banjo actually struck oil the upside for FAR should be reasonably good even in this market. In fact it could be bloody terrific given this stratigraphic prospect has the potential to contain up to 50 mmbbls of recoverable oil. Here's hoping.


    EGO, at the real penny dreadful end of the market, found a farm in partner this week for its long awaited Eclipse well and drilling will commence in mid April. The well is in EP 389 some 60 miles north of Perth and is targetting 90 to 255 bcf of gas with follow up potential in similar structures at Eclipse West, Yeal and Gingin Brook. As accepted geological wisdom has it that structures this far south in the Perth Basin are very tight and difficult to produce there aren’t too many people who give this well much of a chance. But then no one gave the northern Perth Basin prospects much chance either until Cliff Head.

    The announcement of the farm in on Wednesday saw 10 million EGO shares change hands and the share move from 0.9 of a cent to 1 cent. But enthusiasm waned subsequently and the shares closed Friday back at 0.9 of a cent.

    Success at Eclipse would certainly throw a cat amongst the gas pigeons and provide a huge supply source much closer to markets than say Dongara, Hovea or Woodada further north. But EGO and its partners would have to find customers in WA’s unregulated gas market. Nevertheless it is a mouth watering prospect and an opportunity for EGO prove its detractors wrong. Be interesting to see if there is pre drill rise in the share price from here. It is almost tempting enough to put some money on it like farminee Nexus Energy has done. But then you could also go to the Burswood.


    New Zealand Oil and Gas announced the commencement during the week of 3 D seismic over the recent Tui discovery and adjacent areas in offshore license PEP 38460. It will be completed in May with data available for interpretation in June /July. The jv partners, NZO, PPP and AWE hope the results allow for further drilling in the permit on Tui and other prospects next summer. If one was at all excited about that prospect, and shooting expensive 3D seismic suggest the partners are, Pan Pacific is the best entry for my money. But it will be a long wait. PPP shares are currently trading at around 7 cents, half their pre Tui levels and volumes are miserable but at least the company has a cash flow and not too much paper on issue.

    Petsec Energy (PSA)

    Given the potential for PSA to outperform this year I though it might be useful to look at the company in some detail. I visited their Sydney office a couple of weeks ago and picked up some back copies of their annual reports. The following potted history drawn from those reports might be of interest to those that follow the stock. I should say at the outset that I have a stake in the company.

    Petsec Energy is really the story of two companies, the Petsec before its US subsidiary Petsec Energy International (PEI) went into Chapter 11 bankruptcy protection and the Petsec that regained control of its US subsidiary on the completion of a Plan of Reorganisation in January 2001.

    Petsec has been around for years. I think it was first capitalised in the mid sixties. It has dabbled in both oil and gas and mineral exploration and up until the late 90’s still had an interest in Climax Mining. Terry Fern PSA’s Managing Director is also MD of Climax and is a major shareholder of both. The defining moment for PSA was when it decided to sell up its Australian exploration assets and try its luck in the Gulf of Mexico. This was in 1990. It had no cash flow and an exploration budget of $US10 million

    It proved a good move for Petsec. From 1990 to 1997 PSA enjoyed seven continuous years of growth in reserves, production and cash flow . The company achieved its growth through exploration success (39 hits from 42 wells drilled) on generally small (10-20 Bcf) lower risk targets. In the early days on one lease, Main Pass, PSA even made money out of extracting gas from reservoirs into which a major had originally injected gas to extract oil.

    The company’s success was reflected in its share price with PSA reaching more than $7.0 in late 1997 from a low of what looks like 15 cents on my Etrade chart in early 1994.

    But by 1997 competition in the gulf had increased, lease bonus payments were more expensive and drilling and development costs soared. These adversely affected the economics of the smaller lower risk prospects. Petsec’s US operating subsidiary PEI accordingly decided to go after a number of higher risk higher potential prospects and sought some strategic alliances with bigger partners.

    But events conspired to wreck PEI’s plans. Although it had some drilling success in 1998 the finds were small and a number of wells had costly mechanical difficulties. Expenditure reached $US 125 million for the year but cash flow dried up as oil and gas prices fell out of bed. Oil reached $US 11 a barrel and gas $US1.80 per MMcf. PSA’s debt soared to unacceptable levels.

