HotsI have been in and out of AMU (currently in) over the last...

Hots

I have been in and out of AMU (currently in) over the last five years and am not yet excited about the action in the last few days. Although the price has perked up a bit in recent days, sales show fairly small volumes and total dollars, and it is coming off a low base.

However, it is possible that some early movers are picking up that Amadeus will deliver a serious increase in production, sales and EBITDA for FY2002-03. And it looks set to deliver an even larger increase in production volumes in FY2003-04.

These are definite positives for AMU. And as you rightly point out, the biodiesel project is a wild card - and in my view gives AMU a pile of blue sky appeal.

I have copied below my own summary of what their immediate future might look like, with some speculation about what it might all mean for FY2003-04. (My estimate of annual production of 210,000+ barrels sits pretty close to the latest annual production forecast of 208,000 that AMU posted on their website on 24 Jan).

Success in their drill program to end June 2003 will be icing on the cake for AMU.

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 First half FY 2002–03 saw AMU’s share of oil production down around 5% relative to the same period last FY.
 However, acquisitions and drilling success announced in the December 2002 quarter should see AMU’s ongoing daily oil production increase almost 70% for the second half of FY 2002–03, and received prices for FY 2002–03 are up about 20+% compared to last year.
 Accordingly, AMU is set to achieve sales, EBITDA and operating profit levels substantially up on last year.
 These production gains will continue into FY 2003–04 and, if oil prices remain around US$30+ a barrel, could see AMU deliver sales of around A$14 million and EBITDA of A$6 million.
 The 8-9 wells AMU plans to drill before June 2003 could easily add 100+ bopd to AMU’s production for FY 2003-04, which could mean another A$2 million to sales and A$1 million to EBITDA.
 For a company with a current market cap of around A$8.5 million, this looks like a buying opportunity.

FY 2001–02 saw production attributable to AMU of 166,589 barrels of oil (about 456 bopd) plus minor gas production, with total sales of around A$8.3 million, EBITDA of A$3.1 million and a net operating profit of A$2.5 million.


The first half of FY 2002–03 has seen production fall slightly relative to last FY, with total production to end-December 2002 of 78,500 barrels (equal to about 430 bopd).

However, Amadeus announced a range of acquisitions and drilling success in late 2002 which will add significantly to annual production. These were:
 North Knox City Unit, where AMU acquired an 81% interest in a lease producing 40 bopd (AMU’s share is 32 bopd) and additional deep and shallow rights to the prospective formations it contained;
 Red Creek drilling success, with their first two wells producing in excess of 60 bopd each (AMU’s share is 67 bopd); and
 Morgans Bluff Hackberry Unit, where AMU acquired a 68.86% working interest in a lease producing 350 bopd and 520 Mcfd of gas (AMU share 241 bopd and 358 Mcfd, minus 15% royalty).

These are set to deliver an astonishing additional 300 bopd (plus gas volumes worth the equivalent of 50 bopd). Very little of this additional production was available during the first half of FY 2002–03, but will be totally available in the second half (to deliver an extra 55,000 barrels). Thus, for the full FY, AMU is on track to produce over 210,000+ barrels. This represents an almost 30% improvement in oil production volumes over FY 2002–03. As well, this FY will see AMU produce a very handy amount of gas (just under A$1 million).

Moreover, the price of oil relative to FY 2001–02 has increased around 20+% in Australian dollar terms and, as yet, shows no sign of giving up these gains.

Based on this increased production and received prices, Amadeus looks set to achieve total sales for FY 2002–03 of at least A$11 million. On past performance this should deliver an EBITDA of around A$4.5 million.

On top of this vastly improved performance, AMU announced their intention to drill 9–10 low risk wells before July 2003, which will test previously proven oil and gas bearing formations. These are:
 Knox City – 2 wells to test the prolific Tannehill Sands (AMU share 81%).
 Pitchfork Prospect – 3 wells also testing the Tannehill Sands (AMU share 25%. The first spudded on 20 January 2003 but has been plugged and abandoned as a dry hole. The other two wells to follow immediately – the first of which is already on its way down).
 Red Creek – 4 to 5 wells in which AMU has a 51% interest (this is the site of AMU’s last two from two successful wells, each producing in excess of 60 bopd).

