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Antares Energy Ltd (AZZ) $0.69


Recommendation: BUY

Analyst: Scott Simpson Tel: +61 8 9263 1679


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Event

AZZ and its JV partner SIDC has finalised the locations for the next 2 x development wells in its highly prospective Eagle Ford shale acreage in Texas, USA. Earth works at the drilling pads for the Frances Dilworth No. 3H & 4H wells will commence shortly with the wells to be drilled by the end of the March Q.
AZZ is targeting 10 wells online by the end of CY 2010 followed by a further 10 in 2011 and 15 in 2012.
Operational issues due to extreme weather and the Christmas/new year holiday period has delayed progress at the Frances Dilworth No.2H well. However this has now been overcome and further progress will be reported on a weekly basis.
Impact
Confirmation of the additional wells suggests confidence that production from the Frances Dilworth No. 2H will be inline with expectations. The well is reportedly still undergoing the process of fracture stimulation, flowback and clean-up although its progress through these stages is not stated. However, based on time to date, we would assume that the well is close to completed and that a production result will be announced to the market when a steady initial flow is achieved.
In related news, Murphy Oil - a significant player in the Eagle Ford shale with over 100,000 acres, recently reported the results of the George Miles No. 1H well in the nearby Karnes County. The well, which was drilled to 13,320 ft with a 3190 ft horizontal section into the shale, flowed at 7.5mmscf/d. The news supports results thus far which has seen a 100% success rate from 53 wells drilled into the emerging shale play. Our valuation and full field development model is based on a rate of 6mmscf/d and 300bopd, which was determined by predicative modeling of the results seen in the Frances Dilworth No. 2H well. The reported results are part of a growing news flow, highlighting significant investment in the emerging play. Other recent news included Totals US$2.25b investment to buy a 25% interest in Chesapeake Energy's shale assets and is reported to include ongoing discussions towards an Eagle Ford JV. All of this significant investment is occurring on a narrow band of Eagle Ford shale, suggesting that asset prices will certainly rise and the prospect of a bid for AZZ is very real.
We maintain our speculative BUY recommendation with a price target $0.90/sh. AZZ is at a pivotal point, with the impending production test results to substantiate resource estimates across its acreage of ~1.4tcfe. Understanding this resource play is key - geological and mechanical risk are low, with a 100% success rate so far in the Eagle Ford shale and seismic confirming the presence of an extensive shale resource across AZZ's interest in 32,586 acres. Our valuation is currently based on a full field development model of estimated resources (the majority of which have been independently certified at a 2C level) and currently risked at 20%. We view progress towards reserves certification as a primary value driver and will look to reassess our valuation as the path to certification becomes clearer. At this stage we understand that maiden certification will follow completion of the 3 wells by the end of the March Q.




Antares Energy Ltd (AZZ) $0.69


Recommendation: BUY

Analyst: Scott Simpson Tel: +61 8 9263 1679


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