broker recco

Euroz Securities

Company: ARC Energy (ARQ $1.30) - Buy

Valuation: $1.66/sh
Price Target: $1.49/sh

Reason For Update: Dec Q'06 Review

Quick Comment:

* Oil production 34% up on the Sept Q due to Hovea/Eremia
outperformance
* Gas production slightly down
* Revenues up 3% despite received oil prices being down by 22% to
A$70/bbl
* Appraisal/development success at Hovea/Eremia and Jingemia will
underpin earnings increase this FY
* Drakea and Beharra Springs Deep exploration wells in Perth Basin to
be drilled in next 2-3 months
* High risk Canning Basin exploration program to commence in April/May
- high value add potential

Investment Case: We see limited downside to ARQ at current prices given its
sound financial platform and low risk asset base. However, for ARQ to create
a step change in value it must participate in material exploration success
or an acquisition.



Details:

Revenues were $29.8m for the Dec Q (v's $28.9m for the Sept Q'06). Oil
production of 325 kbbls for the Sep Q was up 34% on the Sept Q. Hovea/Eremia
(ARQ 50%) average of ~3,400 bopd accounted for most of the increase.

Solid oil production as a result of the recently commissioned Hovea-12,
Jingemia-8 and Eremia-6 wells should continue for the next 12 months at
least. Eremia-7 to be drilled shortly may also contribute.

We are forecasting a normalised $26m NPAT for the FY'07 (v's $15m for
FY'06).

Disappointing oil exploration continued in the Perth Basin with the
Lyginia-1 well dry. Drakea-1, targeting 15 mmbbls is almost a "last roll of
the dice" well for ARQ. If successful it could be worth 64 cps to ARQ and
revive the outlook for oil prospectivity in the basin.

The first well on ARQ's onshore Yemen acreage, Reeb-1 should be drilled in
the June Q. At this stage at least two wells are planned in block 35 (ARQ
15%) targeting prospect sizes ~50 mmbbls. Continued success by other
operators in Yemen has upgraded ARQ's acreage.