junior oilers january 25/26

  1. 1,317 Posts.

    Junior oilers January 24/25

    Disappointing week for the junior oilers reflecting the broader market’s concern about possible hostilities with Iraq. Even the Cliff Head drilling and next week’s Twin Lions spud failed to excite much interest as investors waited to see the results of the Cliff Head production test. In fact Cliff Head has been a bit of a fizzer so far and the jv partners have yet to pronounce on whether it is commercial or not.

    All the Perth Basin stocks, AWE, ROC, HDR, NEW, VOY, BUY and ARC finished pretty much at or below where they started the week.

    I am not optimistic that next weeks production test of the Cliff Head 3 ST will excite the market. A vertical hole into a mediocre reservoir chasing viscous oil is hardly likely to flow at spectacular rates. But then again I am no expert. The test result will probably disappoint but I don’t expect much impact on share prices as, unless they decide to drill a second ST, the rig will quickly move on to Twin Lions.

    Winners for the week included First Australian Resources (FAR) which closed Friday at 6.4 cents after spending some weeks below six cents following the failure of Argus. On Friday FAR reported good results from its Rainosek 3 well in Texas but renewed interest in the stock is more likely reflecting the drilling of Banjo 1 in March. FAR has a 30% interest in this Apache operated hole though is looking to farm out some of this stake. It has already fully paid $US1.4 to Apache for its share of the costs. FAR should record increased revenues from its operations in the US when it reports on Q2 activities next week I suspect we will see increasing interest and share price strength in FAR in the weeks ahead.

    FAR is a good example of how a stock with an established cash flow and an active drilling program can bounce back from a duster and move on to the next project. FAR was good buying when its shares fell to 5.4 cents back in November after Argus.

    On the other hand PCL, which went to the market this week for $190,000 through an issue of shares at 1.9 cents is a good example of how hard it is for juniors without a cash flow to continue to operate after a drilling disappointment without going back to shareholders for more cash. Usually with a depressing affect on the company’s share price.

    Among the losers were Beach Petroleum, Cooper Energy and Stuart Petroleum. All three have been notably weak lately which reflects the current lull in drilling activity in the Cooper/Eromanga Basin. The fundamentals of all three companies are very sound IMO and all three should easily recover from this period of weakness once drilling activity resumes. My preferences are COE and BPT because unlike STU they appear to have near term drilling activity. I hold COE but sold BPT this week when it looked like they were going below 30 cents.

    Kalrez came back to earth this week with shares finding a base at 0.007 in Friday’s trading. I sold for a loss when they failed to hold 0.008 cents and will sit on the sidelines for the time being. I would be more comfortable knowing where this one will settle once the daytraders move on. After the market closed on Friday, KRZ announced that oil (and mud and emulsion) flowed to the surface under natural pressure from its Bula development well. This well will now be cleaned up and prepared for production.

    There was no mention in the KRZ press release of a second well about to spud. The company has a commitment to drill six wells in the permit this year but is seeking from Pertamina a deferral of four of these wells. The company says it would rather drill wells when prospects are readied for drilling and not solely to satisfy lease conditions. I suspect KRZ would rather drill prospects on the Oseil field than drill more wells on Bula.

    Carnarvon looked as though it was heading for 5 cents mid week but recovered to finish at 5.7 cents or where it began the week. Lack of news about Wichian Buri production is largely responsible for the lack of interest in CVN. All should be revealed next week. Its Canadian partner has been enjoying some support on the Canadian bourse leading some to suggest the news will be good.

    I don’t expect CVN to report significant progress in improving the flow rates from the WB wells despite the new pumps they are using. Holders of the stock can only hope that the rates have not markedly diminished. Going forward the joint venture needs to maintain production above the break even point of 600 bopd, see what the E and G sands hold, and get on with the next phase of the development of the field. The worrying thing is they may have to come back to shareholders for more cash to finance it.

    Horizon has enjoyed a mini resurgence of support on the back of drilling in Tunisia, a farm in to a NZ lease and the spudding of Bosavi 1 in PNG. HZN paid $US 1.5 million to farm in to offshore license PEP 38413 as the Maari-2 development well was being drilled. Results this week indicate that Maari-2 had a net 58 metres of “mobile oil” in two zones in the well and the operator believes the Maari field “is likely to be commercially viable”. The well has been plugged and abandoned. Seems the operator is still not sure if the find is commercial or not. This may have put the cap on HZN shares this week.

