canning acreages valuations and some musings

The more I read, the more I want to post.
I have been putting this post together over the past week.

Disclaimer - I hold stock in BRU and NSE.

As I try and step back to get a 'big picture' view of what BRU has achieved in the past 2 years, it really is an amazing sight. Yes the SP has risen, but that was from a very low base, considering that Mitsubishi farmed in at what is currently close to the average per acre market price across Australia (from Broker opinions/reports), BUT remember, the farm in occurred in 2010, before a plethora of other deals which have occurred across the many basins in Australia. Also, as you will see, just on acreage alone, BRU is cheap for what it could hold in recoverable gas and oil resources and what it has already discovered or in the progress of proving up. Also, I think credit should be given to Eric and his team for getting such a great deal with Mitsubishi and of course for all the work they have undertaken since then.

The initial focus of my post was to discuss the acreage valuations that have slowly been proven up as more and more deals occur in the Canning Basin as well as across the Australian Shale sector.

I thought chronological order would be best, starting in 2010 with the Entry of Mitsubishi. All numbers in regards to acreage are in the Canning Basin only.

BRU/Mitsubishi - June 2010
Total Acreage - 18 million acres - (minus approx 800k acres not part of the deal) = 17.2 million acres
Mitsubishi got %50 of tenements
%50 of 17.2 = 8.6 million acres
Total farm in cost - $152 million
per acre - $17.7

NSE/Conoco- Oct 2011
Total Acreage - 45000 sq km - 11115000 acres
Conoco got %75 of tenements
%75 of 11115000 = 8336250
Total farm in cost - $109.5 (+ $1 million upfront)
per acre - $13.25

KINGSWAY/HESS - April 2012
Total Acreage of Permits - 7800 sq kms permits (1926600 acres)
HESS got %100 of acreage
Total price - $11.5 million
Per acre - $6

BRU/Backreef Pty Ltd - Oct 2012
Total Acreage of Permit - 5062 sq km = 1250314 acres
BRU got %50 of acreage
%50 of 1250314 = 625157
Total farm in cost - $3.5 million
per acre - $5.60

BRU/GUJURAT - Oct 2012
Total Acreage of 2 permits- 10646 sq km = 2629562 acres
BRU bought %90 of acreage
%90 of 2629562 = 2366606
Total farm in cost - $36 million
per acre - $15.20
(( Sorry to say I earlier posted part of a broker report which stated that the est price per acre was $4. I think they are incorrect in their analysis as far as my maths is telling me ))

OBL/FMG - Nov 2012
Total Acreage of Permit - 5062 sq km = 1250314 acres
OBL owns %50, FMG farmed in for %25
%25 of 1250314 = 312578.5
Total farm in cost - $11.75 million
per acre - $37.60
(I am ignoring FMGs purchase of %18 of the company, with the option to buy another 100 mil shares options at $0.09, which equates to another %16 of the company, which IMO, is basically an insurance that FMG can T/O OBL with a huge initial stake of %34 whenever they want, so for OBL holders, no 10 bagger is possible). I do think OBL did well with holding onto %25 of the 5/07-8EP.

((( Speculation section of my post.. )))
I will go one further with my calculations and look at the theoretical T/O price that FMG has basically set for OBL.
The last %25 of 5/07-8EP at $0.09 per OBL share (ignoring all OBLs other assets).
*FMG paid $4.2 million for %18 of the company.
*Plus could spend another $9 million for the options.
*Then the 550 million shares would logically be bought at $0.09
*Giving us $49.5 million.
*Grand total of $62.7 million for OBL.
$62.7 million / %25 of 5/07-8EP acres - 312578 = $200.
Now that is starting to look a little bit more exciting as values go for the Canning Basin (still very very low IMO though).
Just to put it into perspective, at $200 an acre;
BRU would be worth $3.4 Billion.
((( Clearly this is all my own speculation )))

If I can think like a broker for a moment, the average price per acre as set by 'the market' is as follows.
17.7 + 13.25 + 6 + 5.6 + 15.20 + 37.6 = 95.35 / 6 = $15.90

Now when you look at other prices paid across Australia (Wet Gas and Shale acreage), it starts to get really interesting.
As far as I know, the highest amount paid in Australia was for ADE's Wet Gas/Shale acreage, in the Cooper Basin, was BPT which paid $761 per acre.

(I have not included/quoted any valuations from the Coal Seam Gas Boom on the East Coast, partly because I missed it, however I would be extremely interested in getting those valuations posted from others to give another avenue to compare value metrics for the coming Australian Shale boom)

Eric S has on numerous occasions, stated that U.S acreage valuations will eventually appear in Australia, which (IMO) could be anywhere up to $100,000 per acre (see later part of the post for details). There are many variables that would need to be taken into account to get a more accurate picture as to why/when numbers like these might appear, the biggest 3 being infrastructure, drilling costs and the capital needed to undertake the drilling. IMHO, these dynamics are already starting to change. Money is already focusing on Shale in Australia, more drilling rigs are being brought in, and infrastructure is already in place in some locations, or will be built.

This is a great article which quotes Eric S. which I feel is relevant.
"When the first major deal is done in the Australian tight gas and shale gas sector this will change. In CSG over east, companies have built value from nothing to many billions of dollars, and the shale and tight gas in the US has eclipsed CSG by an order of magnitude. The same thing will happen here", he said. He also made the point that unlike CSG, tight gas usually has a lot of condensate and LPG with it and this radically changes the economics."

