junior oilers 5/6 july

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    Junior Oilers 5/6 July

    Oil prices were a little stronger this past week. Closing prices from Bloombergs with those from a week ago in brackets were as follows, Nymex crude $30.42 ($29.27), Dated Brent $ 27.82 ($27.25). US natural gas prices on the other hand were a little weaker, Nymex Henry Hub natural gas fell to $5.23 ($5.36).

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

    The latter seems to have stepped up a pace giving US authorities some reason to hope that natural gas storage levels will be back on track come October and thus take some pressure of natural gas prices going in to next winter.

    Nevertheless I found this on the web re United States natural gas situation which might be of interest to hotcopperites:

    ¡°The United States depends on natural gas for about 24% of its total primary energy requirements, oil accounts for around 39% and coal for 23%. Domestic production of natural gas meets 85% of current domestic demand.

    Natural gas wellhead prices reached record highs of nearly $10.00 per thousand cubic feet (mcf) in late 2000, early 2001, but fell sharply soon thereafter to around $2.50 per mcf. Cold weather in the U.S. Northeast and Midwest during the winter of 2002/2003 raised prices once again, particularly in late February, as gas storage levels hit unusually low levels and cold weather limited pipeline operations.

    For all of 2002, the average natural gas wellhead price averaged $2.96 per mcf, compared to over $4.00 per mcf in 2001. In 2003, wellhead prices are projected to average $4.79 per mcf.¡±

    While there might not be a natural gas crisis in the United States as some in the media have been suggesting, there is clearly going to be pressure on natural gas prices for the next several years.

    Australian companies working in the United States both onshore and offshore in the Gulf of Mexico obviously stand to benefit from this and from the financial incentives the US government has been giving to encourage GOM exploration and deep drilling in particular. This has significant potential economic benefits to the bigger Australian GOM players such as BHP and WPL and to STO.

    But there will also be benefits for the smaller explores/producers for whom even small discoveries can be particularly lucrative at the higher prices likely to obtain over the next couple of years. The advantage of natural gas in the United States is the short discovery to production time frame, the established infrastructure, the ready market characterised by rising demand and falling supply, the excellent prices, the low sovereign risk and the generous fiscal regime.

    Investors in the oilers would be remiss in not having in their portfolio one of the small Aussie oilers with operations in the United States. The choices are PSA (my favourite), NVS, AMU and FAR.

    Week in Review

    Of the 44 oil and gas stocks on the watch list 33 rose this week, as against 18 the week before; 6 stocks fell compared to 22 the previous week and five stayed the same compared to four of a week ago . This was ample evidence, if any was needed that it was a good week for the sector. Much of the recent gain in the United States S & P index has come from energy stocks so maybe we are about to catch up.

    Being the first week of July, investors may have needed to restock their portfolios after the tax loss selling of the last weeks of June. But while sentiment was much better across the entire oiler board, I think future price movements will be stock specific and related to drilling activity, some possible mergers and acquisitions, and a rerating of those stocks whose growing revenue streams have been over looked such as ROC, TAP, NVS, PSA and a bit further down the track AWE and maybe CUE.

    There is no doubt we are in for a very interesting six months as drilling activity resumes in earnest. And the quarterly reports due out this month will give us a better idea of how the juniors are travelling.


    Hardman was one of the gainers this week as investors rushed the stock on Thursday. The shares closed Friday at 58 cents up 4 cents for the week. Volume was nearly double the previous week. According to ¡°hardmano¡± who spoke to the company during the week, the joint venture were currently meeting to agree the path ahead.

    Also during the week there were some rumours around that Woodside was more concerned that some of its partners at the political stability of Mauritania following the failed coup attempt but there was nothing to corroborate this. Nor was there anything to suggest Woodside was now placing a higher priority on its interests in the United States and in particular the Gulf of Mexico than on West Africa.

    What is needed to boost Hardman¡¯s shares is an announcement of the detailed drilling program and confirmation that Woodside has contracted a rig. Last year these announcements were made in early May and the rig ¡°Deep Water Discovery¡± spudded the first well by the end July. By this time last year the HDR shares had jumped to 80 cents from their levels in the mid 60 s through June.

    In other words the action in Hardman is late this year.

