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Company: Otto Energy Ltd

Code: OEL

Recommendation: Spec Buy

Market Cap: $158m

For investors beginning to feel the pinch at the bowser, it may be time to consider taking action against their exposure to rising fuel prices. Buying shares in oil companies that can actually benefit from record high oil prices is one obvious solution. However the sector is not for the faint hearted. Hydrocarbon exploration has always been a ‘hit and miss’ affair, especially at the junior end of the sector where the share prices of explorers are known for their extreme volatility surrounding drilling results.


Drilling targets to find that often illusive ‘company maker’, offers the greatest potential creator of value for any junior oil and gas explorer. However drilling is a very expensive past time, which makes these companies very cash hungry and in need of strong investor support.

In the case of Otto Energy, the good news is they have both a busy drilling schedule and plenty of investor support. Late last year, the company found investors were willing to inject a staggering total of $79m over two raisings into the company, which at the time was greater than the company’s market capitalisation. This was no small feat, and put the company in a strong position to pursue a good mix of low risk low impact and exciting high risk high impact targets.

These funds have also been used to buy a revenue share in the large 'Galoc' oil field in the Philippines which is due to commence production this month. The Galoc oil field is expected to contribute $30m in revenues during 2008 according to Otto Energy, and we estimate it will generate substantially more revenue than this in 2009.

This oil field has 2P reserves of 23MMbbls and is expected to start producing at a rate of approximately 15,000 barrels of oil per day. Otto Energy’s 18.28% interest in this field will give it a share of approximately 4.2m barrels from reserves and 3,300 barrels of oil per day from production.

In addition to Galoc Otto also boasts a swag of other exploration projects in the Philippines. Otto has stakes in the offshore permits SC50 (85%), SC55 (85%), and the onshore & offshore SC51 (80%). At the moment Otto is seeking farm-in partners for these projects to share the offshore drilling costs and will be looking to drill 10 exploration wells from 2009-2012.

Therefore while Galoc undergoes development, and the company’s other Philippine assets await drilling next year, Otto’s current exploration focus lies in Turkey, where it holds a 35% interest in ground covering the onshore ‘Thrace Basin’.

This Turkish Joint Venture has made 6 gas discoveries in total, and 2 wells are still to be drilled as part of the current drill programme. Three of the discoveries were made in a previous drilling campaign, and the 3 have been made as part of the latest campaign. The three new gas discoveries and the earlier three discoveries are relatively close together and can be developed through a central development hub. The joint venture is aiming to establish a reserve estimate from the latest discoveries and bring them into production by mid 2009.

Otto also has exploration interests in Italy and Argentina. The company has just farmed into its Italian project and no drill programmes are planned as of yet. Otto’s Argentinean project is regarded as a potentially ‘high impact’ field. The license to drill this project has yet to be formally awarded, however upon award Otto has indicated that it would be ready to drill 2 wells within 12 months.

The award of this license could trigger a re rating in the stock, however when this will occur remains uncertain. Other catalysts that we feel could drive the share price higher include the revenues from the Galoc oil field, ongoing exploration success in Turkey, an estimate of the Turkish joint venture’s gas reserves, and more detail on a production plan for this field.

In our view these strong share price drivers combined with an existing healthy cash balance of $6.7m warrant a ‘spec buy’ recommendation on the stock. Like any other junior oil play, the risks facing the stock which investors should consider surround the oil price and exploration and development success. Oil is currently trading near record highs, however a significant fall could also drag Otto’s share price down. Although development at the Galoc field has thus far been smooth, any set backs are likely to also have a very severe impact on the share price.