AMU released two great bits of news in its weekly drill report today, but they appear to have been overlooked or undervalued by the market.
First, their drill report noted the Renger Sassin gas wildcat has intersected 40' of net gas pay in two zones - and is still drilling ahead in the lower gas pay sands (so highly likely that that net pay will be extended). The exciting thing about these intersections is that they are in the secondary zones. The drill still has to reach the deeper primary target.
No indications of flow rates are yet available, but other nearby wells have delivered some juicy flows from comparable zones. At either current WTI gas prices or AMU's base $8 mcfg from their cap and collar insurance, I would expect this well to provide a tidy addition to production and profits.
Second, and a lot more exciting, was the news that the polymer treatment program is delivering more fantastic results. The first 6 wells treated saw production improve from 16 barrels of oil and 2750 barrels of water per day to 150 bopd and 200 barrels of water. After this latest treatment of another 3 wells, total pre-treatment production for all 9 wells has improved from 21 bopd and 3500 bwpd to a phenomenal 400 bopd and 900 bwpd. Operating costs would be down significantly with production of liquids down from 3521 barrels to 1300 barrels.
At a cost of about US$70k per treatment, these latest three wells should have a payback period of just under two weeks! From there on it is money in the bank.
For AMU, with its 74.4% net revenue interest, the treatment is yielding additional production of a bit over 280 bopd and a significant fall in production cost (because of that huge reduction in total liquids being pumped). The effect of this treatment does wear off and oil production gradually declines back to the original oil production. It is too early to get a handle on what this decline rate might look like. But it should still deliver materially higher production. And the effect on water production continues, so the benefits of lower cost will continue even if/when oil production returns to pretreatment levels a year or more down the track.
At current oil prices, after payback, this treatment program will be dropping some A$28,000 a day into AMU's bank account. Crunch your own numbers with whatever assumptions you like, but you will still come up with a damned big addition to FY07 profitability! My own guesstimate of the benefit of just these first 9 wells treated will deliver additional profits of in excess of A$6 million. And this is for just 9 wells! There are another 21 still to go with just this program. Of course AMU is no doubt casting their eye over the balance of the 300 wells on the White Eagle lease.
Plenty of good news still to come from AMU's solid drilling program for the balance of this calendar year and for FY07.
AMU Price at posting:
0.0¢ Sentiment: Buy Disclosure: Held
