re: need to be careful with this one.. Have to disagree with you...

re: need to be careful with this one.. Have to disagree with you on this one Jocam9.

AMU is a very easy story to understand, and I don't mind the company locking in an underwriting to guarantee funds at little cost. Just prudent capital management to me.

And that profit increase was as much the result of higher production - 195,000 barrels in FY2002-03 to 256,000 barrels in FY2003-04 - as from higher oil and gas prices (which by the way look like hanging around for a good while yet and will continue to swell AMU's coffers as a result).

I suspect the market here does not appreciate that when AMU do find oil and gas, it is from fields that have well lives of 15-20 years. In other words, once found they just keep on pumping out the money for decades.

What's more, it is very difficult to argue with a reserve increase from the 7 million barrels or so last year to the 13 million (and growing) reserves at latest report! Those reserves alone are worth a heap more than the company is currently valued at.

A quick review of their drilling success rate should also provide comfort that their ground in Red Creek, Raccoon Bend and Halletsville is highly prospective for significant extra licks of oil and gas. but in any case, the upcoming drilling on Raccoon Bend and other prospects will soon show how good or otherwise they are. Time will tell, but if the past success is any measure there is plenty more oil and gas to come.

As for the biodiesel business that you appear sceptical about ... When AMU applied for the recent Commonwealth Government capital grant for their Adelaide plant, one of the criteria applied was that the project had to be viable in the long term without government assistance. Needless to say, getting the nod for their A$7.15 million grant was another way of saying that a very critical, independent eye has been cast over their business model and prospects and it has been found to be solid. (The same inference can be drawn from the fact that their US bank - Wells Fargo - has also cast its critical eye over the project and advanced funds for it).

On that basis alone it would appear that independent judges have found it a sound business model.

Initial feasibility plans in earlier presentations indicated that it would deliver to AMU revenues equivalent to just over 700 bopd. My own estimates of profitability over the first five years of production - based on past presentations and the excise and assistance regime biodiesel will sell into - is that each plant will deliver to AMU a profit of A$5 million or so.

Since the original feasibility study was drawn up and found the biodiesel plant would be very profitably, the project economics have improved significantly. For example, the Federal Government has extended the period in which biodiesel receives a reduced excise (from 2008 to 2011). This effectively means another 3 years in which significantly higher windfall gains will accrue to their biodiesel revenues.

As for your comment about the environment ... biodiesel is in fact very good indeed for the environment. It delivers significant reductions in greenhouse gas emissions (on both a tailpipe and full fuel life cycle basis) relative to the diesel it replaces. It also delivers significant reductions in noxious emissions and particulate matter (again on both a tailpipe and full fuel life cycle basis), which in turn provide major benefits in improved mortality and morbidity in metropolitan airsheds. If you want more information on this or confirmation that this is indeed true, I suggest you have a look at the report by ABARE, CSIRO and BTRE published in December last year on the appropriateness of the government's 350ML biofuels target.

Bottom line is that biodiesel is unambiguously good news for the environment and air quality.

All up, AMU has shown remarkable production growth in the past few years and appears on track to continue to expand both oil and gas production. Biodiesel too looks like a goer and will deliver substantial profits before too long.