    The demand for HDR shares late in the week may have in part reflected Hardman¡¯s Thursday announcement of the drilling of Leafcutter in the onshore Perth Basin in early August and the continuation of the EPT at Jingemia.

    But most investors will be hoping it signalled that a quick end was in prospect to the current uncertainty over the 2003 West African program. HDR supporters will be watching for announcements next week.

    I gave some thought early in the week to rotating out of Petsec to take a position in Hardman but came to the conclusion that the upside over the next six months was better for PSA. For me it is a case of high risk/high reward drilling (HDR) versus low risk/high reward wells (PSA) plus the fact that the Beibu field offshore China could yet prove to be as big as Chinguetti (100mbo recoverable) and development costs there are going to be a fraction of the capex required to get Chinguetti into production.


    There has been some speculation this week that CUE was close to announcing financing arrangements for its share of the development costs of Oyong. Cue was up from 4.6 cents to 5.0 cents on Friday. Weekly volumes have been increasing. I thought it might be useful therefore to revisit what we said in this report a couple of months ago.

    I reluctantly bailed out of my CUE following the release of the company¡¯s March quarterly cash flow report.

    It has been obvious to all that the short term problem for Cue was that it did not have the cash in hand or alternative financing arrangements agreed, for its share of the development costs of the Oyong (and Bilip?) oil and gas discoveries. It seeemed earlier in the year that CUE would only just have sufficient cash to pay for its share of two new wells in the Sampang PSC (Mangga and Wortel) due to be drilled mid year. These will cost around $US 1 million each or $US 300,000 for CUE

    At the end of December CUE had $NZ 4,195,000 in cash but continued to spend more money on exploration and evaluation (eg.seismic) as well as development, production and administration costs, than it received from oil sales from its one producing asset, the SE Gobe oil field in PNG. In the March quarter CUE had revenues of $NZ 1.8 million but spent $NZ 2.0 million on exploration, evaluation and production. Cash on hand decreased from $NZ 4.2 million at the end of December to $NZ 3.6 million at end of March.

    And in the current quarter exploration and evaluation is expected to jump to $NZ 2.7 million while revenues are not expected to increase. So at the end of June another $NZ1.0 million could be taken out of the piggy bank to leave $NZ 2.6 million. The fact is while expenditures are increasing revenues are stagnant and cash on hand is depleting.

    Cue estimates that the development costs for Oyong, its cornerstone gas and oil discovery in the Madura Straits off Indonesia, will be around $US 100 million. This will cover three central gas wells and two horizontal oil wells, a production platform, either permanent or floating, and a gas pipeline. CUE is going to have to find $A25 million of that.

    I understood from CUE that at least three banks are interested in financing the project. But one wonders whether they will finance 100% or only part, forcing Cue to go back to shareholders or sell some assets. And it is this latter prospect that makes investors nervous.

    There are some on Hotcopper who think that CUE has now become a takeover target and that Santos will eventually buy them out. I personally don¡¯t see that happening. CUE is just too small to warrant the effort and wouldn¡¯t bring anything to Santos that the company doesn¡¯t already have. But I guess you never know. I guess Cue could always sell its all or part of its interest in Oyong and/or its SE Gobe assets if it can¡¯t raise project finance for its part of the development costs.

    CUE usually issues its quarterly report early in the month in which it is due so its possible some of these questions about CUE could be resolved next week. Until the situation is clarified I would suggest people stay out of CUE but get ready to buy in quickly when/if a satisfactory financing arrangement is announced. According to the company, Oyong will generate $A1 million net revenues a month for CUE when it is in production. And there is a good chance that additional reserves will be found on the lease in the next six months.

    Horizon Oil

    Horizon oil shares closed up this week rising from 6.4 cents to 7.5 cents, the first time the shares have been back above 7 cents since April. They reached an intra week high of 7.8 cents.

    Horizon announced on 30 June that it was selling its onshore NZ interest in four leases to Indo Pacific for $NZ 1 million. For HZN that marks the end of its association with wells such as Makino and Huinga 1B which proved so costly to BLO (HZN and to many of us!

