The week began with the good news from Cliff Head that the sidetrack had flow tested at 3,000 bopd. This was better than even the jv partners expected. Cliff Head looks well on the way to becoming a commercial discovery. There was little immediate impact on jv partner share prices but most rose slightly as the week wore on and the rig prepared to move to Twin Lions which will spud over this weekend. NWE showed the best percentage gain of all the jv partners.
Carnarvon disappointed the market with the news that December production at its Wichian Buri field in Thailand had averaged 332 bopd and the shares closed out the week at 4.5 cents considerably down on the previous week’s close of 5.7 cents. (See below)
Apart from PSA and CVN there were no major gainers or losers among the junior oilers this week. FAR, after being stronger last week, was weaker this week. The Cooper /Eromanga trio, COE, BPT and STU, remained unwanted even though BPT tried to excite some interest with a justifiably bullish report on its past six months performance. But the market yawned. Drilling won’t start again in the Cooper/Eromanga Basins until cooler weather comes in April/May. The market doesn’t seem to like that sort of inactivity. For contrarians BPT and COE seem to be good buying at current levels. Straw hats …etc etc.
Two big wells Bosavi in PNG and Tui, offshore New Zealand, were drilling ahead this week. Among the Bosavi participants there was little movement in HZN though OSH jumped late of Friday for other reasons. The Tui trio, AWE, NZO and PPP were also quiet. Tui hits a secondary target, the Moki sands, next week but the primary target Kapuni sands are still a week to ten days away.
Twin Lions
It is hard to know how the marker will react to a success at Twin Lions. Results should be known this week as it is a shallow well. The muted response to what was an excellent production test at Cliff Head was disappointing to say the least. Clearly the junior oil sector is not immune to the war jitters which have been affecting markets worldwide. People are wary of what might happen in the middle east and don’t know where oil and gas prices might go if the war is over quickly. Obviously, if Twin Lions comes in, and the reservoir is shown to extend into the Cliff Head lease, there will be a significant rerating of the juniors like NWE, BUY and VOY. But I would’t expect any two or three baggers. The market just doesn’t seem to be in the mood for that sort of exuberance.
In fact the move to the downside if Twin Lions disappoints is likely to be larger than the move to the upside if it is a success. So my trading strategy will be to sell into the spike if the well is a success and buy NWE and AWE on the panic selling if it disappoints. I am holding BUY through Twin Lions.
Petsec Energy
For someone who has long believed that Petsec Energy would eventually be rerated it was gratifying to see this happen during the week. Patience pays. PSA announced after the market closed on Wednesday that its three West Cameron wells went into production on 23 January at a rate of 18 mmcf a day net to the company. This represents free cash flow of something like $40-$45 million a year at current gas prices. Two million PSA shares changed hands the next day with the stock jumping from 28 cents to 37 cents. By week’s end PSA had risen over 30%, not a bad gain for the week.
PSA’s quarterly report issued on Thursday showed that it still had $4 million in cash and its 7% ORRI in Ship Shoal was equivalent to 1.5 mmcf of gas a day or another $3-$4 million a year at current prices.
The question is can PSA hold its current price or move higher, or will it retrace to the low thirties? Hard to say. On fundamentals it should move higher but as we all know the market doesn’t always reflect fundamentals. I don’t know what the charts say, I am not a chartist, so perhaps B2 can help us out there. PSA is not a company to blow its own trumpet so media releases are few and far between (unlike AYO) and as we know media releases move stocks. I am hoping PSA will put out a release next week when it receives its first monthly cheque from Ship Shoal because this will be its first substantial revenue since the company’s reorganisation last year.
But as PSA has no drilling activity scheduled over the next few months there is nothing on that front to move the market. The one thing that could maintain short term interest in the stock is if brokers take an interest and start recommending it to clients. Otherwise I would expect the shares to drift if not retrace a little in coming weeks. In the longer run I think the future looks strong for PSA and for me it is a long term hold with the potential for the stock to at least double again this year even if we do see gas prices move lower after the northern winter.
The problem for some analysts is the small reserves base of 25 bcf at West Cameron (eg. when compared to AYO’s reserves of 100bcf plus at Gocerler). PSA has said that revenues from West Cameron will allow it to significantly expand its activities so maybe they have plans which will address the reserves issue. For example I understand there are at least two other prospects at West Cameron to test. And the company could surprise the market with a new development or farm in announcement as it did with its decision to join Roc Oil in Beibu, the offshore China oil discovery last year.
