salinas valuation significantly higher, page-16

Thanks for your thoughts T Shirt,

I gather that the facilities will be able to handle quite a lot more than 2000 bpd, and in fact production could peak significantly higher than that. Certainly if this well tests at say 300 bpd, a staggered 14 well programme ought to get the rates up there in a sustainable fashion (also presumably more wells could be drilled after that, given the size of the prospect).

However, I don't have a good handle on depletion cuves and of course we are still awaiting the sustainable production test result on the horizontal well, (which should be out any day now). What is also interesting is the surprise presence of gas, which, if sustainable, could increase flow rates and possibly even be burnt to produce steam, reducing a major cost factor. Hopefully it will be possible to have a decent stab at the NPVs on NSA quite soon. Given the good results to date, one imagines 60c for NSA is pretty achievable, as you suggest.

However, I do think that if the flow rates are strong on the forthcoming horizontal test, it will prove to be a second good driver of value. It importanly gives Salinas a very strong cash cow for a number of large new prospects, which have been mapped out and are ready to go in the second half.

I think Salinas right now has become lumped in with a raft of fragile junior E&P plays, and has also suffered after some manipulators jumped on its shares last year.

With a strong supply of internal financing and multiple targets, my feeling is that the co will start to be viewed as a prospective proper mid cap player (as opposed to the rest of the “hype and hope” E&P rabble), which is what its management has been at pains to map out. It has a large team in California with some notable technical successes, production infrastructure almost in place and proven management her in Australia.

In other words, I think there will be a perception change, and the stock will trade at quite a decent premium to NSA. Consequently, I think there is a good chance of seeing a strong re-rating of the stock in the next couple of months, especially as the management finally starts to get out on the road and tell its story.

Am looking forward to the sustainable flow rate test.