huntleys recommendation

This may have something to do with the recent share price. Are you all aware of ths recommendation?
cheers
eman


Mosaic Oil NL (MOS)

Hurricane Approaching
Recommendation: Speculative Buy 05/06/2007

Note: Marker indicates price of $0.18 at publication date.

Investment Rating
MOS owns 50% of the Wallumbilla LPG plant, 100% of the Silver Springs gas processing facility, compressors at Churchie and Downlands fields and 290km of pipeline. Tariff income stems from re-delivery of Santos gas. MOS may increase production if potential at its SE Queensland acreage is realised. Large Permian gas reserves have been masked by mud drilling blocking flows. Nitrogen drilling successfully protects reservoir quality. Gas has high condensate and LPG yields, leases are close to pipelines, construction costs are low and development times short. The future lies with exploration and gas marketing. Recent farm-ins should accelerate exploration and production growth. Cooper Energy’s 6.6% stake adds interest. Speculative and not for conservative investors.


Result Description
Drilling of the long awaited Hurricane-2 well on the North West Shelf is in two weeks. Partners will investigate the possibility of an oil leg below Hurricane-1’s 76m gross gas column. Hurricane-2 has potential for 40-50mmbl of recoverable oil worth 12-15cps net to MOS. Several other leads upgraded by the Hurricane-1 discovery provide an additional combined unrisked potential of 220mmbo with MOS’ share 13.2mmbo. Hurricane-2 is expected to take 20 days. While by no means a certainty, supporting data does indicate good potential. A doubling in share price is possible if successful.


Group net cash at end March was little changed at $5.0m. This may improve if the 28.6% Kimu gas field interest in PNG is monetised early. Operator Oil Search is to conduct 2D seismic at Kimu to appraise for LNG potential. It could take several years and significant capital commitment for first production and MOS might look to realise value earlier if an opportunity presents. Kimu is carried on the books at around A$0.5m. Contingent P10 resources, implying 10% chance, are 386Bcf net but a sales multiple would likely apply to a more assured one tenth of that figure.


Impact
Our Speculative Buy recommendation is retained. Hurricane-2 could be just what the doctor ordered. Our valuation is unchanged at $0.20ps. Long term assumptions remain a US$60/bbl oil price, A$/US$ exchange rate of 0.76 and a 10% discount rate. We upgrade our FY07 earnings forecast from 0.6cps to 0.7cps on a strong 3Q07 revenue result. Our 0.6cps FY08 forecast increases from 0.5cps. At last count MOS said it was on track to deliver record annual revenue in excess of $17m and EBITDA in excess of $4m. The strategy to maximise production from existing facilities impacting positively.


Recommendation Impact (Last Updated: 05/06/2007)
Unchanged.
Price data based on previous close.
Previous Close Market Cap
$0.18 $84 (million)
52 Week High/Low
$0.24 - $0.14
Sector
Energy


Intrinsic Valuation
$0.20
Note



Risk High
Company Beta 1.15
Sector Beta 1.21


Year 6/05A 6/06A 6/07E 6/08E
NPAT ($m) 4.30 2.00 3.60 2.80
EPS (c) 1.20 0.60 0.70 0.60
% Change -- -50.00 16.70 -14.30
DPS (c) 0.00 0.00 0.00 0.00
Franking (%) -- -- 0.00 0.00
Dividend Yield (%) 0.00 0.00 0.00 0.00
PER 21.90 43.50 25.00 29.20

Source: Aspect Huntley analyst estimates

2 Year Price Chart






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Event Analysis

Contingent Kimu resources, project isolation, the requirement to build a pipeline 200km to Port Moresby, risk and time value of money could encourage an early exit but might also limit a sale price. Regardless, cash in the hand would be welcome for exploration, development and/or new projects.



3Q exceeds expectation

MOS recorded 3Q07 revenue of $4.6m, the third highest ever and ahead of expectations, but down 13% on the record $5.3m of 2Q07. The output fall reflected lower gas demand during the Christmas period, natural field decline and maintenance and installation shutdowns at Churchie. In all, group production fell 8% to 100kboe. The oil price, up $1.08 to A$82.15/bbl, was only a partial offset. The oil equivalent average price fell 6% to A$46.11/boe.

Churchie West-1 was brought on production late in March, contributing only one week's worth to the quarter. Downlands-4 was connected on April 23 with sales from May 1. Combined these new wells add daily, 1.5TJ of gas and 30bbls liquids, or just under 25% of prior group output. This into a strengthening eastern Australian gas market!

MOS hopes to drill 3-4 Surat Basin wells before the wet in October. Bow Energy is to kick off in mid 2007 earning 50% of Jawsone-1. Canadian company Avery Resources could drill two wells in the Taylor Oil and Gas Field to earn 50% in a program of over $5m to be spent within a year. MOS is also hopeful of third party funding for two horizontal wells to further develop the Waggambah gas field.





Quarterly Result 2Q07 3Q07 % Chg
Liquids (bbls) 19,817 18,167 -8.3
Gas (GJ) 509,206 465,173 -8.6
LPG (tonnes) 999 976 -2.3
TOTAL (BOE) 108,584 99,766 -8.1

Revenue (A$m) 5.3 4.6 -13.2
Average Price (A$/boe) 48.81 46.11 -5.5