PSA has in the past put its shareholders through a pretty torrid time so understandably there are some who doubt its ability to regain its former glory which at one point took the share price to over $7. But PSA is focusing on the Gulf of Mexico, the area it knows best, and presumably is determined not to make the same mistakes twice. Management owns a large percentage of the stock and obviously has something to prove. It also has a data base on the GOM which is the envy of many others who operate there and enhances its ability to bid for prospective leases. The West Cameron leases, for example, was only acquired in last year’s MMS auction. Nine months later they are in production and pulling in big bucks, not a bad effort by any standard.
Beibu Oil Field, Offshore China
A couple of posters here have wondered why companies like Petsec were spending money on their interest in China though they have given no reasons for their concern. I rang Roc Oil this week for an update on Beibu and spoke briefly to Dr John Doran.
Apparently work is going ahead on a fast track development of the field and all the preliminary figures are now being crunched and engineering studies prepared. A Chinese delegation was in Sydney a week or so ago to discuss a number of development issues. So the Chinese are serious. It looks like CNOCC will exercise its right to a 50% interest in Beibu but in so doing will have to reimburse all the other participants half of the funds they have already expended on the lease ie.well costs, seismic costs etc. As is already public knowledge the jv will certainly drill one and possibly two or three wells on the lease later this year. Doran said preliminary interpretation of the 3D seismic shot last year was encouraging. I understand Roc expects a cash flow from Beibu ahead of cash flow from any of its other development properties which I presume includes Cliff Head.
The Beibu discoveries are not big by any means and the jv is not going to make squillions out of the field. Size was the main reason the major international oil company that made the initial discoveries on the field passed the lease over. The Chinese were apparently not pleased with this behaviour and have welcomed the willingness of the Australian jv to become involved. And that makes it a lot easier for Roc to put approvals and such like in place. For the partners, apart from making money out of what will be a stand alone profitable project, it is also an entrée to China. So maybe we can expect Roc and its group chasing more oil and gas in this energy deficient country.
I think Beibu is a plus for all the Australians involved and indeed for Horizon, it may be the saving of the company. Petsec, with a 12.5% interest after CNOCC farms in, should have another nice little money earner. Apart from ROC, HZN and PSA, FAR also has a small interest. I don’t think the market has so far factored China in to the share price of any of the companies involved.
Carnarvon Petroleum
There can be nothing more frustrating than sitting on a big pool of oil and not being able to get it out of the ground. This is the situation that Carnarvon finds itself in. It will shortly announce an upgrading of its reserves in the Wichian Buri oil field in Thailand. But what the market wants is news of increased oil flows from the six wells drilled into the “F” sands reservoir holding that oil.
Anyone following the Carnarvon thread on Stockhouse will be aware of the frustrations some posters have with Carnarvon. The company’s detractors claim that the management has failed to live up to its predictions for flow rates from not only the fractured “old”wells but also the three new wells supposedly drilled into a much better section of the reservoir. A number of investors believe they have been misled.
Carnarvon announced this week that average daily production in December from all six wells was 332 bopd. In explaining the lower than expected production the company did say that December was a month when wells were shut in for de-sanding and/or for other reasons. It said the operator, Canada’s Pacific Tiger, was working hard to get production from current wells up to the target of 700 bopd. Even that figure disappoints many and is only a 100 bopd above the beak even point for the joint venture.
There is a problem for oil companies making predictions about flow rates, sales levels, reserve estimates etc. When the predictions are proved wrong the market can be very savage. Yet often there is no other way a junior oiler can get attention. And attention can lead to a higher share price and make it easier for the company to raise capital should it need to. But unfulfilled predictions can also lead to a questioning of a company’s credibility. Anyone who received PCL’s annual report with its coverage of the company making discovery of oil at Huinga 1B will know what I mean.
Carnarvon now seems to have adopted a policy of tell it when it happens (like PSA) so predictions are out and facts are in.
Carnarvon is now pretty much on the nose with the market. Flow rates are disappointing, revenues are not yet at break even point and there is no drilling activity foreshadowed in the immediate future. So why would anyone buy the stock? I was tempted to follow Yogi and sell my holding this week but decided not to on the grounds that Carnarvon clearly has oil in the ground and could eventually find a way to overcome the engineering problems associated with the sand filled holes that have plagued them thus far. They will bring the E and G sands discovered in the new wells into production this quarter and are planning a phase 3 drilling program in the latter half of the year.
They hope to use the Deutag rig that so expertly and quickly drilled the new wells last November and should by then have enough information on the field structure and reservoir characteristics to optimally site the next wells. Famous last words I suppose but the fact is if CVN can get flow rates up, even if it takes more wells to do it, their future looks assured. Carnarvon had around $1 million in the bank at the end of the December quarter, so I suspect they will need to raise cash for the next round of drilling. Its partner has already had a capital raising.
