australian article

Black gold deep in heart of Texas: oil CRITERION: Tim Boreham From: The Australian August 04, 2010 12:00AM

THE annals of corporate history are replete with local oil and gas juniors expanding into the US market.
They thought they could teach a thing or two to hard-bitten Texan oil men. In many cases they got the raw end of the deal.

Despite this, the southern US is popular with our hydrocarbon juniors, which are either fed up with the lack of prospectivity and regulatory constraints, or deterred by the risk of doing business in locales such as Africa.

While crowded, the US scene offers easy access to infrastructure, a ready market and low-risk prospects (albeit for a modest return).

According to Hartleys analyst David Wall, the bargaining power is moving towards the Aussies for a couple of reasons: the first is that our juniors have had better access to capital. Their US equivalents tend to be privately owned and the private-equity tap is either off or on.

The second is BP's Gulf of Mexico disaster, which resulted in the Obama administration slapping a six-month moratorium on deep-water drilling. Some have looked at deep-water plays in South America or Africa or non-conventional plays such as shale.

The deep-water stuff doesn't directly affect Aussie operators except BHP Billiton and Petsec Energy (more on that later), but has had a flow-on positive effect down the acreage food chain.

As a result, some of our juniors are likely to get a handy price for divested assets, while the value of their existing acreage may also be re-rated.

In particular, there's been a strong re-emergence of interest in shale oil plays, which geologically are low risk but have been expensive to exploit. But horizontal drilling technology and fracture stimulation techniques have greatly enhanced the economics.

One Aussie junior in the shale game is Samson Oil and Gas (ASX code: SSN), which proposes to sell 22,000 acres (8900ha) in Colorado's DJ Basin for $68 million to $88m. Interestingly, the real value of the dirt is not what it contains itself, but to protect other leases in the Niobrara Shale precinct.

According to Hartleys the deal would value Samson's remaining acreage at $57m, which compares with Samson's market cap of $95m

Wall describes Niobrara as "one of the hottest resource plays in the US."

Sundance Energy (SEA), which also has a shale focus, sold assets in 2007 for $53m ($7860 an acre) and then used the proceeds to build a stake in the producing Bakken and Niobrara Shales. Wall estimates this was acquired at less than $112 an acre, but is now worth $3600-8420 an acre.

The buyers' interest is also reflected in three unsolicited offers for Amadeus Energy (AMU), which has operating assets in Texas and is currently drilling the first of three "high impact" wells. Amadeus is highly leveraged to oil-price movements, which means some folk are convinced oil is due for a spike.

"Our view of the quality of assets was confirmed by conversations with local industry participants, including a private-equity group who believe that the assets are undervalued when compared to US counterparts," Wall says.

Meanwhile, the drilling moratorium lasts until November. Even if it's lifted on schedule, there's still the issue of insurance availability, which will make it a lot more difficult in deep water. The Gulf of Mexico disaster has already bloweth poor winds for BHP Billiton, which expects two projects -- Mad Dog South and Knotty Head -- to be delayed.

Petsec Energy (PSA), which drills in shallow waters, cites "general delays" receiving new drilling permits.

Its fourth-quarter production from the Gulf was also 35 per cent lower because of damage to a third-party pipeline, which proves that when a butterfly flaps its wings in the Amazon the effects are felt elsewhere.