update: woodside sells hardman stake for a$118.3m, page-12

re: could fall to $1.50 Just a bit of info that might be of use here.

Huntley had a buy on HDR about a month ago.

Buy Below $2.30 Accumulate $2.30 - $2.50
Hold $2.50 - $3.30 Reduce Above $3.30

Still no new exploration success for Mauritanian co-venturers


Since our last report HDR's share price has experienced a 15% retracement, in sympathy with a 10% pullback in oil prices to sub US$60/bbl levels, but also no doubt due to ongoing lacklustre exploration results coming from Mauritania. The market has been waiting for the next Chinguetti-like discovery to rear its head from the highly prospective offshore north west African acreage but to no avail. The score in early October was one discovery, Tevet, from six holes, drilled since the initial flurry of success involving Chinguetti and Tiof. Including the Tevet-2 sidetrack, two further holes have been completed. Tevet-2 evaluated a deeper Cretaceous target in addition to the shallower Miocene discovery highlighted by Tevet-1. The good news from an appraisal perspective is that Tevet-2, located in HDR's 21.6% PSC Area B, encountered a gross oil column of 37m with a 1.5m gas cap in the Miocene channel sands. Tevet is within tieback distance to Chinguetti. The discovery of oil in the deeper Cretaceous target provides encouragement. While the 8m oil column in quality sands is itself not likely to be material, the result upgrades the prospectivity of deeper Cretaceous strata across the tenement portfolio. Prior discoveries were only in the Miocene.


Drilling of the Labeidna-1 well 15km from Chinguetti again provided encouragement but did not live up to the market's elevated expectations. Oil was encountered in two separate accumulations over a total column of 120m but the oil bearing sands are thin, interbedded with shales and unlikely to be commercial. HDR CEO Simon Potter was nonetheless upbeat describing Labeidna-1 as a discovery. He believes thicker channel sands are located downdip and adjacent to the discovery well. Labeidna doesn't quite cut it yet and the exploration slate from our perspective reads one from eight. A separate appraisal well would more adequately evaluate Labeidna which is within tieback distance to Chinguetti. First oil from the cost challenged Chinguetti development is forecast from February 2006.


The next Mauritanian exploration cab of the rank is 18% owned Faucon-1 located in the Dana Petroleum operated Block 1. The Cretaceous reservoir target is in excess of 300mmbls. This is likely to be followed by an as yet undecided prospect in Block 6. HDR's first Ugandan wildcat, 50% owned Mputa-1 is likely to drill from mid-December. The well will target multiple objectives defined by 2005 seismic.


Our earnings forecasts for FY06 and FY07 are essentially unchanged at 10.8cps and 30.8cps respectively. Our valuation declines 10% to A$2.52ps. Assumptions remain a US$60/bbl oil price, A$/US$ of 0.76 but we have increased the discount rate from 12% to 15% across the board. Sovereign risk plays on our mind and the Tiof oil field is more complex than Chinguetti and an investment decision has been delayed until 2Q06. At this stage there is no impact to our valuation as we don't assume first production until FY09. By 3Q06 HDR's price should reflect the likely successful transition from explorer to producer. In the longer term, Tiof's commissioning could see HDR on a prospective PE of three beyond FY09 assuming oil prices of US$60/bbl.


The high impact international exploration campaign with 12 wells to be drilled by June 2006 also appeals. The exploration report card while surprisingly disappointing does not greatly influence our overall valuation as we take a fairly conservative approach applying only A$300m or 46cps including Banda gas field in Mauritania. Only 18 exploration wells in total have been drilled in a basin the size equivalent of the Northern and Central North Sea. Over 140 prospects have been identified including 100mmbls size. Mauritanian LNG potential is sitting as a sleeper with the Banda and Pelican gas accumulations to be appraised.


HDR will change its financial year end to December to synchronise reporting with that of its major joint venturers as well as the taxation reporting requirements of the principal jurisdictions of its activities