The company has yet to report on January flow rates and a pleasant surprise is possible but unlikely. If they had significantly increased flow rates since December they would have said so in the quarterly. But as long as the next production figures are above December figures there is hope!!! Carnarvon is for the very brave but it is one to keep an eye on, it could turn around very quickly. They are after all sitting on a lot of oil.
Herewith a look at one of the newcomers to the oiler boards and one not covered by Quentin Cameron!
Carpathian Resources (CPN)
Carpathian Resources debuted on the ASX in June 2001. It has on issue 25 million 20 cent shares though only 17 million are listed. It began public life with a bank of $3.0 million and a portfolio of oil and gas leases in the Czech and Slovak Republics in Central Europe.
CPN’s goal was to bring into production small oil and gas reservoirs thought to exist on five leases in the Western Carpathians (hence the name) which history had demonstrated were highly prospective being in known hydrocarbon provinces.. After the disintegration of the Soviet Union in 1989, the Czech and Slovak governments privatised state utilities and encouraged private investment in energy assets. Both put in place regulatory and fiscal regimes attractive to investors. As partners CPN has local organisations associated with both governments so it is well connected and has good access to geological and seismic data in government archives.
CPN now has a 14 exploration and production licences in the five areas of interest. Details of the project areas including maps can be viewed on CPN’s website along with a 2003 brokers report from D J Carmichael which has Carpathian as a speculative buy. Carmichael values CPN's oil reserves and exploration interest at $9.1 million or 33 cps as against a last traded price of 10 cents.
It is taking longer than expected for CPN to develop a cash flow but 2003 could be the year in which first revenues are earned.
In December 2001 CPN had its first drilling success with the Postorna 1 well located in the Breclav or Vienna Basin license. Posturna 1 encountered an 11 metre oil column in a high quality reservoir. Subsequent perforation resulted in a natural flow of crude to the surface. CPN’s shares made it to 35 cents on the back of the discovery but retraced significantly when a dispute with a minority partner looked like holding up development for some time.
The company told me this week that it is hopeful the dispute will be resolved in March. CPN is the junior partner with a 17% interest in the license . Geocan Energy of Canada is the operator and major partner. Once the dispute is resolved funds can flow quite quickly as Geocan intends to truck production to a nearby refinery. The Postorna field has the potential to be a good little cash earner for CPN. Recoverable reserves are estimated to be 9 mmbbl of oil.
Another potential earner for CPN is the Krasna oil field discovered in the Czech Republic just prior to the end of communist rule. CPN has formed a consortium with a Czech Company (Unigeo SA) to reopen the three wells on the field and produce an estimated recoverable reserve of 236,000 barrels. Not much you say and you are right but a nice little earner nevertheless given Carpathian’s 50% interest. And the potential exists to increase reserves. Weather conditions permitting this project will start producing in March/April. The field is in a mountainous area and the short access road to the main road is snow bound and not easy for tankers to navigate.
A third prospective money earner for CPN is the natural gas field within the Janovice block in northern Moravia in the Czech Republic. Two discovery wells were drilled under the former communist regime but no production occurred. Proved and probable gas reserves are 1.6 bcf and the potential exists to increase that by further drilling. CPN announced on 22 January that it had executed a letter of intent with a Czech company (again Unigeo SA) to form a consortium to being the field into production.
Carpathian is facing the problem of most new entrants, that is running out of money before establishing a cash flow. At the end of the December quarter CPN had some $400,000 left. I suspect they will need to go back to the market for more funds before too long. That said if they can bring the Krasna oilfield, Janovice gasfield and Postorna well into production quickly that might not be necessary or the amount of money needed might be less. Carmichael’s assesses that Krasna and Postorna alone are worth $2 million a year to CPN.
The shares are seldom traded but that can change if good news comes to the market. The managers know their area of operations very well. Accumulating under 10 cents could prove a profitable investment in six months time. I have a small holding. But remember a share pummelling capital raising is a possibility.
As usual the foregoing is to stimulate discussion and exchange ideas. Do your own research before investing your hard earned. I welcome all your feedback good and bad.
Weekly trades: I sold WON on Friday at 1.2 cents to finance an additional parcel of Gindalbie. I chose to offload WON when I realised that WON’s interest in South Crackling was dependent on TAP not exercising pre-emptive rights. Didn’t like what could happen to WON shares if it had to announce its farm in was not agreed by TAP.
I bought Gindalbie because I like what it did at Minjar, it is spending a bucket load of money exploring in a prospective area and because I used to live on the goldfields! Negatives for GBG are low reserves and its hedge book but I can live with those. These are highly speculative stocks after all. A good find would have a big affect on the share price. I am with B2 on that.
Disclosure: I hold BUY, CPN, CUE, CVN, COE, FAR, ICN, GBG, OSH and PSA
