VIETNAM BACK IN FOCUSInvestment PerspectiveNeon has announced...

VIETNAM BACK IN FOCUS
Investment Perspective
Neon has announced the securing of the Ensco 107 drilling rig for the first exploration well in Vietnam Block 105. Drilling is expected to commence in June 2013 into the Cua Lo target which carries a prospective resource of up to 13.9 TCF gas. Neon is substantially carried through drilling of the well by Eni. Pursuant to the terms of the farmout agreement, Neon will be carried through the drilling of the Cua Lo well up to a gross cost cap of US$25 million. Any costs in excess of the cost cap will be paid by the parties in accordance with their respective working interests.
Last week Neon announced the Songa Mercur rig was contracted to drill first exploration well in Vietnam Block 120 with drilling expected to commence in August 2013. 3D seismic confirms the prospectively of Block 120 and Neon will be carried through the drilling of the well up to a gross cost cap of US$20 million. We welcome these announcements and view that Neon has successfully negotiated itself into a position for large material gains in Vietnam with minimal overall risk.
Investment Highlights:
• US$6.78m ENI reimbursement for costs incurred in Vietnam and securing rigs cements ENI commitment. ENI now have formal government approval to take over operatorship of the Vietnam assets. We view that this removes any lingering doubts regarding ENI’s commitment to exploration in Vietnam.
• Our free carry assumptions have been updated. Neon has now informed the market as to the extent of the free carry on the Vietnam wells and we have factored those into our capex numbers. NEN is receiving a gross free carry on Block 105 of US$25m with gross carry on Block 120 of US$20m. Conservatively we have factored in a total US$35m gross cost of Block 120 (net to Neon of US$3.75m) and gross cost of Block 105 of US$40m (net to Neon of US$3.75m). This equates to ~ a 70% cost increase.
• Additional operations continue. With the North San Ardo water injection well completed & operational (Mid April) and the Glau 2D seismic programme progressing we consider NEN is in a strong position to increase production in California and increase is cash generation base while Vietnam is progressing.
BUY rating maintained, Target Price $0.78
With cash at end of Q1 period of US$23.3m and after factoring in our very conservative Vietnam capex assumptions, we forecast Neon is adequately positioned to finance any additional costs should there be delays or cost increases arising during the 2013 Vietnam drilling campaign. Overall the revisions have resulted in a negligible change to our blended DCF-based (NPV10%) valuation. We maintain our BUY rating with Target price of $0.78 per share.