euroz comments on corybas

Company: ARC Energy (ARQ $1.80/sh) Buy
Valuation: $1.72/sh
Price Target: $2.10/sh
Reason For Update: Free gas flow from first zone at Corybas-1 (ARQ 50%)
Quick Comment: We are encouraged by a free gas flow from Corybas-1 - the first step in the commercialisation of a potentially very large gas resource in the onshore Perth Basin.
Investment Case: We anticipate ARQ will continue to add value with its ongoing exploration program, whilst anticipation and speculation of the high impact 3D oil exploration program commencing in March should continue to drive the stock upward. ARQ remains underpinned by its solid earnings this FY and next - at our target price of $2.10/sh ARQ would trade on an FY’05 PER of ~11x, which is not unreasonable.

Details:
ARQ have recorded a 0.1 mmcf/day gas flow rate from the upper Irwin River section of Corybas. This is the first free gas flow from this section ever recorded.
Although the flow rate is small, ARQ is encouraged as only approximately 2m (of 18m) of section was perforated during the test. If developed, horizontal wells should facilitate much higher flow rates. It is estimated 2-3 mmcf/day would be deemed commercial.
The next section to be cored and tested over the next week or so is the lower Irwin River section - ARQ are hopeful of 0.1 - 1 mmcf/day from this section.
The High Cliff Sandstone exploration potential will be third section tested if the reservoir is gas saturated - high flow rates could be achieved.
Total Corybas reserves could be 200-400 bcf if proved up - this would be worth 30-60 cps to ARQ. We stress that it is still early days and it will be probably be a lengthy process to determine its commercial potential of Corybas.
With the current shortage of gas in to the Perth market, gas supply remains a hot topic - due to the excess capacity in the Parmelia pipeline, ARQ is well placed to deliver in to the shortfall if further gas reserves can be commercialised.
ARQ is due to report its Dec H’04 NPAT results early next week - we are forecasting $18m. We are confident a $40m NPAT can be achieved for the FY’05.