"this is whats its all about"

Friday, December 09, 2005
CARPENTER Pacific is rapidly discovering it's a great time to be a low-risk, high-margin, onshore US oil and gas explorer. By MARK STORY RESOURCESTOCKS*

The growing US appetite for natural gas, fuelled by a mounting supply crunch, and the double-whammy effects of two (recent) major hurricanes on production and spiraling prices – plus major plans to exploit mature onshore oil and gas reserves – are driving US-based, Australian explorer Carpenter Pacific's ongoing upside.

The company plans to develop low-cost projects by exploiting mature reserves and finding new reserves in existing producing areas.

Favorable industry fundamentals, plus record high natural gas prices, advances in drilling, completion and fracture stimulation techniques – coupled with ready access to infrastructure – have let Carpenter Pacific pursue several attractive investment opportunities in the US. The company now has a significant gross acreage position of some 30,000 acres in its three projects.

Since repositioning itself last year, Carpenter has refocused on aggressively pursuing a low-risk strategy to increase its reserves and production of conventional but more significantly non-conventional natural gas in the onshore US.

The explorer has ramped up its development programs in East Texas and Utah. In addition to raising $US22 million in new capital, the last calendar quarter of 2004 also saw Carpenter Pacific acquire significant interests (a 30% interest in the 5,000 acre oil and gas projects) at Jefferson-McLeod in the East Texas area. This has now been expanded to 12,000 acres and the 5,000 acre (64% working interest) Helper prospect in Utah.

Carpenter's Dallas-based CEO Jeffrey Clarke expects the 15 new wells and numerous recompletions (expected to start in 2006) to give the company opportunities that will lead to two to three years of drilling opportunities.

Underpinning the low-risk strategy is the development of new reserves in known areas. The ambitious lease acquisition program in East Texas has resulted in the acquisition of an additional 7,000 acres, taking the company's position to over 12,000 acres of mineral leases.

Considered on par with the big Middle-Eastern fields in terms of size, the fields where Carpenter is drilling in East Texas have previously made over 15 trillion cubic feet of gas and over a billion barrels of oil.

"Instead of saying there's nothing left, we're taking the stance there's still lots to come out," said Clarke, who has over 35 years experience in the oil and gas industry in North America and internationally in technical and senior executive positions.

"Because there's so much 'known area', the chances of drilling a well where there's no commercial hydrocarbons are very low."

What's driving much of Clarke's optimism is a significant improvement in the technology associated with gas production, especially since the 1950s and 60s when most of the last big discoveries were made.

With the recent successful completions (the Childers-1, Huntington-3, Harris-1U and Davis wells) now tied, Clarke expects to have from five to seven million cubic feet of gas a day gross. And with a 30% interest (with 19% royalty), Carpenter will end up with a 25% share of the wells' revenue stream.

During the past 10 months, the success of the development program in the Jefferson-McLeod project in East Texas has resulted in several recompleted wells being successfully tested. The second phase recompletion, in August, of Childers-1
alone has been tested at a daily rate of 1.4 million cubic feet of gas and 10 barrels of oil from this zone, flowing at 1200 lbs of tubing pressure through a 22/64-inch choke.

In more recent developments during early October, Carpenter identified at least 10 further prospects on its East Texas leases, following the discovery of oil and gas at the recompleted Huntington-3 well. After re-entering the abandoned well, the company and its partners perforated and fracture-stimulated two new reservoirs. Huntington-3 was tested at 240 barrels of oil per day and 450 thousand cubic feet of natural gas per day, flowing at 475 lbs of flowing tubing pressure.

These two completions will be part of the production being brought on in the next four weeks and will add to current production.

"As a result of this success and the previously announced success of Childers-1 [in August], the company believes that it has at least 10 further development locations on its leases," said Clarke.

"That's as well as an additional recompletion in Huntington-1, to exploit this discovery and target the same reservoirs producing in Huntington-3."

The company has also identified a substantial inventory of future drilling locations in all three projects, and has positioned itself for strong near-term growth in production, revenues and operating cash flow.

Beyond East Texas, Carpenter Pacific has two major operations in central Utah. The first of these to be tested was the Helper field, where the company has a net position of 64%. This field is part of a large complex called Drunkards Wash (comprising conventional and coal reservoirs), where there are currently two drilled wells in test phase. but it's understood that up to 20 wells could ultimately recover around 40-50 billion cubic feet of gas from the project.

The second of Carpenter's Utah-based developments is the Clear Creek Unit (55% net position), where the company has its single biggest potential resource.

Clear Creek has produced over 130 billion cubic feet of gas, most of which was produced in the 1950s and 60s. The company has an active program for this area and is currently in the process of testing two wells.

Carpenter suggests there's potential for over 500 billion cubic feet left to be produced out of this field. Ryder Scott, one of the most prestigious independent petroleum engineering consulting firms in the US, has estimated the field could potentially contain up to one trillion cubic feet of gas.

Most of this field was originally developed when gas was selling at 10-20c per thousand cubic feet (MCF). Even compared to more recent history, gas prices have soared on the back of the mounting US supply crunch.

For example, even only seven years ago gas was selling for US$2/MCF compared with around US$13.88/MCF today.

To Clarke, the fact that oil was selling for US$9/barrel, and gas at US$2/MCF back in 1998 tells a very revealing story. He claimed that while a tight market for oil field services has raised operating costs, with production prices up at least six-fold they remain affordable.

"Right now oil and gas in terms of pricing is a great business to be in," said Clarke.

"As a result of commodity prices – currently approximately US$13 per thousand cubic feet – operating cash flow margins should be at enviable levels."

Carpenter Pacific…at a glance

HEAD OFFICE
Suite 3.14, Pacific Tower
737 Burwood Rd
Hawthorn VIC 3122
Ph: +61 3 8862 6466
Fax: +61 3 8862 6614
Web: www.carpenterpacific.com.au
Email: [email protected]