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neo report from tricom






Nuenco - An Exciting Speculative Opportunity




Recommendation: Speculative BUY Target: $0.10 Stop Loss: $0.025




Nuenco is an exciting oil play focusing on the San Joaquin Basin in California, one of the most prolific oil fields on the planet. Formally Anzoil NL, NEO has new management and is committed to the exportation for oil and gas in Australia, Asia and the US. NEO provides exposure to an immediate drilling program.




San Joaquin Basin


The San Joaquin Basin California is one of the world's most prolific oil provinces, having produced 26 billion barrels of oil from major fields, of which 51 have contained at least 100 million barrels of oil. The San Joaquin Basin is a major proven petroleum province and the focus of the big oil companies including Shell, Chevron-Texaco and Exxon. The Basin provides low cost, shallow drilling targets and is supported by excellent infrastructure (NEO's project is 2km from an oil and gas pipeline). The Basin is also in close proximity to the energy hungry markets of Los Angeles and San Francisco.




NEO has a 25% interest covering 2650 acres, with the option to double the acreage, in the South East Lost Hills project area. The aim is to capture the southern expansion of the Monterey Formation. The Large Lost Hills oilfield less than two kilometres to the north has yielded over 500 million barrels of oil (mmbo) with increasing production rates since its initial discovery in the early 1990's (currently producing 31,000 barrels of oil per day). The reason NEO has been able to get its hands on a field of such quality is that the majors are focused on getting the oil and gas out of their existing fields due to the high oil price, and they already control deeper leases with known reserves.




NEO have the benefit of teaming up with experienced partners for the project. Including NEO there are four parties each with a 25% interest in the project, the other three being:





· Orchard Petroleum: Management team has a great track record and company has built powerful alliances in California.


· Nahabedian Exploration Group (NEG): NEG is a private group that has drilled several hundred wells offshore California and has relationships with some of the big petroleum companies.


· Matris: Also have a very experienced management team, who have excellent knowledge of the San Joaquin Basin.




NEO have had success with their first oil and gas discovery well, Jackhammer #1. The well encountered approximately 1000 gross feet of hydrocarbon section in the Monterey Shale and Etchegion formations. This discovery exceeded expectations and could transform into a major oil and gas development. This is an especially encouraging result since it was the first well sunk on site. The next stage is to sink an appraisal well which will involve opening the prospective zones and seeking to establish a stabilized flow rate. This testing is to start as soon as possible (as soon as a service rig becomes available). Drilling of Jackhammer #2, the second appraisal well is planned for later this month and will look to extend the Monterey play.




With oil in the ground having a conservative value of $10 per barrel, and management believing the project to have reserve potential of one hundred million barrels of oil, a good find will see the value of NEO soar considering that it only has a market capitalisation of $16 million. The investment costing $2 million has earned NEO a 25% investment in a project that NEO management believe could generate revenues of several billion dollars in oil sales at current market prices. On top of this gas could also produce significant revenue in addition to oil.




The Company has also taken a 25% farm in interest in three more exploration blocks covering some 1913 acres in the San Emidio project area located in the south of the San Joaquin Basin. This project lies between two large oilfields that are only five miles apart - Midway Sunset to the west (one of the largest field in the US at 3.6 billion barrels) and the 150 million barrel Yowlume oilfield to the east.




NEO expects to invest between $5 and $5.5 million in these projects and may need a small (approx $2 million) capital raising to fund the investment.




This project will be drilled over the coming months - dependant on when the rig arrives - and we expect the share price to appreciate into the appraisal well results as speculators come in looking for a good result. This is a pattern often seen with Oil Explorers.




Queensland




NEO has a 40% interest in the Utopia oil Field in Queensland. The project has recently commenced to produce break even to positive cash flows. NEO is working with joint venture partner Oilwells to optimise the value of the field. NEO may look to sell this asset to provide cash flow and focus on the Californian projects.





Technical Outlook


Neo is an example of a stock "coming alive" with volume only having kicked in during the past four months. These stocks can provide awesome opportunity to profit while the story is only just getting out. Other examples of stocks coming alive include Felix Resources in June 2004 and Paladin Resources back in 2003.




We favour that NEO is only at the beginning of a major move higher that could produce spectacular returns. NEO is definitely not without risk however and only a very small position should be taken. NEO is more like an option than a stock as it provides massive leverage to drilling success. Investors therefore need to treat it like an option and be prepared to loose upwards of half the position value on the trade.




NEO is very speculative trade with massive potential and are only willing to include it within the mid cap portfolio with a minor weighting of only 2% - because of its very speculative nature.




The 2% allocation for this trade will come from slight reductions in the weightings currently held in Western Areas and Energy Developments, both currently at 6%. This will be reduced to 5%.







17/11/2004 10:59:42 AM - Produced by Gregory Tolpigin

Andy McAlpine
Senior Client Advisor
Level 9, 10 Bridge Street
SYDNEY NSW 2000
(02) 9210 7887 Direct
(02) 9251 6331 Fax
1300 732 200 Toll Free
[email protected]




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