junior oilers 9 march

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    Junior oilers 9 March

    Awfully tempting not to write anything this week given the parlous state of the market. Was thinking I would only add to the gloom. But here goes anyway.

    First just a comment on Cliff Head 4. The JV reported Friday that the well was at 1,180 metres below rotary table and drilling ahead. They were preparing to core the reservoir zones. No mention of any hydrocarbons though I assume they had not passed through the target zones. At Cliff Head 3 these were found in the side tracked well at a vertical equivalent of 1,213 to 1,242 metres below rotary table. Just have to wait to Monday for hopefully some good news.

    Gainers for this week included AWE which was up 5 cents closing at 76 cents on Friday with some 900,000 shares traded. This was AWE’s best volume day for a couple of weeks. Couldn’t see anything in particular to justify this buying, certainly not Cliff Head 4, nor the company’s activity update on 4 March. So maybe a broker’s report fuelled the interest. Anyone any suggestions? I had been thinking AWE would be down in the sixties by now so this movement comes as a bit of a surprise.

    No other significant gainers as far as I could see but one or two important losers eg. AYO, down eight cents for the week from 69 cents to 61 cents. HDR also lost ground this week finishing three cents down at 45.5 cents. And I think that is a trend that will continue with HDR for the reasons advanced in past weekly summaries. ROC lost just two cents to finish at $1.28.

    There were other small gainers and losers but the volumes were so small in most cases they didn’t mean a great deal. Someone had a buy order in for a million HZN at 6.8 cents during the week perhaps a director trying to prevent a further slide in the sp. If so the strategy didn’t work with all the 6.8 cents bids taken out and HZN falling to 6.2 cents at weeks end, the lowest level at which they have traded since I have been following the stock. Can’t see an upside for HZN in the short term.

    Cue fell to 4.7 cents on Friday on small volume. And that’s the lowest it has been for some months. There was little interest in Carnarvon, or Bounty or Coopers, or indeed in a lot of other oilers. Some like ICN, AMU, WON, AOE, DLS, SUR EPR, NZO, PCL, CVN, CPN and MOS all had at least one day of no trades while many were wall flowers for two or three days. There is just no interest in the speccie oilers out there at the moment.

    FAR’s recently issued 20 million shares and attached shares options began trading this week. The options traded as high as 2 cents before finished the week at 1.1 cents. The head shares moved around quite a bit beginning the week at 5.2 cents then traded as high as 5.7 cents and as low as 4.7 cents before finishing the week at 5 cents.

    Volume has picked up a little in the last few weeks and hopefully the price will become less volatile on a strengthening trend as the drilling of Banjo nears. The newly issued shares will presumably put a cap on the price rise until churned out of the hands of those who got them through the prospectus. FAR issued an update o its US operations on 5 March

    ICN announced after the market on Friday that it had placed 3.75 million shares to raise $100,000 to keep the wolves from the door and that it had also been in negotiations with a Canadian Bank to raise $US45 million to finance an extensive development program on the Bayou Choctaw leases in Louisiana. ICN believes this credit enhanced bond issue will be in place by May. I’ll believe it when I see it. In the meantime ICN is selling off the rest of its CBM assets for $1.5 million.

    Amity Oil

    Undertook to look at AYO this week and perhaps it is timely to do so given the weakness in its share price. This appears largely to reflect the fact that Turkey neighbours Iraq and the market fears it could suffer some fall out from any US invasion of Iraq’s Kurdish inhabited northern regions particularly if that invasion is from Turkish soil. AYO operations are at the opposite end of Turkey in the Thrace Basin but that doesn’t seem to influence the market.

    AYO has 158 million shares on issue giving it a market cap of $96 million at a share price of 61 cents. It also has 38 million options on issue exercisable at $1 in September 2004. It had $17.6 million in cash at the end of the December quarter $12 million of that from the exercise of options in the previous September quarter.

    AYO first listed in November 1994 at 25 cents. A year later the shares shot to more than a $1.50 on drilling success which I assume was the Whicher Range gas find. The shares came back to earth almost as quickly as they skyrocketed then slowly over 1997 made their way back to $1.50 before falling yet again to 20cents towards the end of 1998. They then range traded between 18 cents and 44 cents through 1999 and 2000 until the Gocerler gas find in Turkey spirited them back into the stratosphere, the shares reaching a high of $1.25 on the initial burst of enthusiasm.

    The shares have had a roller coaster ride since then falling to as low as 39 cents in September 2002, then recovering to close at 80 cents on 22 January (following a good write up in Shares magazine) before beginning a slow retracement which gathered pace this past week.

