Joining the oil producers club.After years of keen investor...

Joining the oil producers club.


After years of keen investor anticipation, the company has taken its initial steps as an independent oil producer, with first oil production from its Cambay oil field in India during late 2008. The company intends to grow production from Cambay during 2009, whilst also commissioning first oil from its Pendalian field in Indonesia early this year. The company will also undertake advanced flow-testing on its Omani oil project, with the aim of securing production from this third source. 2009 will therefore mark a major transitional period for the company.

From a charting perspective, Oilex continues to disappoint. Since our last review in November, prices have declined from the 35-cent region, to reach a low of 19 cents last week. As evident on the charts, this is the lowest level for the stock since mid 2005.

From a longer-term perspective, following the depth of the decline over the past 12 months, an extended period of consolidation and base building at the lows will now be required, before upward momentum is likely to return.

The company has marked its formal transition to cash flow and production status by delivering a strong December Quarter operating performance, with the first oil production from its Cambay oil field in India, with 16,800 barrels of oil produced during the December 2008 quarter from two wells.


The company commenced production from the Miocene Basal Sand (MBS) in the Cambay field on 17 October 2008 from the Cambay-64 well, which produced 9,374 barrels to the end of December. A second well, Cambay-74, was brought into production on 5 December, and produced 7,453 barrels to the end of the quarter.


First oil output was a pleasing start to the company’s production activities at Cambay, where there is significant potential to rapidly boost production levels over the course of the coming year. The company’s focus during the months ahead will be to increase its production profile from Cambay by enhancing its off-take infrastructure, as well as by maintaining an active appraisal program to increase the reserve base.


It must be pointed out that production from the Cambay wells during the December Quarter was constrained by restrictions with oil off-take infrastructure, which led to limitations on daily production rates. The company is currently sourcing an additional storage tank to alleviate these production constraints.


Oilex is targeting sustained long-term production of 3,000 barrels of oil per day (bopd) from the Cambay Field by the end of 2009. We believe improved infrastructure, production enhancements on the current Cambay-64 and 74 wells, in addition to the drilling of two additional wells, should enable the company to achieve its production target.


Two additional development wells are currently planned for the Cambay field during the second quarter of calendar 2009, with potential to add an additional 800 bopd - 1,000 bopd. During the December Quarter, integration of seismic data with reworked data from old wells was used to identify a number of high grade locations for these wells.


We believe that the market is currently valuing Oilex purely on the value of the MBS sand at Cambay alone, which hosts an estimated 5-20 million barrels of recoverable oil, with Oilex’s share being 2.25 million barrels.


Elsewhere, in addition to its growing production profile at Cambay, the company has also announced continued positive results from its portfolio of international exploration assets.


The company’s second priority development target is the West Kampar PSC (Oilex 45% stake), located onshore Sumatra, Indonesia. The company is continuing to target early development from this region, submitting a development plan for phase 1 to the relevant authorities in November 2008. This development plan is a precursor to full field development, and involves a single well completion at Pendalian-3 oil discovery.


Oilex is targeting first oil production from the Pendalian field in early 2009 from two wells once government approval is received, working towards full field development later in the year. The company is targeting production of up to 2,000 bopd from the Pendalian field during 2009.


The Pendalian field, like Cambay, represents an excellent low-cost, low-risk production opportunity for the company, providing additional early cash flow to further support the company’s exploration program.


Turning to the third of the company’s international projects, the second phase of drilling was completed in early January on Block 56 in Oman (Oilex Operator and 25% stake). A four-well program generated encouraging results from three wells, including the Al Jumd-1 well for which a testing program is being planned and the Umq-1 well in the central part of the block, which had oil and gas shows over more than 500 metres of section.


The well results have confirmed the oil potential of the Eastern Flank Salt Basin within Block 56 and have extended the prospective area into the extensive Central Terrace area, where no previous drilling had been carried out. The program included the drilling of the Sarha-2 appraisal/exploration well and the Lathab-1, Al Jumd-1 and Umq-1 exploration wells.


Preparations for the Al Jumd-1 testing program have been finalised and operations commenced in late February, with the initial flow period planned to be completed around March 6-8.


The Al Jumd-1 exploration well (spudded 1 December) discovered oil in the Al Khlata Formation over the interval 1163 – 1328 metres measured depth, with no oil-water contact identified. The well was suspended for further evaluation.


Following in-depth analysis of the oil zone using all available well data, five zones totalling 46.5 metres were selected for perforation and flow testing. A down-hole pump will be run to maximise the recovery rate in the event that heavier crude oil is present.


Pre-drill estimates for the well were 20-82 million barrels of oil-in-place, which could translate into between 6-23 cents of value per share to Oilex.


Oilex’s key focus in 2009 will be on fully assessing the Miocene potential at the Cambay Field, boosting production from the current wells and drilling additional wells. The company will also be seeking to appraise the deeper Eocene oil and gas projects at Cambay, and assess the best oil and gas potential in the other two advanced assets within its portfolio, not forgetting the Joint Petroleum Development Area between Timor Leste and Australia.


We are tremendously encouraged by the fact that Oilex has been able to bring its production ambitions to fruition, notwithstanding the current dire oil price scenario. The company can look forward to a solid, growing production base during 2009. Importantly, the company continues to carefully monitor its cash reserves and ongoing operating costs, with the aim of becoming cash flow positive by the middle of 2009.

Finally, let’s turn our attention to the situation with respect to the crude oil market. The price of oil has seen headier days, that’s for sure. And it wasn’t so long ago. But the US$147 a barrel level of July last year seems a distant memory now, as oil demand has ground to a halt in the wake of a huge drop-off in demand. Meanwhile, efforts to reignite the US economy (the world’s largest oil consumer) are very much a work in progress.


As we’ve previously highlighted in outlook comments on oil, the oil market right now is being incredibly short-sighted. Demand is understandably on the wane due to weakness in the global economy, with the resulting surplus meaning producers are frantically looking to reduce output.


However, the oil price does not reflect oil’s basic medium to longer-term fundamentals, with a price of US$70-$80 a barrel required to sustain longer-term exploration development. Indeed, current price levels render many forms of oil extraction and many projects uneconomical; the world’s easy oil has gone and extraction these days comes at a cost. Production from oil sands for example requires the oil price to be at around US$80 a barrel in order to remain feasible; at today’s US$36 oil price this is unjustifiable.


Tomorrow’s supply is being put at risk by today’s price collapse. We reiterate our bullish medium to longer-term view on oil prices. Oil is a commodity that we have increasingly consumed at a much faster rate than we have replaced it. That fundamental situation will not change despite the current economic turmoil.


While we all enjoy cheaper petrol at the pumps, OPEC member nations are not enjoying the current situation. OPEC has so far cut production by 4.2 million barrels a day since September 2008 to boost prices; however the oil market remains in surplus and further production cuts at the organisation’s next meeting on 15 March in Vienna are almost assured.


Encouragingly, OPEC members seem to be abiding by their latest round of productions cuts. Compliance with quotas has traditionally been somewhat of an issue, however with the price of oil having dipped below US$40, the message that cheaters-never-prosper may be hitting home.


Accordingly, Oilex will remain firmly held within the Fat Prophets Mining & Resources Portfolio.