It is a reasonable assumption that some of these wells will be successful, and deliver extra production to AMU over the remainder of 2002–03.

Looking forward to FY 2003–04, on the basis of announced production (existing and accretive from known acquisitions and drilling success) AMU can expect to collect some 270,000 barrels of oil over the full FY, or an average of some 740 bopd. This is significantly up from the 166,589 actual in FY 2001–02 and 210,000 est. for FY 2002–03. Gas volumes are expected to remain largely unchanged, and should continue to deliver sales of around A$1 million.

With production of this magnitude, and assuming an oil price of US$30.00 a barrel (I'm an optimist) and an A$/US$ rate of 0.60, AMU could end FY 2003–04 with total sales of about A$14 million (including gas sales). Sales of this order would deliver an EBITDA of around A$6 million. (If the WTI oil price falls to $US25.00, this would still deliver total sales of around A$12 million and EBITDA of about A$4.5+ million).

Given AMU’s drilling program is targeting formations previously shown to be hydrocarbon bearing, it is highly likely that they will add to production. Based on the drilling success of other North American companies on these formations in the same vicinity (check out the Texas Railroad Commission, SiouxChief and Essenjay Oil websites), the drilling program to end-June could easily deliver over 100 bopd to AMU. Success of this order would generate additional revenue at current prices of about A$2 million and EBITDA of A$1 million. On that basis, AMU sales for FY 2003–04 could potentially reach A$16 million with EBITDA of A$7 million.

And Amadeus’s drill program is ongoing. For example, their 3D seismic results on the exciting Red Creek prospect have already generated plenty of leads. Their record there to date is two producers from two wells, and they have stated they intend drilling up to 60–70 wells on Red Creek, with the expectation that over 80% of them will be successful. This and additional development wells on their other leases appear certain to both replace the marginal yearly decline expected from their mature fields and to produce net additions to total oil production. Future increases in production appears likely in this regard.

In addition to their improving prospects in oil production, Amadeus look good on an asset backing basis. In June 2001, Amadeus’s bankers (Wells Fargo) commissioned an independent valuation of their US producing assets. At that time it considered AMU had proven and probable reserves of around 3.28 mmbo, which it valued at around US$13 million (about 25 cents per share at current exchange rates).

Since then the value of these long lived assets could be considered to have declined marginally as a result of almost two years production (although oil prices are considerably higher so that is a moot point). But that should still leave plenty of asset value left.

Also since then, AMU has acquired the Red Creek prospect. Pre-drill estimates indicated possible reserves of 9 mmbo for AMU’s 51% share. A research report by Russell Langusch in April 2002 estimated that the planned exploitation of this had a NPV for Amadeus of around US$37 million (A$64m on current rates) or some 75 cents (A$) per share. However, initial drilling success at Red Creek suggests that range looks conservative, with total reserves of up to 50 mmbo possible. If future drilling confirms this higher estimate, a commensurate increase in NPV would be justified.

And on top of this, AMU acquired the producing lease of Morgans Bluffs (350 bopd and 420 Mcfd of gas) with all shallow and deep rights to any productive formations it might contain.

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In addition to their core business of oil production, Amadeus has added appeal from their exposure to two other business ventures — an exciting biodiesel project and a remote power monitoring system. Of these, the biodiesel venture looks closer to commercial fruition.

AMU has signed a licensing agreement with an Austrian company (a world leader in biodiesel production technology) and has progressed its plans to construct the first commercial biodiesel plant in Australia. This plant (the first of five planned for Australia) is slowly moving to reality in Western Australia. AMU has engaged Leighton Holdings as construction contractor. In addition, AMU has secured the WA local government superannuation fund as an initial investor – it put up A$2 million to take an 11% stake in the plant. Discussions are proceeding with other institutions to take a further 33% for $6 million. Each plant, if constructed, has the potential to deliver annual profits of A$6 million. On that basis, the first plant could well drop A$3+ million into Amadeus’s coffers when it gets up and running.

Although construction on the first plant was due to begin in 2002, delays in the Commonwealth Government’s policy deliberations regarding the treatment of alternative renewable fuels have held things up.

The prospect of commercial success in this arena adds considerable blue sky to any holding in Amadeus.

For added information see Amadeus’s web site.