    There also seemed to be an expectation in the market this week that the research reports HZN has commissioned from RISC on its two main assets, Maari oil field offshore New Zealand (10% interest) and Beibu oil field offshore China (30% interest), will result in a rerating of the company¡¯s shares. Problem is that the report is now overdue for release. First target date was mid June. It is possible that the problem is with the Chinese who appear to be paranoid about the release of any information on Beibu for reasons that escape me.

    Hopefully the report will see the light of day this week and put an end to the speculation. As Horizon has commissioned and paid for the research the likelihood is that is will be reasonably positive and could have a spin off affect on ROC, PSA and FAR, other participants in Beibu, and WGR and CPC other participants in Maari.

    Beach Petroleum and Cooper Energy

    As the market closed for the weekend Christies 1, the first well in the BPT/COE Cooper/Eromanga 2003 drilling program was drilling ahead to target depth
    During the week the operator reported oil shows from a further 7 metre interval bringing the total interval of fluorescence to 17 metres. A DST over the initial 10 metres appears to have been inconclusive though disappointingly no oil flowed to the surface (cf. DST 1 on Sellicks discovery which flowed 1,915 bopd and 0.25 mmcf of gas on testing)

    Wireline logs will now be run and a more definitive report on the oil find released next week. Even if the find is considered sub commercial it has demonstrated the prospectivity of the area.

    My understanding is that although Christies is some 7 kms from the Sellick¡¯s discovery the target formations are different so I assume the companies will be pleased with the evidence of oil in the Hutton Sandstones. Sellicks produces from the Patchawarra Formation.

    Beach share price rose 3 cents for the week, up 10% and Cooper Energy rose 2 cents up nearly 20%.

    TAP Oil

    Tap Oil is beginning to reap the benefits of its decision to participate in the Woollybutt oil field development in the offshore Carnarvon Basin. By June the field,which came on stream in April, was producing at a rate of 41,000 bopd which equates to about 4,000 bopd for TAP¡¯s 15% interest. With liquids production from TAP¡¯s first successful oil and gas field, the Harriet Joint Venture, (TAP 12.2%) expected to average 20,000 bopd or 2,600 bopd net to TAP, the company¡¯s forward daily production will be an impressive 6,500 barrels.

    TAP is also working hard to commercialise the gas component of the Harriet JV¡¯s liquids production and one project which looks like coming to pass the is the agreement to sell gas to Burrup Fertilisers. Add to that recent oil discoveries at Cyrano and Taunton which may prove to be commercial and it is no wonder that TAP is being rerated

    TAP is now expected to build up its cash balance significantly and hopefully fund future exploration and development from this cash flow. However there are no forward revenue or expenditure projections in any of the material recently released by the company, an omission which detracts from the usefulness of an otherwise detailed if somewhat breathless recent investor update.

    TAP first floated on the ASX in September 1996 at a price of 50 cents. It currently has 155 million shares on issue so at its current price of $1.42 it is capitalised at $220 million.
    It currently has no net debt and the princely sum of $A1 million in cash balance by mid June.

    I think TAP is probably a sound investment going forward though it would be useful to have some revenue and expenditure projections from the company, if only to compare TAP¡¯s likely net cash flow with other oilers who might attract our interest.

    One also needs to bear in mind that most of TAP¡¯s assets are short life fields, for example Woollybutt is not expected to last beyond three years. TAP believes that there is further potential at both Harriet and Woolybutt but that needs to be proved up with the drill bit.

    Bear in mind also that TAP has relatively small interests in most of its projects ie in the order of 10-15%. That¡¯s good in the sense that its spreads TAP¡¯s risk but it also means the returns are not as great as they would be if the exposure was larger.

    TAP has an active drilling program coming up in the next six months with the focus on its acreage in the offshore Carnarvon Basin. This includes participation along with Apache, Santos and PPP in drilling activity in TP/7 and TL/2 where TAP bought Exxon Mobil¡¯s equity interest earlier in the year.

    It also has interests in onshore New Zealand which are being proved up for drilling in 2004.

    But I repeat it would be useful if the company could release some forward looking revenue and expenditure figures. Unfortunately, like a number of other oilers, TAP doesn¡¯t seem required to do this in detail on a quarterly basis.

    As usual the foregoing is intended to stimulate discussion and provoke an exchange of ideas. I don¡¯t try to cover all the week¡¯s events just those that I think might be of general interest. 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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