shrewd crude report valuation, page-22

Shrewd, I did an NPV-15 analysis on this several weeks ago, and there are three big problems with your analysis:

1) You are assuming a net $8 per MMBTU / MCF as their cash profit after costs. I think that is not a good number. Assume $8 as the price for Perth gas, and then you need to model real costs.

What is their capex? I have data points for low cost producers in Canada around $1.8B per Tcf, and high cost around $2.5B Tcf. I think at the start Australia won't be a low cost producer, so figure the high end of that range, and then interpolate down to the single well level.

What are their variable operating costs? An efficient producer might get $400M per Tcf in variable extraction costs, but high cost can be nearly $2B per Tcf. Again, Australia is paying firms like Halliburton full list price for the first few years. There just isn't a competitive services industry yet. I think you need to model in the high end of range.

So I think you need to model in a fixed plus variable cost of at least $4 per MMBTU / MCF for the first three years, and I think it is okay to amortize that over lifetime just to get a ballpark estimate.

So bottom line is you won't net $8 per MMBTU / MCF. You will be lucky to see $4 net after capex and variable costs, and those are using Canadian numbers. Australian numbers could be higher. I think to use your $8 net figure you have to model selling price of $12 for the gas, and that is just too optimistic.

2) The original Resource guess from the NWE Dec 2010 Quarterly Activities report uses 3 Tcf as the total resource. The actual development plan laid out below that estimate calls for only 12 wells per year, and 50 wells total. They estimate 80 acres per well so only 50*80 = 4000 acres involved in that initial production, compared to the 40% * 125K acres = 50K acres that they estimate are produceable. It is not really appropriate to use an NPV analysis on the entire resource if so little is going to get produced initially.

The bottom line is the NPV-10 using more reasonable cost assumptions, against your 330 days of production gives $2.2M of NPV-10 for the *lifetime profit* per well. Against even the high costs I used that is pretty good ROI. But common sense tells you ROI on a well is under 50%, not 1000%. The oil and gas business is an expensive business. These are not 90% gross margin businesses.

3) You are assuming linear output in the well, whereas in reality these horizontally drilled wells typically deplete about 80% the first year.

I think a better valuation model given that NWE is not funded to fully develop the resource quickly is to price out Resources. Using the 20 cents AUD per MCF number that was used to pay for Coal Seam Gas Resources in Australia, at a 3 Tcf resource we get $600M AUD valuation, and our 29% of that is $174M.

For now, let's be thrilled to get to $175M. If we can find more than 3Tcf resources, fantastic. If we can rapidly produce what Resource we find on someone else's dollar, great.