down but not out by a long shot

Although AMU is languishing just over the $1.00 mark --and down over 20 cents from its highs of late last year -- my view is that it is heavily oversold and represents excellent value at these levels. True, the shallow SGT drill was a dud (and that removes a bit of the blue sky optimism about what the SGT deep target might hold) but it has plenty of goodies in the pipeline to suggest today's price will be left well behind before too long.

Among those goodies are:
1. The deal with Union Gas to share seismic costs over 24,000 acres adjacent to Raccoon Bend which gives AMU a farm-in on the shallow targets and a lesser % share of farmin on the deeper targets. This deal covered a big chunk of acreage and is with a partner who has had great success in finding hydrocarbons in the deep Wilcox formation. These targets are in the 20Bcfg range, which would be worth quite a bit to AMU. AMU's history of Raccoon Bend drilling success would also suggest the revenue upside from the shallows too is nothing to despise.
2. The NE Waller exploration program, whereby AMU picked up a 30% working interest in 32,000 acres - ground on-trend with prolific oil and gas fields
3. A 2006 drill program that has the potential to deliver big time (eg the current 18 well back to back drill program for Lavaca County where AMU has had spectacular success in finding very lucrative gas producers.
4. The inevitable success of production workovers to wells on their recent acquisitions - especially the production upside from the big Kansas deal.
5. The (in my view) very high probability of success in drilling LOTS of new producers on those recent acquisitions (witness the former success rate of drilling on the Kansas ground as a result of targets chosen from 3-D seismic .
6. The inevitably growing reserve base AMU is accummulating (this is now probably well in excess of 15mmbblo).
7. An interest rate hedge to cover US$40m of debt at an interest rate of 4.925%.
8. A cap and collar hedging that for oil puts a floor of US$52bblo and a cap of US$90 bblo and for gas US$8mcf and $20 respectively, for 75% of their current
production (kicks in from April 2006).
9. The growing value of AMU's holding in Australian Renewable Fuels (which looks to be getting a scurry along now that production from the first plant is getting closer).

I note too that Shaw's last report on AMU suggested it had a fair value of $1.68 a share. Since then AMU have announced the Union Gas and NE Waller deals, so I would expect this level to be conservative.

Upshot of all this is I reckon AMU is seriously undervalued at today's price and a good candidate to buy and stick in the drawer for a year or so.