    Since the initial discovery Amity has been busy drilling to extend reserves and building production facilities and pipelines to get the gas to market. It has not been all plain sailing for AYO. Marketing the gas has proved more difficult than they first thought and at one stage middleman was contracted on a commission basis to arrange sales. Then there is also the suggestion that in order to make sales some of the company’s contracts have been at a discount to prevailing market prices. The company has yet to clarify some of these issues.

    Additionally there were some problems at Board level and a change in CEO with stockbroker and major shareholder Tony Barton taking over from Chairman Richard Elliot late last year. According to some observers this was to bring a bit of pizzaz to the company and some helium to the stock price. Elliot remains on the Board together with company founder Peter Allchurch so question marks remain about how settled the management really is.

    AYO has an acreage holding in seven exploration licences in three separate areas of the Thrace Basin. One of these areas is a joint venture with the national oil and gas company and this is the area which hosts the Gocerler gas discovery. Amity has three other areas which it owns 100%.

    Part of the problem for Amity has been a failure to get gas sales up to levels the company had earlier predicted. In its latest announcement sales were running at around 13 mmcf a day but only half of that is attributable to AYO ie. 6.5 mmcf. Amity hopes to get sales up to 30mmcf a day by the end of the June quarter.

    There is no doubt Amity has the gas in the ground confirmed recently by step out wells Gocerler 4 and 5. Gross recoverable reserves are thought to be over 100 bcf a figure likely to be increased with recent drilling. And with an active drilling program this year which will in part use AYO’’s own rig they may well find some more “Gocerlers” given the proven prospectivity of the Thrace Basin.

    But in the short term AYO is going to spend more money on exploration and development than it receives from gas sales. For example in its recent quarterly report AYO foreshadowed exploration and development expenditure in the March quarter of $A 6.4 million. So even if its December gross revenues of $A2.9 million doubled in the March quarter AYO would still have to dip into its cash reserves to cover negative operating and investing cash flows. And this situation could obtain for the rest of the year.

    I agree with those who see AYO as a potential cash cow. Most analysts have assessed that a production of 20 mmcf a day is worth $18 million annually to AYO before interest and tax. But milking that cash cow is going to take a little longer than perhaps first anticipated. In order for AYO to win investor confidence it has to get those production and particularly sales figures up substantially.

    And if one looks at the map of the Thrace Basin on the Amity website and sees the number of significant gas discoveries already made there by other companies one can only assume AYO faces a bit of competition for customers.

    It will be an interesting year for AYO particularly to see how the management reconciles the not necessarily conflicting priorities between the need to bed down the production and sales side of the Gocerler gas find and the desire to undertake more high profile exploration with the attendant risk of share hammering dusters. I expect 2003 will be a wild ride for AYO shareholders.

    For me Petsec Energy is still offers the best leverage among the gas producing junior oilers. At a share price of 33 cents and with only 105 million shares on issue PSA is capitalised at $32 million or one third of AYO. And yet its net revenue for this year 2003 is likely to be something in the order of a conservative $30-$40 million twice or three times that of AYO. Granted there is a question of PSA’s reserves at West Cameron but what turns the argument for me is that PSA is already selling 18 mmcf daily net to the company at spot prices well in excess of $US6. AYO is selling 6.5 mmcf a day at prices closer to $US4 until they tell us otherwise.

    Why the disparity in the share price of the two companies? Interesting that since the 1 October last year AYO has issued some 40 press releases and PSA only 10. To say PSA was a mite careful about what it releases to the market is an understatement. Still it should release its annual report at the end of this week or first thing the following week which hopefully will include an update on this years revenue flows, reserves and expansion plans.

    Press Releases

    The following is a brief look at some of the companies that had news releases in the market this week. The full text of all junior oilers releases can be found on Yogi’s aussie oiler site at www.yahoo.com/groups/AussieOilers. Can highly recommend it. Yogi also noted the increasing number of CBM/CSM producers in the news and this is worth following up in coming weeks.

    ARQ

    Arc announced that the results of initial testing of Hovea 7 indicated that at this southern end of the field the area contains a gas cap overlying the oil zone. Company said this did not necessarily have a material effect on the size of the oil reserves. Arc is acquiring pressure data prior to a possible production test. The rig has now moved on to drill Eremia 1. Still no news from Arc about completion of production facilities at Hovea. An update is overdue. But I guess all eyes will be on Cliff Head 4 and Eremia this week.


