junior oilers 3/4 may

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    Junior oilers 3/4 May

    Oil prices have held up reasonably well this week nymex crude closing Friday at $25,.67 and Dated Brent at $23.39 Nymex Henry Hub natural gas finished at $ 5.26 which although down slightly for the week is strong for this time of the year.

    Of the 33 junior oilers on my watch lists, 14 rose, 15 fell and 4 remained the same, much the same spread as in recent weeks. There were no spectacular gainers or losers.

    Amity Oil was among the winners up eight cents or 11 % and Icon Oil another, up nearly 50% finishing the week at 4.8 cents.

    Amity rose on the back of apparent drilling success at Cayirdere (a 19 metre gas column will be tested after production casing has been run), a Korean farm in to Whicher Range and Tony Barton¡¯s media releases. Gas sales are slowly increasing though the rate of connection of new customers is taking longer than expected which is having an affect on budgeted revenues.

    In the short term Amity¡¯s share price is dependent on drilling success so buying into the stock now is a bit of gamble that Cayirdere will prove commercial and that the jv partners will be successful with the second well in Turkey, Adatepe and the third , Yesiltepe, in June. Then in September AYO will drill the long awaited Whicher Range in the Perth Basin.

    Amity¡¯s prospects seem reasonably good and success at Adatepe, Yesiltepe and/or Which Range could really set the stock alight. The company had $15 million in cash on hand at the end of March and gross revenues from gas sales for the quarter of $5 million.

    Icon rose this week because I presume some see it pulling off the financing deal of the century to get drilling rigs back on site at Bayou Choctaw in Louisiana. I thought I detected some interest in ICN a few weeks back and it became more evident on Thursday when 1,345,321 shares changed hands and the stock jumped 1.4 cents.

    This coincided with the statement in its quarterly report that a funding proposal for Bayou Choctaw had reached the ¡°bond credit enhancement stage¡± whatever that means. Some took it as a positive and plunged on the stock. Unfortunately there was no spin off for other Bayou Choctaw participants, FAR and HZN.

    It will be interesting to see if Icon does pull off the deal for it would be truly remarkable in the current climate. FAR and HZN would both benefit if the money comes through and drilling resumes.

    Carpathian Resources also was up this week but on minute volume as it graduated to an oil producer from a lease in the Czech Republic (the Krasna oil field). Its recent capital raising at 10 cents was to raise $1 million to fund gas production on the proven Janovice gas field. Its a bit difficult to accumulate or trade CPN as its shares are virtually illiquid. But it could be worth adding to the portfolio at around 10-12 cents if one can shake the stock loose. The principals know their area of operations well.

    Among the losers Norwest plunged to a recent low of 3.6 cents at which price you would think it is a screaming buy. First Australian Resources also fell to a record low at 3.1 cents. And again I think FAR is way oversold. NWE was down 15% and FAR 10%.

    Empire Oil and Gas looked like expiring at the close on Friday following less than optimistic reports from Eclipse 1. And that¡¯s a pity because what the junior oilers need more than anything at this time is a few decent discoveries.

    Petsec Energy traded up to 59 cents on the release of its quarterly report but dropped back to end the week at 56 cents. Over the month of April PSA rose 15 cents or nearly 40%. Petsec continues to be my favorite oiler and am looking forward to attending the AGM on 13 May. Bruce Hextall wrote Petsec up in the Financial Review this weekend so it will be interesting to see what interest if any this stimulates in the stock next week.

    Lastly WON continued its downward slide and there is still no news as far as I can see about what its new management intends for the stock.

    Bit of wheeling and dealing action in the oil sector this week, a reminder that calmly floating ducks can be paddling furiously under water. And some of our junior oilers need to do a bit of paddling if they are to survive and prosper in this difficult market for resource stocks.

    ARQ was one to show the way on Thursday with the sale of its interest in Cliff Head to pay off its debts and set it up for an interesting drilling program later in the year in its onshore Perth Basin leases. Interesting that ROC should agree to pick up the ARQ interest when the Cliff Head discovery has yet to be declared commercial. But I guess the arrangement puts paid to any doubts one might have about the field being developed.