    Or it might have been the news from Chott Fejaz, HZN’s well in Tunisia, which was not that encouraging. Last week the well was about to intersect the reservoir, this week it got lost in a fractured zone after passing through one thin sand with associated gas peaks. HZN is due to put out a further drilling report next Tuesday but you would have to say Chott Fejaz is looking like a duster.

    Bosavi is off and running and the OSH farm in we predicted last week was announced on Tuesday. OSH has taken a 28% interest in the well reducing HZN share to 20%. In return HZN will also get a 20% interest in OSH operated PNG permit PPL 227 and a carry of $US 300,000 in the next well to be drilled in the permit. I’d love to know how much cash HZN has left. It has chewed through a lot of money this year and with no producing assets you would have to wonder about a capital raising being in the wings. I bought into OSH this week given the turn around potential of the stock which would be enhanced by success at Bosavi-1. HZN I’ll leave to others.

    Tui

    Tui spudded on Friday and its progress will be followed by more than the usual interest given its huge potential of 700 million to 1 billion barrels. One has to hope that in this earthquake prone area the stratigraphic traps are undisturbed and oil not water filled. AWE is the safest entry to this play given that its other interests will help it withstand a failure. But AWE has already had a very good run over recent months, up more than 30%. PPP has a lot riding on this one and is possibly the best leveraged play but its shares will halve if the well disappoints. NZO shares are just too illiquid to offer a decent entry. That said those who accumulated NZO when they were below 30 cents just a few months ago would already be sitting on a nice profit. They closed at 37 cents on Friday. I sold out of PPP this week.

    West Oil

    WON had been sailing along quite nicely at 1.3 to 1.4 cents when it hit some shoals mid week and fell back to 1.2 cents threatening to go lower still. Volumes remain very small and the price retracement looks like a temporary aberration to me. I still think there will be some upside in WON ahead of the drilling of South Crackling in a month or two.

    Northwest or Bounty or both?

    After the recent capital raising NWE has some 137 million shares on issue and a market capitalisation of around $15 million with shares at 11 cents. Since listing in 1998 NWE has not had any success in finding and developing any revenue producing assets. The company appears to have followed a high risk high reward strategy which to date has not paid off. Cliff Head and possibly Twin Lions may change all that.

    In the past five years the shares have visited 5 cents four times, twice in 1999 and once in 2001 and 2002. In the year 2000 after the drilling success at Puffin 5 the shares went as high as 38 cents but that was when it had far fewer shares on issue. After appraisal well Puffin 6 proved a duster the shares retraced viciously in the late months of 2000 and early months of 2001.

    NWE has an extensive portfolio of assets which are described in detail at its excellent website. Some leases it shares with WON (see last week’s post). The prize assets now appear to be WA-286-P (Cliff Head). TP-15 (Twin Lions) and the Puffin field in the Timor Sea. One thing to note is all these assets are offshore and if one or more prove to be a commercial discovery lead times to development will be long . Moreover the company will almost certainly need to call on shareholders for more capital to finance its share of development costs. NWE has one onshore lease in the Perth Basin, which if I am not mistaken was where the Arradale well was unsuccessfully drilled, and another in the Northern Territory.

    If Twin Lions lives up to expectations then all the jv partners will benefit. NWE could move into the 20 cents range but I wouldn’t expect much more given the state of the market generally and the fact that that NWE only has a 10% interest. Remember too that as there are seven companies involved, punters/investors will have a number of investment options. And once people realise that the development lead time will be at least a year and that NWE will need more cash to finance its share, enthusiasm will wane. It would have to be a mighty good discovery to get fast tracked given what the big investors in this well (HDR, AWE, ROC) already have on their plates. So a big spike on the announcement of good news might be the time to take your profits and run!!! Still I don’t hold NWE so I shouldn’t presume to be giving advice.

    If Twin Lions doesn’t live up to expectations then I fear NWE is in for a mighty dumping because the reality is that it doesn’t really have a second act, at least not immediately. Puffin is a possibility in six months or so (see comments on WON in last Sunday’s post) and Moondah might come to the rescue but the latter is a much smaller target.

    For those who see in NWE another Arc Energy in the making remember that Arc had an onshore discovery which was cheap and quick to appraise and bring into production. And Arc’s interest in the discovery was 50%. Moreover ARC already had established revenues from Dongara gas. NWE doesn’t enjoy any of these advantages.