    EPR

    Essential Petroleum announced during the week that it was re-entering the Port Fairy No. 1 well with a specialised work over rig in the hope that a re-completion of the well will result in a commercialisation of the Port Fairy field. The well flowed gas and recovered light oil in Sept/Oct last year. The re-entry should begin on 11 March and take three to four days to complete.

    There wasn’t much appetite for EPR shares this week which at 13.5 cents were plumbing six month lows following the West Koriot and Banganna dusters. EPR has some good acreage, reputable partners including Mitsui, an elephant prospect offshore in Descartes and some $6 million in cash at the end of December. If the Port Fairy re-completion doesn’t work and the shares take another dive they could be value buying. The company does not have any more drilling in immediate prospect so suspect there will be a bit of time to accumulate maybe in the 11-12 cent range.

    Jingemia

    AWE announced during the week that long term production testing would begin in mid March which no doubt came as good news to some of the littlies who have small interests in this well like PCL, VPE and Voyager. For PCL the revenue stream is likely to at least keep the bailiff away and give it time to get back on its feet after last year’s disappointments in New Zealand. AWE has a Jingemia 2 scheduled for drilling in the third quarter of this year.


    NZO

    NZO announced this week that it had contracted Veritas to acquire 350 km2 of 3D seismic over the area encompassing the small Tui oil discovery. NZO expects the work to be completed by April. It will define the extent of the F sand oil discovered in February and will extend over several similar features nearby. The company expects this to generate several targets for possible drilling next summer. NZO has 20% equity in PEP 38460, a lease it shares with AWE and PPP.

    NZO has some 133 million shares on issue valuing the company at $33 million at a share price of 25 cents. It recently reported an operating surplus after tax and minority interests of $NZ 491,000 for the six months to 31 December down 83% from the previous corresponding half year. In part this can be explained by the deconsolidation since the previous reporting period of then subsidiary PPP and the distribution of its shares to shareholders.

    But the other factor is the fall in revenue from its Ngatoro oil field where production declined 41%. This is more worrying for NZO as it had relied on revenue from Ngatoro to fund ongoing exploration. While efforts are being made to reduce the rate of decline production will inevitably diminish as the field is drained. Ngatoro is currently providing gross revenues of around $NZ 1 million a quarter.

    NZO’s share price is underpinned by its interest in the producing Ngatoro field where remaining reserves are estimated at 1.8 million barrels, the recent Tabla well (yet to be tested), a 19% interest in the Kupe offshore gas field and a 72 % interest in the Pike River Coal Company. The development of the latter’s coal deposit is awaiting government approval. NZO hopes this will happen in Q2. NZO also has an interest in five onshore and three offshore Taranaki permits.

    NZO had some $6 million in cash at the end of December and raised a further $4.5 million in January as a result of a cleverly timed share purchase plan. So NZO is nicely cashed up.

    NZO shares trade very thinly on the ASX. Even in the lead up to Tui when they touched 38 cents the total volume for the last week of January was 270,000 shares and the following week set a recent record of 505,200 shares. So not easy to buy and difficult to off load in a hurry.

    Is there any reason to buy them at all? Tui was a disappointment though a small oil accumulation in the F sands suggests that it might not be a total disaster. But there won’t be any more drilling on the leases for at least 12 months.

    In PEP 38472 in the offshore Taranaki, NZO believes it has identified a potential 500 million barrel prospect which they have called Ray. NZO has also acquired from Swift Energy and interest in Tuihu 1 well which will be re-entered and deepened to reach the Kapuni Formation. Potential here is estimated at 50 billion cubic feet of gas. There are no firm dates for either of these wells.

    NZO’s partner in the Kupe gas field, the state owned electricity generator Genesis plans to sell its stake in Kupe to a new operator. NZO has foreshadowed an early development of the field to fuel a new power station and this might come to pass sooner rather than later in the light of a bigger than expected decline in gas reserves in the producing Maui field. But Kupe will still be some time away and not a project that will influence the share price in the short term.

    A firm proposal to go ahead with the Kupe development is awaited as is a government approval to develop the coal prospect at Pike River in which NZO has a majority interest. The NZ government is taking a lot of time over the latter decision and there is considerable green opposition to the development.

    Were it possible to accumulate NZO in the low twenties and sit on the stock for another year or more it might eventually realise some of the value that is in its assets.
    A negative decision on Pike River would be a temporary setback to the stock which could signal a good buying opportunity.


    Disclosure: I hold a bunch of stocks all except PSA terrifyingly in the red. They are BUY, COE, CUE, GBG, WON, FAR,

    As usual do your own research and seek expert advice before investing your hard earned.
 
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