A disappointing week for the junior oilers with Twin Lions, the jewel in the crown of the Perth Basin drilling program, turning out to be glass, just sand and water. Although the jv partners are yet to disclose the results of the wireline logs run on TL over the weekend, there is little doubt that, apart from some minor background gas readings, TL has failed to meet pre drill expectations. It is unlikely that a sidetrack will be drilled though expect an announcement on that tomorrow. I suspect the rig will move on to Mentelle, a mid size prospect between Cliff Head and Twin Lions. Vindara may also be drilled along with Cliff Head 4 so plenty of action yet to come
As big a disappointment as TL was it is not the end of the world and the drilling caravan moves on. For those of us who try to make money out of the junior oilers the Twin Lions result underlines again the reason why holding stocks through the drilling of a wild cat well is such a risky strategy. Despite all the hype, the DHI’s and the upgraded probabilities of success pre drill, which I and many others fell for, mother nature kicked us all in the butt, as she so often does.
So what do we do now? I guess that depends on the stocks one holds.
AWE
For a company that only floated in 1997 AWE has come a long way in five and a half years. It has achieved exploration success with Jingemia and Cliff Head, acquired and developed gas producing assets at Beharra Springs and in Argentina, committed to a major development project in BassGass and increased its share market capitalisation from $25 million to a $180 million. There are many other junior oilers that have been around for a lot longer but have achieved a lot less. If AWE has one weakness it is that while asset rich it is cash flow poor with only $2.47 million in cash generated in the December quarter. (AYO and PSA are now generating more than that a month!) Big revenue streams are still ahead of AWE.
AWE was considered one of the low risk jv partners in the Perth Basin drilling program given its sound financial position, portfolio of other assets and on going drilling program. But on Thursday, AWE got hit just as hard as the juniors and that requires some explanation.
In the past few months, despite Huinga 1B, AWE had run up quite strongly from around 70 cents in September to an intraday high of 1.04 cents last Wednesday. As far as I can tell there was nothing of singular significance to justify such an increase. Government approvals for BassGas were received late in 2002 and Mitsui farmed in for a share giving AWE a timely capital injection. AWE also had a successful well in Jingemia but these developments alone would not account for a 30% rise in the share price. Indeed most of the rise seemed to be in anticipation of the drilling in the Perth Basin and the much touted Tui well offshore New Zealand and the fact that AWE seemed a low risk entry to both.
With expectations of Twin Lions so high and the share price at record levels, with the benefit of hindsight, it is no surprise then that AWE took a 20% hit. I suppose you could call it a reality check. There may also have been some shareholders who, bitten by Twin Lions did not want to be savaged by Tui, which seems likely to report on Monday. That possibly added to the selling pressure, particularly as the early news from Tui was not good with nothing found in the secondary Moki target. AWE’s partner’s in the well. NZO and particularly PPP. had taken a battering earlier in the week on that news.
For those who bought AWE in the 90 cents plus range the opportunity to get out before Tui reports seems to have gone. It seems likely Tui will have hit the Kapuni sands this weekend and some initial results should be out on Monday. If TUI hits then AWE holders can breathe a sigh of relief. You won’t get a many multiple rise, but AWE could reverse much of the losses of this week if not more. If Tui disappoints then AWE could be heading back to resistance levels around 70 cents or lower.
From those levels it would take AWE probably the rest of the year to recover unless there is subsequent success in the Perth Basin. It was the Cliff Head discovery that sent AWE from 60 cents to 90 cents in December/January last year so a similar sized discovery eg. Mentelle could do the trick again. But if there are more disappointments after Twin Lions all the jv partners are in for a tough time despite the apparent success of Cliff Head. The downside could well be pre Cliff Head discovery levels of 50 cents for AWE. And then at those levels AWE becomes a takeover target.
Longer term AWE seems to have the potential to become a significant Australian-based petroleum exploration and production company with a share price to match but the short term movement of the share price is very much dependent on drilling success. If you are in AWE I would say stay put. You can either be prepared to exit quickly if Tui disappoints or ride the current ups and downs, including more drilling in the Perth Basin, in the knowledge that AWE should come back strongly when BassGas ramps up. If you are out of AWE you may be able to get in at lower prices still. As a long term investment I share the broking community’s enthusiasm for the stock and will buy some eventually.
NWE
Northwest Energy had virtually bet the company on the the Perth Basin drilling and there were few more disappointed with the Twin Lions result than MD Ivan Burgess. Pre drill the shares had risen from 8 cents to a close of 13 cents on Friday before last. On Wednesday the stock closed at 11 cents perhaps a portent of what was to come. On Thursday, on the news that the well was “water wet” NWE retraced all its pre drill gains ending at 8 cents. It closed Friday at 8.1 cent.
