where is the growth???, page-23

macquarie report

AWE
Gas reserves trimmed at the Otways
Event
 Following an internal technical review of reserves at the offshore Otway Basin
(Casino. Netherby and Henry), the JV has downgraded initial gross 2P
reserves by 26% to 448.5PJ.
Impact
 Future production uncertainties rather than serious technical issues:
The re-assessment of reserves follows a technical review (completed in
conjunction with remediation work associated with a subsea electric fault).
Indeed the downgrade stems from the uncertainties surrounding forecasting
ultimate recovery (given the complex reservoir) rather than any serious
technical issues associated with the field development.
 Downgrade negative for sentiment, but negligible impact to valuation:
Following the booking of reserves associated with the Adelphi acquisition,
AWE previously had 2P reserves of ~71mmboe. Consequently the revision to
Otway reserves equates to a 9% downgrade. While we recognise any
reserves downgrade will be negative for sentiment, the offshore Otway assets
only account for 8% of our NAV. Furthermore AWE highlight that the reserves
revision is not expected to impact contracted gas volumes (which we only
typically model).
 Encouraging results at the Eagle Ford shale: AWE also released updated
well results at the Sugarloaf AMI in the US. Importantly 60-day production
tests continue to highlight minimal decline in well-head pressure (albeit
through constrained chokes) and production rates. Furthermore high average
condensate rates of between 280-300bbls/mmscf are likely to be supportive
for a wider development program.
 Attractive underlying value: AWE continues to offer a sector-leading
valuation. In addition to trading at a 20% discount to our core valuation of
A$2.24/sh, AWE still offers a revised 2P reserve life of ~10 years through
long-life producing gas assets. On a cash-flow multiple basis, AWE is trading
at 4.5x in FY11E.
Earnings and target price revision
 We have made no changes to our earnings estimates, but have marginally
lowered our NAV less than 1% to A$2.92/sh.
Price catalyst
 12-month price target: A$2.60 based on a DCF methodology.
 Catalyst: AWE is due to report its December Quarter operating results on 31
January and its FY11 interim result on 22 February.
Action and recommendation
 Maintain an Outperform rating and a A$2.60/sh target price. In addition to the
attractive valuation and long-life asset base (despite this downgrade to
reserves) we see obvious upside remaining in AWE's growing reserves
foothold in the Eagle Ford shale in the US and the potentially large shale gas
resource in the Perth Basin.