    I suspected ARC would look to raise funds but didn¡¯t think they would do it this way. Interestingly, at the same time as it was selling its stake in WA 286P, ARQ increased its stake in EP 413 (Jingemia) by buying a minor interest from Victoria Petroleum. Looks like Eric Streitberg thinks that the onshore Perth Basin is all the go, but then he always has. (ARQ¡¯s recent slide presentation is worth a look, you¡¯ll find it on their website)

    The ARQ/ROC deal also gives an indication of what Norwest¡¯s interest is worth and raises the possibility of NWE going down the same path. Eight to nine million dollars must look pretty good to Ivan Burgess right now. That said Norwest still has $1.52 million dollars in the bank and I suspect is doing a bit of paddling of its own.


    Norwest now has 162 million shares on issue and the scrip closed at 3.6 cents this week. This values the company at $5.8 million which is less than the value of its Cliff Head stake alone, much less the cash in hand and NWE¡¯s widespread other interests.

    Norwest is clearly a ¡°straw hat in winter¡± and there are a lot of them around the junior oiler sector at the moment. We will look at some others a bit later but first Norwest.

    NWE has widespread interests in offshore Perth Basin permits (WA 286P 5% and TP/15 10%) where further drilling is virtually assured, along with two onshore northern Perth Basin leases (EP419, 80% and EP 368, 10%) where seismic is being interpreted.

    Norwest also has 7.5% of the offshore WA 226 P lease where the Morangie 1 disappointed but proved oil had moved through the area and hopefully into the Fiddich and Macallan prospects being matured with 3D seismic. Origin and Apache opted in to this lease after the Cliff Head discovery further south so Norwest is in good company.

    Then there is the 10% interest in the permit covering TAP¡¯s recent Cyrano discovery. Norwest opted not to participate in this well but can farm back in after paying a hefty penalty if the well is commercial. It can participate in any other wells on the permit under normal permit conditions. And then there is still Puffin.

    So all in all Norwest at current prices may reward patient investors prepared to wait until the end of the year. The one problem I see with Norwest is that without producing assets it will inevitably have to go back to the market for more funds to pay for development costs of Cliff Head for example. But I suppose it is possible that NWE could follow ARC¡¯s example and sell its Cliff Head stake if Cyrano proved commercial and offered NWE a chance to become a producer at last.

    I¡¯ve always been impressed with the management of Norwest and think the team there has had more than its fair share of bad luck. Maybe it is about to change. People could do worse than have some money on Norwest at these levels.

    The Cooper/Eromanga Basins

    Action in the Cooper/Eromanga Basins is about to get under way with something like 20 wells being drilled in the second half by the likes of Santos, Beach, Cooper and Stuart. It amazes me that there is so little interest in the juniors involved particularly given the good results from last year¡¯s drilling.

    It amazes Reg Nelson too, MD of Beach Oil. Nelson told a meeting of the SA chamber of Mines and Energy this week that equity dealers were obsessed with only the big offshore oil and gas plays and exotic locations when the sums added up much more favourably for companies driving progressive onshore exploration and production, with the stand out performer being the Cooper Basin.

    For the risk averse, given its strong revenue base, Beach is probably the best exposure among the three juniors to the upcoming drilling program. Beach has sufficient capital from its currently producing assets (Kenmore/Bodalla, Acrasia and Sellicks) to fund five firm wells and three contingent. Most of the targets are small with the exception of Waitpinga in PEL 94 with a mean PRR of 7.5 million barrels.

    In fact it is the small size of the targets in the Cooper/Eromanga Basin that highlights the problem Nelson spoke of. Punters just don¡¯t want to know about 1 to 2 million barrel reservoirs. Big is beautiful. This may change however with more discoveries and Santos¡¯ decision to expand its exploration program in the area.

