new all time high/lots more coming

AMU is certainly motoring along, hitting new all time highs and doing so on decent volume. For many this might be viewed as time to get off the train after an enjoyable and profitable ride. But that would be a mistake in my view.

AMU looks like it is still well under its fair value from a fundamental analysis. Lets look at two crude measures by which it might be valued - expected profit and net asset backing.

On the first of these, the latest (September) broker report from Shaws on the AMU web site indicates an expected NPAT for FY06 of around A$20 million. This assumed an oil price at US$53/bbl and a gas price at US$7mcf. You can make your own mind up about how realistic these might be. My view is that given futures contracts for WTI oil out to end 2010 have oil above US$55/bbl, then that average oil price is probably at least 10% low. The gas price too seems very conservative, and I reckon FY06 gas prices will average closer to US$10mcf.

Since that report, AMU has added big licks of production and associated profit from their Kansas acquisition. On the basis of current gross production from that those leases of around 700boe per day, AMU's net revenue interest share of that should amount to 560 bopd, or around 135,000boe over the remainder of FY06. Making some rough and ready estimates of the margin they might earn from that suggests added earnings of about A$4 million. As well, we should expect production to grow substanitally above that gross 700boe per day. AMU's past performance has shown it has been hugely successful in squeezing added production from existing wells by applying modern technology and better field management. On top of that I am sure we will see significant added production from development and exploration drilling (witness their 5 from 5 drill success on the recently acquired Ford East-Reeves County ground in Texas). Over the balance of FY06 I wouldn't be surprised to see another A$1 million in profits from these sources.

I would also expect AMU's impressive drilling program on the rest of its ground would deliver ongoing success rates and associated production. Just one Byczynski-like success, with flow rates around 4mmcfgd, from a drill in which AMU has a 50% working interest would for example deliver over A$2 million NPAT over 6 months. So adding in some allowance for drilling success and associated profits seems reasonable too.

Taking all this into account presents an impressive profit scenario for FY06. Take Shaw's forecast as a base (A$20 million), tweak it by expected higher oil and gas prices - say an average 10% (A$22 million), add a profit contribution of about A$5 million from the Kansas deal (A$27 million), and something extra from ongoing drill success on all their other ground - say A$3 million as a guesstimate (A$30 million).

This very crude basis suggests AMU could report a profit for FY06 of around A$30 million. For a company which has exhibited impressive annual growth in production, profits and reserves over the past few years, I would expect a price earnings ratio of somewhere around X15 might be appropriate. On this basis, an annual profit of A$30 million would support a market cap of around A$450 million. AMU will have about 195 million fully paid shares on issue following the recent capital raising and share purchase plan. These estimates suggest that AMU's expected profit could support a share price of around A$2.30. Clearly well north of where it is today.

On a net tangible asset backing the story is broadly the same. Before this acquisition I reckon AMU had announced sufficient exploration and development drilling success to increase its 1P and 2P reserves to 15mmbboe. The Kansas acquisition has been stated to bring to AMU net reserves of around 4.2mmboe (an 80% NRI of the 5+mmboe) which would bring that up to a total of around 19mmboe. (Note that this does not includes any allowance for AMU's share of the possible additional 4mmboe of 'attic oil' reserves that DeWayne Travelstead reckoned to be awaiting discovery in the recent Open File briefing).

When oil was trading around US$35 a barrel, 1P reserves were being bought on market for around US$10/bbl and 2P reserves at US$8/bbl. Now that WTI oil is trading north of US$60/bbl and futures contracts out to end 2010 are still trading over US$55/bbl, I would have thought an average of US$15 would not be an excessive value to apply to reserves. On that basis, my estimate of AMU's reserves would have a market value of close to US$285 million. Take off the debt they have incurred to buy the spate of recent acquisitions - say US$75 million - and that leaves a net US$210 million. Using an Aussie/US exchange rate of 0.76 that works out to about A$276 million of net asset value.

To that we can add AMU's 31.73% holding in Australian Renewable Fuels (worth nigh on A$50 million at today's price), and the cash that will flow from the recently announced share placement (23m) and spp (16m with a 100% max uptake). That will bring in a maximum of A$39 million. (And don't quibble that the $23m will be used to pay down part of the Kansas debt - it all washes out in the net aggregation). So to the A$276 million we can add another A$89 million, for a grand total of A$365 million.

With the total number of shares on issue somewhere around 195 million, this suggests a net tangible asset backing per share of A$1.87. Again, well shy of today's level of around $1.20.

Using these two admittedly crude measures of fair value, AMU's share price looks like it still has quite a way to grow before it approximates fair value.