favourable writeup in eureka report

Nuenco’s confidence vindicated
By Rudi Filapek-Vandyck




PORTFOLIO POINT: Anthony Kain finally found a committed partner, all 14 test holes found oil and gas. Now for investors to find the stock.




Many chief executives of public companies are forced to continually put in crazy hours, but they seldom do it with the energy and commitment Anthony Kain puts in at emerging oil and gas company Nuenco (NEO).

We meet in between visits to stockbrokers, shareholders, industry contacts and a few prospective investors in a seedy sports bar underneath the lobby of a well-known hotel in Sydney. Kain apologises repeatedly for the location, and because he is tired of all the traveling in between California, Perth, Melbourne and Sydney. He's had another busy day and is looking forward to lying on his bed, maybe watching some late-night television.

Instead he's sitting with this journalist in the bar underneath the hotel. Within five minutes the table is covered with maps and presentation folders and Kain confesses, while pointing at the table: "This is my life."

The story of Nuenco is closely aligned with the re-discovery of California's untapped oil and gas potential. If we consider all individual US states on their own merits, California becomes the world's fifth-largest economy. It is also the fourth-largest energy producing state in the US, after Louisiana, Texas and Alaska.

Although the oil industry has known for decades of California’s rich potential, the region has been left untouched until today. The reason? Major oil producers, which still own most of the land positions and exploration leases throughout the state, had easier targets elsewhere.

Kain's body language becomes tense when he is asked about Nuenco's regular joint venture partner Orchard Petroleum. The companies are in a few joint ventures in the highly prospective San Joaquin Basin, mostly with Orchard owning the largest equity stake. Discussing Orchard's past behaviour clearly brings back painful memories for Kain, and latent frustrations about a partner that was supposed to bring in the riches, but ultimately couldn't be bothered.

Market sources say that Nuenco at one stage offered to take on the operational responsibility over the joint ventures. Is this true? Kain says he has repeatedly thrown the offer on the table. At one stage he even proposed Nuenco would fully finance all drillings.

A radical change of fortune came with the arrival of Crosby Capital Partners, a Hong Kong-based asset manager and investment banker with Macquarie Bank-like ambitions.

Crosby bid about $US130 million for Orchard and things began to improve immediately. The Hong Kong company did not even wait for the takeover to be fully completed to embark on a busy drilling program.

On Tuesday, Crosby announced the full takeover of Orchard had become unconditional. The same announcement also vindicated Kain's confidence in the joint prospects: 14 holes have been drilled in between Lost Hills and South Belridge in the San Joaquin Basin, and all found oil and gas. Most results have exceeded pre-drilling expectations.

Already, eight of the wells have been successfully completed with multi staged hydraulic tracing. Three of these wells are in production. Five others are scheduled to start soon.

The same press statement also reveals where Kain's and Crosby's confidence stem from: Eleven of the current top 100 US oil fields are in the San Joaquin Basin, including four of the top 10.

The joint ventures with new-born Orchard Petroleum cover only part of Nuenco's potential. Other California based ventures, such as the Kreyenhagen oil field, are equally considered to be of "company-making" potential. The first well at Kreyenhagen spudded in February this year. Nuenco has a 5% free carried interest in the project.

Probably the largest upside potential stems from the significant acreage position the company has secured over the past few years. In fact, Nuenco's gross acreage position today is considerably larger than total acreage from Orchard, Salinas Energy (SAE) and Livingstone Petroleum (LPL) combined. All three are similar California focused explorers/producers.

Kain says in-house petrophysics suggests oil-in-place (OIP) for Nuenco's acreages runs into billions of barrels. (Note: oil in place is the total estimated hydrocarbon content of an oil reservoir, not to be confused with oil reserves, which are the estimated technically and economically recoverable portion of the OIP.)

The only thing that seem to be missing is a rising share price. At 16¢ Nuenco's market capitalisation barely exceeds $18 million. But Kain is hopeful this too will change in a not too distant future.