Northwest has no producing assets though in Cliff Head it has now what looks like a commercial discovery worth some analysts say at least 15 cents a share to the company. It also has a range or prospects to test including a possible follow up well on the Puffin field mid year. And there is also more drilling to come in the Perth Basin with Mentelle to spud after Twin Lions. And as one poster here mentioned, NWE still has $2 million in the bank and has paid for both Mentelle and Cliff Head 4.
So all is not lost for Northwest by any means. Since listing in early 1998 the company’s shares have had a bit of a roller coaster ride. Within twelve months of listing they had fallen from 20 cents to 5 cents but then rose through 1999 and 2000 to peak at more than 35 cents in September 2000 on the back of the results of Puffin 5 in the Timor Sea. The failure of the follow up appraisal well sent the shares skidding back down to 5 cents and they have moved within a range of 5 and 14 cents over the last two years depending on drilling activity. They have been an excellent trading stock in the past. I suppose those of us that held NWE through the drilling of Twin Lions can take some solace from the fact that the shares appear to have bottomed at eight cents and not five!
On Friday NWE showed signs of trying to recover the losses and volume was down to 4 million shares as against nearly 19 million the previous day. The worst of the rout appears to be over and we could see them pick up a little ahead of Mentelle. If Mentelle is a duster then hallo five cents. If Mentelle comes in then hopefully we will get our money back and perhaps a bit more. I expect selling pressure to keep a lid on any significant rise in the share price ahead of Mentelle particularly as there will be some now who won’t want to hold the stock through the drilling of the well and will attempt to exit on any pre drill gains.
BUY
Bounty followed the pattern of NWE and AWE and fell from a high of 13 cents pre drill to close Thursday at 9 cents a bigger percentage drop than either AWE or NWE. But it was interesting to compare the volumes. Turnover in BUY was only 523,226 shares on Thursday while NWE, with roughly twice as many shares on issue, churned 18.9 million. And again on Friday ten times more NWE stock changed hands than shares in BUY. Easy to see which stock the punters were riding. The marked difference in volumes suggests to me that BUY will probably recover more quickly than NWE. BUY shareholders seem to be in for the longer term.
BUY, like NEW, has some $2 million in cash thanks to the recent capital raising and was free carried through the drilling of Twin Lions and will be free carried through Mentelle. Voyager is meeting BUY’s costs for both wells after farming in for 5%.
Unlike NWE, BUY has a revenue producing asset in Woodada gas which contributed some $435,000 in the December quarter and should contribute more in coming quarters given workovers on the field and the placing in production of Woodada 19.
BUY also has Leafcutter coming up probably after ARQ drills Erimia as I believe HDR and BUY will be using the same rig. Leafcutter is a shallow well (1,400 metres) targeting 16 mbo in zones similar to those holding hydrocarbons in the Hovea and Cliff Head discoveries. BUY is also looking for a partner to drill a development well on a proven oil field at Thomby Creek in the Surat Basin.
Anyone with an interest in Bounty should visit the website, clearly one of the best of the junior oilers.
VOY
VOY was on the skids even before the Twin Lions duster having fallen from a high of 32 cents at the beginning of January to just 24 cents on Wednesday last. Twin Lions pushed the stock down below 20 cents though it closed at that figure on Friday. Unlike all the other jv stocks VOY was more actively traded on Friday than black Thursday. Don’t quite know what to make of that if anything.
In fact I don’t know why VOY has been a bit on the nose for the last few weeks. VOY has a small revenue stream ($200,000 net of production costs last quarter) from oil production at Nockatunga in Queensland. Not much to write home about but better than nothing. It has also disposed of some of its non core assets in order to concentrate on its Perth Basin assets. These include 5% in both WA 286-P and TP/15 and a 6% interest in the Jingemia discovery. It has also joined with ROC, BUY and Apache oil in WA 325-P and WA 327-P two offshore leases immediately north of the Cliff Head and Twin Lions leases.
Maybe investors think VOY is too narrowly focused or perhaps paid too much for its interests in Cliff Head and TL. To me the company looks the goods, experienced management, decent assets, revenue from Jingemia and $4.5 million in the bank in December. I do notice that Westgold sold its interests in VOY at the end of January though VOY hasn’t said at what price. Market price at the time was 26 cents and heading south.
I’ll keep an eye on VOY but for the moment think BUY has more upside potential.
ROC, ARQ and HDR
For all three of these companies with their extensive other interests, Twin Lions is no major disaster and this is reflected in the way in which the market lightly treated their shares on Thursday. ROC was hardest hit as one might expect being the operator, but the shares recovered somewhat on Friday. HDR and ARQ did likewise. HDR has been in a down trend for a couple of weeks I suspect because there is no drilling activity scheduled in Mauritania until much later in the year. HDR is now trading some 10 cents below the price it traded at before last years successful second round of African drilling. The shares hit 80 cents pre spud and that’s as high as they ever went. I suspect the same pattern will be repeated this year. The question is when to time one’s entry to capitalise on the likely anticipatory gains as Mauritanian drilling approaches. Personally I don’t think one could do much better than current prices though some my prefer to wait out the rest of the Perth Basin drilling and Leafcutter before looking at HDR. By then it might be too late.