    Santos¡¯ more active participation is important, not only does it increase the chance of oil discoveries but also it could lead to better infrastructure in the area ( pipelines etc) and therefore lower production costs. And with Santos joining the hunt all the oilers involved should get more attention both from the media and from brokers and analysts.

    Interesting too that on Friday Kalrez announced a farm in to PEL 104 in the Cooper Basin taking advantage of Vicpets straightened financial circumstances. Maybe a change of focus coming up for Kalrez? Now if only CUE would follow its example!

    Kalrez now has its headquarters in Adelaide as does Beach Pet, Santos and Stuart Petroleum. Maybe Kalrez has been speaking to some of the others about the prospectivity of the area. Kalrez and Vic Pet have no plans to drill in PEL 104 this year though eventually two wells are part of the deal once current seismic has been analysed and more shot.

    Cooper Energy possibly offers more leverage than Beach given that it has fewer shares on issue (54.5 million as against 185.7 million) and the shares are currently trading at a third the price of Beach. COE has an income stream from the Sellicks discovery which returned it $367,000 gross in the March quarter. Anticipated higher future production from Sellicks will more than offset lower prices.

    Cooper has a healthy $4.2 million in the bank enough to finance its initial firm three well drilling program. These wells are Christies 1 (PEL 92) in June, Eucalyptus 1 (PEL 88) in July and Semaphore 1 (PEL 110) in August.

    Stuart Petroleum is the other junior oiler in the Cooper. With 58 million shares on issue and a share price of 32 cents the company is currently valued at $18 million. (Beach is capitalised at $59 million and Cooper Energy $8 million).

    Stuart¡¯s share price is less than half what it was this time last year when the shares flew on the strength of the Acrasia discovery. In the perverse way the market works the shares went down as STU brought the field into production. Acrasia¡¯s three wells are still not producing at optimum levels but Stuart is working on that and the results should be seen this quarter.

    Stuart¡¯s exploration program is partly tied in with those of Beach and Cooper and includes a possible four wells Arwon 1 (PELA 113), Warrior 1 (PEL 93), Delta 1 or Kiwi 1 (PEL 90) and Doriemus 1 (PEL 102). We are not looking at elephants in any of these wells and success may not have the same leveraged affect as it would have for COE. STU is probably between COE and BPT in terms of safety for those looking for a medium risk entry. STU has just had some personnel changes with Tino Guglielmo replacing Rod Hollingsworth as CEO and is well supported by the Adelaide broking community.

    I would hope that by the end of May Beach shares will be above 35 cents, Cooper¡¯s shares above 13 cents and Stuart above 35 cents. My choice is Cooper Energy though I think if I had the decision to make over again I think I would have gone for Beach. I may make that change at the end of May.

    First Australian Resources

    Another straw hat in winter in my humble opinion is FAR, a small Perth based explorer that has been around since the 1980s. FAR¡¯s share price, at 3.1 cents, is at its lowest level ever and capitalises the company at $4.9 million. At the end of March FAR had $1.9 million cash on hand

    FAR is a junior oiler with an established cash flow from producing assets in the United States (Louisiana and Texas) which brought in a gross $616,000 in the March quarter. Revenues have virtually halved in the last twelve months as producing fields declined but FAR believes that recent development activity including at its Rainosek prospect in Lavaca County, Texas is reversing the down trend.

    FAR¡¯s has a two pronged strategy of some high risk/high reward activity (eg. in the Carnarvon and Canning Basins) together with some lower risk but revenue producing developments (United States). It also has a small 5% interest in the Beibu field offshore China.

    So far its high risk strategy has been a disappointment with a string of dusters including most recently Argos and Banjo. But things could turn around for FAR in the next twelve months.

    FAR¡¯s next well is the Terry Ewing 2 scheduled to spud in the Clear Branch Field in Louisiana on 15 May. This well is a replacement well for the Terry Ewing 1 gas discovery in 2000. During the completion phase of that well the producing Hosston sands were damaged beyond repair necessitating the second well. The target is 8 bcf which would be a nice revenue earner for FAR with its 9.375% interest if it comes in.

