euroz report

Price Target: $0.10/sh



Reason For Update: Mar Qt’ly



What We Know:

· Galoc oil production totaled 91 kbbls (OEL share) for the Mar Q.

· The improvements to the Galoc FPSO riser and mooring system were successfully completed and production recommenced on 25th Feb.

· The average gross daily Galoc production rate since recommencement has been 13-14 kbopd with > 99% uptime achieved.

· BHPP elected not to continue with its HOA with OEL in relation to the SC 55 deepwater Philippines exploration block.

· OEL’s first well in Italy , Gazzata-1 (OEL 50%) is scheduled to commence in mid-May.

· Site preparations have begun for OEL’s onshore Santa Rosa oil exploration well (32%) in Argentina – June spud likely.

· OEL had reduced its Galoc project debt to US$4.9m through Galoc cash flows.


What We Think:

Galoc production looks to be tracking according to the prognosed 2P reserve decline curve at this stage – a good sign. Current rates are ~13 kbopd and production costs are currently ~US$20/bbl, providing solid margins at current oil prices.



OEL’s share of Galoc project debt is currently US$4.9m. Assuming production and oil prices remain at current levels, OEL should be debt free following the next cargo, which is scheduled for early May (payment in early June). Following the entitlement issue, OEL will have no other corporate debt and $10-15m cash (depending on take-up).



Monthly cash flow from Galoc is forecast to be US$1-1.5m net to OEL for the FY’10 assuming production declines in line with the 2P estimates and the Brent oil price rises to US$55/bbl (from ~US$50/bbl currently).



Whilst the BHPB decision not to extend the HOA is disappointing, an agreement may still be reached (albeit, likely on less favourable terms) given discussions are still ongoing. Nevertheless, we remain confident OEL will farm SC 55 down to a major party, citing BG’s decision in 2005 to pull out of Karoon Gas’s offshore Browse Basin farmin prior to Conoco Phillips farming-in on very favourable terms.



OEL’s Argentinian exploration well is a low cost (US$1.4m) shot at a large, very high risk target of >100 mmbbls. Success would be worth > $0.20/sh.


Investment Case:

We anticipate upward pressure on OEL’s share price following the close of the entitlement issue on 7th May, given the recent solid Galoc production, OEL’s expected debt free status and pending high impact exploration wells.



News flow and potential high impact events remain significant – share price catalysts include; Italian and Argentina drilling, Edirne gas production and Philippine exploration farmouts.



The Edirne gas project (OEL 35%), onshore Turkey, will create OEL’s second cash flow and commodity stream from the June H’10 – our EBIT forecasts are $5-10m/yr net to OEL. Gross capex are estimated at US$10/mcf.



OEL’s Italian acreage is a longer term proposition, complementing several short to medium term assets in its growing portfolio – it also consolidates its European gas strategy. Success could net >$0.10/sh of value to OEL from the first well Gazzata-1, targeting >100 bcf gas.