rm milestone group (target price 6c), page-6

Thanks Erich,

Good to see some research companies looking into Perth Shale.

A couple of things I noticed that were relatively inconsistent in the report. I'll split this into upside and downside:

UPSIDE

-The low gas price. They mention $4.50mmbtu. Are we not talking more $7 - $8 per GJ in W.A? Given the conversion of mmbtu:GJ is ~1:1, they should be applying $7-$8 as a key metric.

-Production seemed relatively low. Remember Arrowsmith-1 (an adjacent permit) flowed at 4mmcf per day...and that was a vertical well. Imagine what they could do with mulitple horizontal + fraccing. It seems the research was only applying maybe one well to WGP? In USA they are doing a well every 160 acres. We have 66,000 acres. You do the maths....I'm not saying there will be 400 net wells, but simply put, 6.7mmcf per day is too low.

-Reserves. They say there is only around 49bcf, conservatively. I'd say this is very, very conservative! Going by AWE (who are also very conservative!), they have 620,000 net acres with a recovery rate of 20% of 13-20tcf (mid case 16.5) which gives 3.3 tcf's recoverable. WGP have an acerage postion around 10.6% of AWE's (also note WGP's acerage appears more relatively more prospective per proportion of acerage). Therefore, 3.3tcf * 10.6% = 350 bcf! A factor of 7 of the estimate by RBMG? Going by their explanation, I can't see why/how they got such a low number.

DOWNSIDE

-Number of shares on issue. They use the 320m on issue currently, but do not take into account dilution, which as shown on another post is quite substantial (however substantially more cash).

OTHER

Methodology used seems relatively bizzare. NPV per well is usually a lot more accurate, although I understand it would be difficult to model given lack of testing thus far. Still, price:sales ratio doesn't do much for me.

Constant flow rates. Flow rates are usually modelled by log normal...see NWE announcements for this. In short, pay back is short as production is stacked up to the early life of the wells and then decreases quite quickly....hence the high number of wells.

In summary, I believe the valuation although higher than the current shareprice, should be higher.

Would like to know other peoples thoughts. Cheers.