selling relentless, page-10

re: selling relentless huntleys take this is a few weeks out of date but has some comments about ching flow rates ? they are giving 60000k p/day as best case scenario.

Huntley's Recommendation: Hardman Resources Limited

Recommendation: Buy

HDR's strategy is to secure large prospective acreages in greenfields areas and add value prior to farm-out. The exploration portfolio includes offshore Guyane and Eritrea, onshore Uganda and Tanzania, Suriname, Falkland Islands and the Timor Sea. Focus is on the deepwater Atlantic Margins. It is hoped the assets can generate value-add similar to the Mauritanian interests. In JV with Woodside Petroleum, HDR's 19% Chinguetti Field began production in February 2006. Chinguetti could be followed by the Tiof development boosting annual equity production to 6mmbo by CY09. HDR is a suitable oil exposure for aggressive, growth oriented investors with a stomach for exploration and tangible sovereign risk.

Event08-Jun-2006
HDR shares were dumped in mid May after the company reiterated two production wells in the northern part of the Chinguetti field were making minimal contributions. Failure of a gas compressor on the Floating Production Storage and Offload (FPSO) vessel further delays commissioning of gas re-injection into the Banda field. Gas re-injection is pre-requisite to return Chinguetti oil production to >60kbopd levels albeit below the 75kbopd originally envisaged. Poor field performance was the final chink in the armour after the share price had hitherto weathered a lacklustre series of drill results from offshore Mauritania and shenanigans from the militarily installed interim government, which successfully extracted a greater share of the oil revenue pie. Shares have continued to drift lower, at last count down 30% from pre-announcement levels. HDR raised $153m in late April placing around 10% of its then issued capital at considerably higher prices on London's AIM market. There is doubtless some added selling pressure from disgruntled participants.

Business Impact: The recent operating track record in Mauritania is disappointing to say the least. Our overall HDR valuation declines 30% to $1.95ps. Long term assumptions remain a US$60/bbl oil price, A$/US$ of 0.76 and a 15% discount rate for sovereign risk. Despite the decline we retain our Buy recommendation given the significant price retracement and redeeming features. HDR will be spending substantially on exploration over the next two years and the large concept plays appeal. The company is cashed-up after the April placement. There is also considerable upside potential within existing projects after our relatively harsh re-appraisal. Markets tend to sin-bin companies for a considerable period after a failure of the likes of Chinguetti. HDR may have to impress big time to earn an early reprieve. Regardless, for the less risk averse, the stock presents a buying opportunity at current prices.

Forecast Impact: --

Recommendation Impact: Unchanged.

Event Analysis
Chinguetti output worsened from 66kbopd in March to 41kbopd by May, essentially from four wells in the southern sector. Poor performance has surprised, particularly given an operator of Woodside's standing. It is now proposed to drill three new optimally configured production wells in the south to restore output. Each new ~US$30m well is expected to increase production by around 10kbopd. Drilling starts in October meaning production should be restored by 1Q07. The damaged FPSO compressor should be available by end August. Options to accelerate the timing are being explored. As a result of delays, we downgrade our FY06 and FY07 earnings forecasts by 45% and 27% to 15.8cps and 21.7cps respectively. This is disappointing given our recent earnings upgrades on the back of Chinguetti's early commissioning. HDR is undertaking a reserves review with an independent third party, but to date has stated production issues do not impact estimates of oil in place or likely recoverable reserves. However, the extra wells needed entail additional cost and increased risk. Our Chinguetti valuation declines 28% to $480m or $0.66ps. Tiof remains on track for a JV decision on project scope in 2Q06. Resource complexity demands risk reduction. The partners intend to use a tension leg platform rather than FPSO. The concept entails higher initial capital cost, indicatively US$650-700m, but lowers the threshold of recoverable reserves per well. Six production wells would initially access 40mmbls of reserves with first oil by 2009 at 50kbopd capacity. The facility would have 15-18 well slots for expansion once production reliability was established. It now appears likely combined Chinguetti/Tiof output could be limited to the existing 75-80kbopd FPSO capacity at Chinguetti. This severely clips group equity output compared to our original forecast. We now assume 180mmbo will ultimately be recoverable from Tiof, down from Woodside's 289mmbo recoverable reserve figure, with production at a reduced rate. We downgrade our Tiof valuation 40% to $440m or $0.60ps. Drilling in Mauritania is to re-start in July including 24.3% owned Colin with 170mmbo mean recoverable, 18% owned Flamant with 5TCF or 1 billion barrels recoverable, a 16.2% Block 7 well and 24.3% Kibaro. The 2H06 campaign was to expose HDR to net unrisked potential of over 300mmboe. Chinguetti in-fill wells may push back exploration. Regardless, exploration is an area that could meaningfully deliver for the company. Chinguetti notwithstanding, the remainder of 2006 sees HDR participate in seven exploration and one appraisal well in addition to two Suriname wells. The 2007 campaign is to include 8-10 exploration wells covering Mauritania, Uganda, Tanzania, Guyane in addition to up to 15 wells in Suriname. The lion share of the recent $153m placement proceeds are earmarked for exploration. HDR's frontier and deepwater Atlantic Margin areas are of a nature to deliver substantial discoveries.