Shale Gas ‘To Eclipse CSG’ In Australia

BRU is able to boast some fairly spectacular numbers when one asks what might be possible in ground. In today's announcement BRU did present some fairly large numbers in TCF and billions of barrels of oil. Here are the raw numbers from last year which blow anything else in Australia away.
>>> 905 TCF of high risk Unconventional gas resources
>>> 80 BILLION of oil
Yes, these are real numbers which have been provided to the market 16 months ago as possible in place resource figure (not recoverable). It is no wonder that BHP has finally started looking in its own back yard…

Unconventional resource assessment

Since that time the McDaniel report has been commissioned and published on JUST the Valhalla BCGA. BRU has also stated that the McDaniel report will be updated in the future as further data can be incorporated.

McDaniel Report

Another great quote from Eric - Valhalla worth much more than shale:

Company Insight

Here is the visual growth of BRU's tenements since Mitsubishi farmed in 2010.

The reason I post the new acreage maps is to give you a idea of what BRU has achieved. All of these new tenements (Blue, Red & Orange) are not yet NOT farmed into by Mitsubishi.

Acreage in 2010.
18 million acres
%50 farm down - did not include approx 800k acres.
17.2 / 2 = 8.6 million acres

Since then they have awarded 4 blocks plus gained 3 more through corporate actions.
Block L10-7 Oct 2011 - 842k acres
Block L10-8 Oct 2011 - 980k acres
Block L11-2, Mar 2012 - 500k acres
Block L11-1 Mar 2012 - 1.942 million acres
Sept 2012 - BRU purchases from Gujurat and Backreef Pty Ltd
EP 457 & EP 458 - 10646 - %10 = 9581 sq km = 2366606 acres
5/07-8EP - 5062 sq km -%50 = 2531 sq km = 625157 acres

Millions of acres. BRU
18 - Original amount
8.6 after Mitsubishi farm in
11.9 - L10-7 & L10-8 - permits awarded
14 - L11-1 & L11-2 - permits awarded
17 (Guj+Obl) permits - purchased

TOTAL 17 million acres net to BRU (Net result is BRU is only down 1 million acres after 2 years since the Mitsubishi farm-in)

In the most recent increase to BRU acreage, they gained 3 million acres net when they bought Gujurat/Backreef. In the announcement to the market, it mentioned that Mitsubishi had the option to 'farm in' to the new acreage for $19.75 million (%50 of the costs of the 2 deals), the cash would be used by BRU for 2013 exploration and dev.
Also, I feel this would now be the lowest possible price that anyone would be able to offer BRU for any of their acreage.
Total acres from the 2 deals / 19.75 mil. = $6.6 per acre. Also, it highlights how great the two deals were. Clearly BRU had to move fast and did so whilst showing the support it has by being able to raise $40 million at a small discount to the market.
I might also add, that the deal was extremely value accretive - BRU raised %6 of its issued capital to increase its total tenement acreage by %21.5.

BRU acquisition

A couple of posts on the BRU threads in the last few months have briefly discussed the 4 new tenements that BRU gained through tender, 12 months have passed since the first tenements were awarded, and Mitsubishi has not farmed-in to these tenements. No explanation as yet has been forthcoming from either of the interested parties.

Mitsubishi' original farm in 2010 was priced at $17.7. Even if Mitsubishi get a great deal and pay the same price BRU might get the following:

Amount that can still be farmed into by Mitsubishi for %50-
17 - 0.8 (still not wanted from earlier deal) = 16.2 - 8.6 = 7.8 million acres
for example
At the price of $17.7 per acre = $ 138,060,000
(I would argue that Mitsubishi should pay a higher price than the 2010 $17.7 per acre, due the Canning Basin acreage having successful exploration carried out etc. Also, it makes me wonder if an even higher value could be asked, just going by the very recent OBL/FMG deal which valued the tenement at $37 per acre (which I might add, has only ever had 3 shallow wells drilled! )

My first thought is why have Mitsubishi not farmed into these new tenements yet as they were added to BRU?
Is this a conscious decision by BRU management? The conclusion I make is BHP wants into the Canning Basin, they will either farm into all of BRU's tenements for a number that is very big, or grab %50 of the as yet un-farmed in tenements.

This also caught my eye, its from the presentation provided whey BRU announced the acquisition of the Gujarat/Backreef purchase. There is very few tenements left in the Canning Basin for purchase, other than from private holders, or further acreage release.

BRU acquisition

"The Acquisitions bring Buru’s long term portfolio optimisation program close to completion"

Could BRU be looking 1-2 more purchases? Many months ago I posted on the other non-listed holders in the Canning Basin, Anatol's Canning Maps delineates them (thanx Anatol)

Lastly, speaking of the recent corporate transaction regarding EP 457 & Ep 458 from Gujurat, BRU gained not just the acreage, but I assume the data which has been collected by the pervious owner.
*GUJARAT has already undertaken 1813 km of 2D seismic since 2008
*Petrophysical evaluation of 14 wells since Oct 2008

BRU is currently trading at a MC of $721. therefore 721/17 million acres = 42.4118 per acre.
In the U.S, $200 per acre for good prospective tenements is seen as cheap. In the Eagleford in the U.S, prices have risen as high as $100,000 per acre. Many will scoff at that wildly high number, but an Australia company, well respected, recently paid $100,000 per acre (AUT).

AUT spends big

I was going to continue the post with all the valuations throughout the different Wet Gas/Shale basins, but it is not finished, infact, it is taking me bloody ages to put it all together, so another time I hope.

Very much looking forward to hearing others thoughts. This is a fairly long post, so I have undoubtedly made mistakes, if you see any, don't hesitate to let me know either on HC or on the email in my signature.

BRU is IMHO, the 1 in 100 company that small holders like myself hope to find, but almost never do.