    In early 1999 PEI sold a 50% working interest in a number of production and exploration leases to Apache for $US 68.3 million thus reducing its debt which nevertheless remained high at $US 109 million. It scaled down its drilling program for the year and went back to chasing lower risk plays. In 1999 PEI participated in eight out of ten successful wells drilled by its joint venture partners. But the jv spent more money than PEI had budgeted for and by year’s end PEI was still in financial trouble.

    To cut a long story short in April 2000 PEI placed itself under the protection of the US courts. A plan of organisation was put in place which saw many of PEI’s assets sold off to repay debt. Petsec lost control of PEI while the courts were sorting out its finances. PEI emerged from the process in January 2001 and PSA regained control of an entity that had 5 leases and its valuable data base intact. PSA had no debt and some $26 million in cash. The plan was to start all over again in the gulf with the original game plan, ie. a conservative approach focussing on smaller low risk reasonable reward plays.

    PSA didn’t do much drilling in 2001 other than participate in an unsuccessful onshore well in Louisiana. But it did bid for leases in the March 2001 auctions acquiring ORRIs in a number of leases including Ship Shoal 184 and 191, where Llog subsequently successfully drilled four wells in 2002. PSA now receives a monthly royalty cheque from Llog of an estimated $A 300,000-$400,000.

    In March 2002 PSA bid for and obtained its West Cameron lease 343 and later an interest in adjacent West Cameron lease 352. It drilled three succesful gas wells in October 2002 from an already established platform in 352 and brought all three
    wells into production in January this year. By both design and good luck the success at West Cameron has been a major step forward for PSA assuring it of a substantial net cash flow depending on future gas prices, of $A3 to $A4 million a month over the next two years which will allow it significantly to expand its activities.

    Since January 2001 PSA has expended $A23 million or thereabouts on exploration and drilling, acquiring new leases and establishing a production platform at West Cameron. But this investment will pay off handsomely this year. I estimate net cash revenues for March quarter alone to be in the vicinity of $A14 to $A 15 million as a result of recent high gas prices.

    The future looks good for Petsec. In February of last year it joined with a number of other small Australian partners in the Beibu field offshore China and the first well drilled intersected a nine metre oil column. ROC the operator is currently putting together a plan of development for the five established oil discoveries on the lease. ROC also plans to drill in November a large prospect identified by recent seismic which could significantly add to the reserves.

    According to recent information the development of the Beibu field might be delayed by the Chinese partner (CNOOC) which in some respects might be welcome by the market if not the jv partners as it puts back expenditure commitments. PSA has a 25% interest in Beibu reducing to 12.5% if, as seems likely, CNOOC takes up its option for 50%.

    PSA has plans for another two to three wells this year on its West Cameron leases. The first well should spud in June. As I understand it the plan is to increase reserves there and to bring any discoveries into production as the current reservoirs are expended. The targets have been defined with the aid of data from the last round of successful drilling on the leases so the chances of success are high.

    Later in the year PSA intends to drill at least one prospect on its recently acquired Vermilion leases which I understand the company is quite excited about. This is a higher risk/reward play than West Cameron so the company make look for a farm out.

    Petsec is just as vulnerable to the vagaries of the drill bit as any other explorer but given its knowledge of the Gulf you would have to rate it a good chance of
    bringing off a successful 2003 exploration program. There are question marks about the reserves at West Cameron which the company rates at 25 bcf based on p3 reserves whereas an independent analysis puts them at half this figure on a p2 basis. But only production experience and the data derived from that, can indicate the size and life of the reservoirs. So far they have maintained excellent pressure and daily production rates are up from an initial 30 mmcf a day (18 mmcf net to PSA) to 38 mmcf per day (22 mmcf net to PSA).

    What makes PSA so attractive at current prices is the prospect of very significant free cash flows from West Cameron over the next two years. If the company, mindful of its former near death experience in the Gulf, can use these funds wisely and profitably there is every chance it could regain some of its former glory. Certainly that must be the goal of management.

    As usual do your own research and consult experts before investing your hard earned particularly in the speccie end of the market.

    Disclosure: I hold BUY, CUE, COE, FAR, FAROA, GBG, ICN and PSA.

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