PSA 0.00% 2.1¢ petsec energy limited

usual sunday petsec ramp...

  1. 1,317 Posts.


    Sydney based oil and gas explorer and producer Petsec Energy (PSA) closed on Friday at bid 81, offer 85 and last sale 85 cents. The company's share price has all ready risen from 25 cents in January to a top of 95 cents this year.

    My recommendation is to buy PSA at or under 85 cents in the expectation that the stock will rise 10-15% in the lead up to drilling commencing at Vermilion (GOM) in early December. At that point one can either hold through the drilling or sell before spud. The expected share price appreciation is a conservative one!

    Petsec was a share market darling of the 90's when its shares reached $8.00 on the back of drilling success in the Gulf and handsome (A$20 million plus) profits in 1996 and 1997. Petsec's world fell apart when it strayed from its original low risk drilling strategy which yielded 19 successful wells in a row. They got a bit overconfident and got involved in some high risk, high cost wells that failed.

    Add to that hurricane damage on some leases, burdensome debt and a savage drop in oil and gas prices and PSA was pretty soon on the ropes. It sought Chapter 11 bankruptcy protection for its fully owned US subsidiary which had to sell off most of its assets to pay off debt. It emerged from this reorganisation in January 2001 with $A21 million in cash, an extensive data base of the Gulf and badly bruised egos.

    The company was and still is led by Terry Fern who owns 25% of the 105 million shares on issue but it had lost one of its directors and lots of staff. The core team including CFO Ross Keogh who was promoted to run the US office and Company Secretary remained. Fiona Roberston joined as new CFO. The team is not likely to make the same mistakes again and has recommenced activities on the basis of the original low risk, shallow gas well drilling strategy in the Gulf of Mexico and the Beibu Gulf offshore China.

    In its first year back in the field PSA had an onshore duster but then a string of three successes at West Cameron in the GOM in October/November 2002. The wells were drilled to develop "scraps" (left over pockets of gas) on a previously worked over field and have proved up about 14 bcf at P50. The wells came into production from an existing platform (big cost saving there) in January.

    Initial production rates were explosive, thanks to unexpectedly high gas flows from a couple of deep, water pressured sands. The high initial rates coincided with the spike in natural gas prices at the end of last northern winter (PSA sells into the spot Henry Hub price). Petsec made an absolute killing and paid off its total initial investment in the field in two months.

    By June PSA was able to announce a half year profit from West Cameron and a 7% Overriding Royalty Interest in another field (Ship Shoal) of A$16.3 million and set the company on course to earn A$20 million plus for the year.(PSA operates on a calender year basis).

    Since then Petsec had added two extra small producing wells at West Cameron but revenues have fallen back largely as a result of seasonally lower summer prices, production disruptions due to the drilling program in September and the natural decline in the field. All 5 wells were back in production in October at a rate of 15.8 mmcf a day which, including the contribution from Ship Shoal,equates to roughly A$90-100,000 net a day operating profit (ie.after production costs and transport costs of 50 cents an mcf) at current gas prices.

    So we now have:

    a management team determined to place Petsec firmly on the recovery path,

    a company set to achieve a record equalling annual profit in 2003,

    a strategy based on a low risk drilling program in the shallow waters of the Gulf (with a side bet 25% interest in a very prospective shallow field offshore China)

    low number of shares on issue with 68% held by a very loyal top twenty (of which I am one!)

    no debt with all costs of drilling at Vermilion and China easily met out of current cash flow

    The company's shares have risen this year on low turn over. It is still in a sense an undiscovered value stock. The management do not do any broker presentations and generally put out brief understated press releases. No hype here.

    The company needs to expand its reserves base to really attract attention and that is what it hopes the upcoming drilling program will do. Both leases to be tested have already been drilled with gas discovered at Vermilion (by Forest Oil in 1988) and five small oil accumulations discovered in China (by Total and confirmed by PSA in 2002). The upcoming program is a long way from wild cat drilling but is not without risk. Success at both will propel Petsec into the stratosphere IMHO.

    The partciular reasons I like PSA going forward is that I know what it plans doing in the next two months and that includes not only the much awaited drilling program but a new website and, for the first time since it got back on its feet, broker presentations. The latter is what I think will be instrumental in winning back some support.

    Add to that Petsec is the best Australian junior exposed to any spike in natural gas prices as a result of a demand/supply imbalance as we head into the northern winter. And it was abnormally cold this weekend!!

    Worth a look at folk, ,as I have said many times before!
    Actually since they were about 25 cents!!
 
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