FAR
Having been slammed on Thursday by Twin Lions I didn’t expect any new disappointments on Friday but I wasn’t counting on FAR to issue a new prospectus for 20 million shares at 4.5 cents with accompanying free option. Current shareholders will be given preference in a placement which appears to have been brought on by the failure of Rawson Resources to get to the market and farm in to Banjo. I bought shares in FAR at 5.8 cents in anticipation of a rise in FAR’s price in the lead up to the drilling of Banjo. Now that doesn’t look such a smart idea.
FAR floated in 1985 largely at the instigation of Michael Evans who remains Chairman and a Director. The company’s shares went for a run in 1994 when they traded between 40 cents and 70 cents for much of the year. They dive bombed late in the year and traded between 15 and 30 cents over the next two year. The shares were stronger in 1997 in a range of 30 to 40 cents. Thereafter it has been all down hill except for a spike to 40 cents in early 2000 probably ahead of Carlston1. This well proved a duster and the shares have trended down to a close of 4.7 cents on Friday. They haven’t been at these levels since 1989.
I am going to apply for shares in the FAR prospectus, I think FAR is undervalued at 4.5 cents, a price reflecting more the difficulty the small oilers have in raising cash than the true value of the company’s assets. The new shares come with free options attached exercisable at 7 cents in July 2005. This can hardly enthuse current option holders who are way out of the money. As a shareholder it will be interesting to see if I get what I apply for or whether the decision to offer a prospectus for all and sundry was a way of earmarking cheap shares to supporters. No, that’s being too cynical. I suspect they may have thought that current shareholders were unlikely to cough up, a case of a company visiting the well a bit too often.
FAR has revenue producing leases in the United States and. despite higher oil and gas prices, revenues actually fell slightly last quarter on smaller production. Production rates, however, should be up again this quarter. FAR also has an interest in Bayou Choctaw if it ever gets drilled and is carried for $US 630,000 worth of costs this year associated with the development of the Beibu field offshore China. FAR is a well run little company with small but expanding gas assets in the United States. It is unlikely ever to set the world alight but you never know. For a company that has been around for so long the fact that it still has only 138 million shares on issue reflects its conservative approach (though it may have had a share consolidation some time in the past that I am not aware of). Some drilling success is what is required after a couple of failures in its offshore Carnarvon leases. Perhaps Banjo will revive its fortunes.
PSA
Oil and gas prices ended the week higher with US natural gas prices closing over $US6.0 for the March contract. PSA could not have gone into production at a better time and by my calculations is currently netting close to $A1.0 million a week. In the current market malaise brought on by the poor international outlook for the world economy and war jitters, junior oilers that have good cash flows like Amity Oil, Arc Energy and Petsec Energy stand to benefit. No surprise that my choice of the three is PSA. Pleased to see it hold up during the week. Doesn’t look like PSA is going to announce the first Ship Shoal cheque arrival which company told me this week was about 10% of West Cameron revenues. Handy little cheque.
Carpathian
A postscript to last week’s look at Carpathian Resources. The company announced a small capital raising of $396,000 during the week issuing 3.96 million shares at 10 cents. The shares went to supporters of the company and shareholders were not given an opportunity to either approve or subscribe to the capital raising. I don’t suppose that matters much given the small size of the offer and the fact that it was all done so quickly. The company can now get on with developing its recent oil and gas acquisitions without any other distractions. Not a bad buy under 10 cents but a bit hard to accumulate at that level as shares are thinly traded.
New Float Flop (NFF)
In looking at the charts for AWE and NWE I was interested to see that both companies share prices halved, or in NWE’s case more than halved, within 12 months of listing. Both then enjoyed a resurgence which took them well beyond their original listing price. I have mentioned before in these posts the uncanny tendency of many IPOs to follow this pattern. Some take longer than others to reach their bottom before rising again eg ARQ took fours years but NWE and AWE were classically only twelve months. I call this the new float flop and two stocks that are now at their “flop” point ie half or more of their original listing price some twelve months ago are BUY and COE. Maybe worth buying on nff strategy alone particularly as both have sound fundamentals!
Foregoing only for information and to provoke discussion. Sometimes I don’t even follow my own recommendations! More discipline needed. Do your own research before investing your hard earned.
Disclosure: I hold BUY, CUE, CVN, COE, CPN, FAR, GBG, ICN, KRZ, NWE, PSA and WON.