    Bounty Oil and Gas

    BUY has around 72 million shares on issue and a market capitalisation of $8.6 million with the shares at 12 cents. It listed a little over a year ago and since then has seen its share price drop from 20 cents to below 10 cents. In the lead up to the Perth Basin drilling the sps have recovered to 12 cents. This is a pattern characteristic of new oilers. Almost all see a 50% drop in their share price in the first year after listing. This is usually a period of deal making, asset buying and occasionally drilling. Once established most of the newcomers begin to gather support and with a bit of drilling activity go on to bigger and better things particularly if they can establish a cash flow early on. Hopefully BUY will follow this pattern.

    BUY doesn’t have an interest in Cliff Head and is only 5% free carried in two wells in TP-15 (Twin Lions). Its shares will benefit from a discovery at Twin Lions but perhaps not to the same extent as NWE. But if Twin Lions is a duster BUY has enough going for it in other areas including the Perth Basin, that should ensure it is less damaged than NWE.

    Indeed it has one well, Leafcutter 1 targettng 16 mbo in PL4 and PL5 in the Perth Basin, that is being touted as a Hovea look alike. It is a shallow on shore well in a prospective area a few kilometres from the Woodada gas field. BUY has a 25% interest. A discovery here would almost certainly ignite BUY. Its partner in the well is Hardman Resources. This well is due to spud in March.

    In addition, if BUY can find a farm in partner it will drill the Thomby Creek development well in the Surat basin which looks almost certain to increase oil production from this field. It is a small but well known target that could provide very useful cash flow additional to what BUY now has coming in from the Woodada gas field.

    BUY also has an interest along with ROC and Apache in two offshore leases immediately north of the Cliff Head and Twin Lions tenements. These leases are WA-325-P and WA-327-P. Bounty has a 22.5% interest. The prospectivity of these leases must have been increased by the discoveries to their south and the jv has fast tracked a 2D seismic run to identify prospects. We will hear more about these leases this year.

    There have been some questions raised by some here about Hardman’s interest in Bounty. Ted Ellyard is a non executive Chairman of Bounty and personally holds some 5 million shares. Hardman as a company has 5.3 million shares (6.83%). Some are concerned that HDR may sell out of the company so the shares represent an overhang. Personally and without the benefit of asking either HDR or BUY I suspect the relationship is a long term one. I think one can discount the possibility that the Ellyard or HDR shares will come on the market any time soon.

    What may come on the market and put a damper on BUY are the 18 million shares issued recently in the share placement at 7.7 cents. Holders are already looking at a handsome gain. But the same could also be said of the 25 million shares NWE issued at 8 cents.

    For me BUY is a safer long term investment than NWE but the market is showing that most people don’t agree with me.

    Quarterly Reports

    Cue Energy was the only oiler to report this week. Expect a swag of them next week. Despite higher oil and gas prices Cue’s revenues were off $US100,000 from the previous quarter due to declining production at SE Gobe. However Cue also reported that production was likely to be up again this quarter as wells had responded to additional gas compression measures. CUE still has $4 million in the bank, a possible new producer in Bilip 1 and the Oyong development going ahead. It also has gas in PNG which is not a particularly useful place to have it in unless that pipeline ever gets the go ahead. And, as OMR pointed out during the week, Cue also has a 10% buy back right to a well Tap is drilling in the Carnarvon Basin (Bob1).

    To say Cue is undervalued is an understatement. Trouble is the market is not listening. Perhaps it is the legacy of past management mistakes that Cue still has to live down and/or the fact that it operates in Indonesia and PNG. Cue will have its day in the sun I’m reasonably sure of that and perhaps a new round of drilling (Wortel, Mangga and Anggur South) due mid year in the Sampang PSC could be the catalyst for a rerating. It is possible too that Cue might announce some Australian activity in due course as it is fully aware of the apprehension shareholders have about Indonesia and PNG. Cue is for the very patient.

    West Koriot 1

    Essential Petroleum announced this week that West Koriot 1 was a duster and the well was plugged and abandoned. Bad luck for both EPR and LKO. If you were quick you could have picked up some EPR at 20 cents or thereabouts on Friday before they bounced back and settled at 21.5 cents a drop of 1.5 cents for the week. The fact the stock wasn’t punished harder says something about the quality of the assets EPR has. On now to Banganna in March.

    As usual the foregoing is to stimulate discussion and interest in the junior oilers. Do your own research and come to your own conclusions before investing your hard earned.

    Disclosure: This week I am holding BUY, CUE, CVN, COE, CPN (new purchase), FAR, GBG, OSH (also new), ICN and PSA. Gone are KRZ (temporarily), BPT and BPTOA , NWE and PPP. [email protected]



































 
arrow-down-2 Created with Sketch. arrow-down-2 Created with Sketch.