    Drilling activity also continues in Texas at the Rainosek prospect with FAR announcing this week more production coming on stream from the recently perforated Midcox interval in the Rainosek 1 well. And the lower Wilcox interval in the third well on the lease the Evans 1 well is about to be perforated and tested and brought on stream.

    The ¡°blue sky¡± potential for FAR lies in the Bayou Choctaw field in Louisiana, the China interest, the Eagle well in California and its interests in the Carnarvon Basin including the Sage and Collier prospects , the West Kora oil discovery and in the Canning Basin, the Point Torment and Valentine Prospects.

    It is a lot of potential expenditure for a company with few funds so it will be interesting to ask at the upcoming AGM how FAR intends to allocate its capital. With a couple of the oilers now resorting to selling interests in leases to raise capital maybe FAR will go down that route too.

    Beibu Field offshore China

    It is interesting to compare the March quarterly comments on this field from the four joint venture participants.

    ROC, the operator said the 3D seismic continued to show encouraging validation of existing leads and prospects as well as new leads. ROC was continuing to work towards a one firm well and two contingent wells for the fourth quarter 2003.

    FAR said the 3D seismic is designed to be integrated with an engineering review of a fast track, low cost, development of one or more of the five oil discoveries within the block. It also is expecting one to three wells back to back in Q4 .

    Horizon was more forthcoming stating that the Wei 12-8 field was a commercial field of approximately 25 mmbo. HZN said there were several satellite leads with hc like amplitudes in the vicinity of the 12-8 discovery which should add incremental reserves. HZN also pointed to a cluster of leads exists to the north at Wushi 1-4, lying between the Wei 12-8 field and Weizhou Island which were due for interpretation later in 2003. ( The best map of the field that I have come across is in the FAR annual report)

    Horizon goes on to describe in some detail two development options under discussion both involving a tie in to nearby Chinese facilities and both costing in the vicinity of US$70-US$80 million. First oil production could commence in Q3, 2005. A preliminary oil development plan is expected to be finalised in July.

    Petsec Energy speaks of up to four wells being drilled later in the year or early in 2004.

    In short there seems little doubt that this field will prove to be a nice little money earner for all involved when the current discoveries are developed. But it also has the potential to host significant new discoveries which will be the target of the drilling later in the year. According to ROC we are talking about 100 mmbo recoverable.

    Success in China might not move ROC much but could provide some much needed upside for FAR and HZN and be icing on the cake for Petsec. The joint venture is anxious to get on with the development but their Chinese partners are apparently not used to working at quite the same pace as the Australians. Nor are they accustomed to keeping the public informed of developments so we may not hear much more about the project until drilling nears.

    I like the potential of the China project. If it comes in at the high end ie. 100 mmbo, it could be worth $125 million to PSA, a bit more for Horizon and a healthy $25 million for FAR at an NPV of $10 a barrel.

    Other Straw Hats

    There are a few other oilers worth looking at with a view to buying now and getting your reward later. Pancontinental (PPP) is today pretty much where it was in the middle of last year, in the doldrums. Maybe it will go for a run later in the year as Tui 2 is proved up or development wells at Taunton confirm a new commercial discovery. Bounty Oil (BUY) should attract some attention as Leafcutter nears. Spud date has been put back to June so there is plenty of time. You would think BUY had done a Matrix Oil, the amount of interest the market is currently showing in it. But things can change and change quickly.

    As always do your own research before investing your hard earned in speculative or indeed any stock these days. Fortunately I was out of AMP when this week¡¯s events unfolded and understand better now why traders don¡¯t like to hold stocks overnight. I added HDR to the portfolio this week. Hardman is clearly the best of the ¡°buy early sell before spud¡± prospects and at current prices is a steal. All feedback welcome, lets all help keep the thread alive.

    Disclosure: I hold BUY, COE, FAR, FAROA, HDR and PSA.
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