re: Ann: Sugarkane Field Reserves Update for ... "Where is this...

re: Ann: Sugarkane Field Reserves Update for ... "Where is this puppy going to be by end of 2012"

Reading between the lines (of the AUT latest presentation), it looks like there will be a progressive securing of the outer lying Longhorn acreage (most of the wells drilled appear to be neighbouring Sugarloaf) followed by drilling to secure most of the remaining leases.

Some time around September 2012, AUT & NSAI are expecting a mysterious $1m fall in well cost (slide 28), which happens to coincide with the completion of the drilling to hold exercise. That suggests planned multi well drilling from pads, which could herald the closer spacing and the simultaneous fraccing of the closer-spaced laterals, which might be drilled double-decker into the EFS & overlying chalk or even triple-decker if the vertical penetration of fissures really is dismal.

If that is successful, it could have an explosive effect on the share price. AUT is already suggesting/dreaming of an uplift in recoveries from 5 - 10% to c40%. That was 'old' technology applied to the other shales as well.

They might experiment before. They are drilling so many wells in Longhorn that there could be some experimental wells at closer spacings included.

So, if they are saying up to 4x recovery of oil & gas in place, that becomes 8x NSAI reserves because of the Austin Chalk, which could be increased by 20%, say, for EURs coming in consistently above the NSAI curves used and increased again by 15% if they can count all of their acreage (a point repeated by AUT in just about every presentation). And that, multiplied up, comes out at 11x, which is more or less the position that CMG Securities is reported to have had when AUT was floated on the TSX.

As it is clear that AUT can service the development of the field using debt facilities, there should be no further dilution and that increase in reserves valuation (we're talking about March 2013, probably) could see the SP at above $10 or even $15 with good prospects for the price of oil. I'm assuming that the current SP is discounting some of the probable uplift to the very conservative NSAI valuation.

The weakness of the share price could be investors taking the view that there will be that progressive drilling for a number of months, so nothing that could cause a material re-rating, and, in the meantime, that there is downside risk from external economic factors. So, maybe, they would rather lose the first bit of the uplift and play safe with their money. The reversal might be quite exciting for holders when it comes if that is the case.

Longer term, the current weakness of the PoO could work in our favour if it causes O&G companies to shelve some of their capex in competing, but more expensive, sources.