Ferrets Stock to Watch: ARC ENERGY LIMITED 08:41, Friday, July 13, 2007
ALCOA SUPPORTS LOCAL GAS PRODUCER WITH MAJOR SALE
Sydney - Friday - July 13: RWE Aust Business News *************************************************
OVERVIEW ********
ARC Energy Ltd (ASX:ARQ) is one of Australia's emerging energy companies, owning and operating oil and gas interests in the Perth, Canning and Bass basins and internationally in Yemen.
The company attracted market attention on Wednesday after it announced a gas sale agreement with Alcoa.
ARC has an aggressive exploration and development drilling program which continues to drive increased shareholder value by the early adoption of innovative technical and commercial practices.
ARC Energy told the Australian Stock Exchange that it has entered into a major gas sales agreement with Alcoa Australia for the delivery of up to 500 petajoules of gas from future discoveries on its interests in the onshore Canning Basin.
The GSA includes a gas prepayment by Alcoa to ARC of $40 million in September that will be used to accelerate ARC's regional Canning Basin exploration program.
The transaction has a range of benefits, including:
* Provides ARC with the customer support to rapidly commercialise gas discoveries;
* Provides Alcoa with a diversified long-term gas supply option;
* Accelerates ARC's Canning Basin exploration program; and
* Allows ARC to retain all liquids and oil discovered in the exploration program and retain operatorship and full equity in its permits.
ARC's Canning Basin exploration program is due to commence in August when the Century Rig 18 is transported to the Canning Basin from the Perth Basin.
The Canning Basin exploration program is currently scheduled to run for three years and to drill up to 20 exploration wells.
As part of the GSA arrangements, at least four of the exploration wells will target gas prospects with potential reserves sufficient to supply the GSA.
The first wells in the program will test the Valentine and Stokes Bay prospects targeting reserves of up to one TCF of gas and 19 million barrels of liquids.
GAS EXPORTS NEED A PIPELINE ***************************
The export of gas from the Canning Basin will require the construction of the Great Northern Pipeline (GNP) from the area east of Broome to the Pilbara, a distance in excess of 630 kilometres.
ARC has applied for a licence to construct the GNP and is currently undertaking preliminary engineering design and route and environmental surveys and discussions with the traditional owners of the area.
Once constructed, the GNP will serve as a vital infrastructure link for the development of the gas resources of the Kimberley region.
Separately, ARC is investigating the feasibility of supplying gas through the shipment of "coastal LNG" from the Kimberley to Perth or other customer sites.
The GSA has established a powerful commercial alliance between Alcoa, Western Australia's, largest domestic gas consumer and one of Australia's leading industrial and resource companies, and ARC, WA's largest onshore oil and gas producer and most active onshore explorer.
In addition to the commercial benefits to both ARC and Alcoa, the GSA promotes the exploration and development of Western Australia's onshore hydrocarbon resources and represents an innovative and timely response to the Western Australian Government's concerns regarding the security of domestic gas supplies.
ARC's extensive Canning Basin exploration program and the subsequent development of any gas discoveries and building of the GNP will also bring very substantial benefits to the Kimberley region of Western Australia, including the traditional owners, with minimal environmental and social impact.
Furthermore, the development of significant new onshore gas resources in Western Australia would allow gas to be economically substituted for other fuels in industrial processes.
Any substitution of gas for liquid hydrocarbon fuels reduces greenhouse gas emissions and associated climate change impacts.
SHARE PRICE MOVEMENTS *********************
Shares of ARC Energy Ltd yesterday traded 21c higher at $1.555. Rolling high for the year is $1.845 and low $1.21. The company has 317.6 million shares on issue with a market cap of $490.7 million.
In a recent Corporatefile interview, ARC Energy's managing director Eric Streitberg said the gas sales agreement was very flexible.
"We have established a 'base case' which is a nominal 400 PJ of gas delivered over 15 years with a take or pay quantity of 75 TJ per day and a minimum daily take of 20 TJ per day.
"Alcoa has the option to take another 100 PJ of gas in addition to the 400 PJ if we find it.
"Both parties have flexibility around these numbers to ensure we get the best commercial outcome.
Mr Streitberg said the pricing terms are confidential, as they are in all other WA gas contracts, but there are a series of commerciality tests to ensure neither side is disadvantaged when it comes to a development.
"If we don't reach our reserves targets we can't be forced to deliver, and Alcoa can simply cancel the contract.
"However, if we do get the minimum reserves we need, we both have the incentive to go into a development," the managing director said.
"Our aim is to supply the gas from the Canning Basin. We have the flexibility to supply it from the Perth Basin as well, but the reality is that we are unlikely to find 400 or 500 PJ of gas in the Perth Basin in the short term, as attractive as that would be.
"We think the earliest we could get gas to Alcoa is 2010 and the most likely is in 2011."
The agreement included a gas prepayment by Alcoa to ARC of $40 million.
"The prepayment provides a demonstration of Alcoa's seriousness in diversifying their gas supply options and opening up new areas of production, and provides us with a great incentive to accelerate and focus our exploration program on gas," Mr Streitberg disclosed.
The first two wells, Valentine and Stokes Bay should spud in August.
ARC is close to finishing the Apium well in the Perth Basin and construction of the Valentine pad is underway.
The company expects to drill five or six wells in this drilling season and has a large range of candidates.
"We have had a string of wells that have found oil and gas pools but none that have given us an immediately obvious commercial success, which is encouraging but frustrating at the same time," Mr Streitberg explained.
"I suspect one or both of Frankland and Dunsborough in the offshore Perth Basin will be developed in a reasonable timeframe and the Drakea results have opened up a whole new play type for us and we definitely have an oil pool there; it just looks a bit restricted on the data we have.
"In Yemen we are testing the first well with some encouragement, but the wells have to be pumped so it is a bit of a slow process to get a definitive result."
ARC recently completed the Wandoo Petroleum asset purchase for in excess of $US175 million.
Mr Streitberg has described the Wandoo purchase as a "cracker," a bit like the Alcoa deal.
"Our reserves have essentially trebled, the BassGas project looks to have the potential to have twice the resources we thought and we think the offshore Perth Basin will be a good long-term exploration playground for us.
"Our strategy has been to focus on share price growth through acquisitions that have good upside and through oil and gas exploration," Mr Streitberg told Corporatefile.
BACKGROUND **********
ARC Energy is a long-time listed WA oil and gas explorer and producer, having listed on May 21, 1987.
The company based its foundation asset in the Perth Basin, 360 kilometres north of Perth, as well as a significant exploration holding in the onshore Canning Basin in Australia's northwest, production and exploration interests in the Bass Basin south of Victoria, and interests in highly prospective acreage in Yemen.
ARC produces and sells gas to industrial customers in Perth via the Parmelia Pipeline and has substantial oil production which is trucked to the Kwinana refinery in Perth.
The company has:
* The dominant acreage position in the most prospective parts of the Perth, Canning and Bass basins;
* Developed and operates key infrastructure in the Perth Basin;
* A solid earnings base from diversified oil and gas production;
* An experienced and innovative management team with proven project execution skills;
* A strong balance sheet and cash position;
* Outstanding near-term exploration potential in the Perth and Canning basins, as well as Yemen; and
* A focus on investing for growth in exploration and development.
ARC's corporate vision is clear and focused - to become a major Australian oil and gas company through organic growth and value-adding to complement its existing businesses, whilst maximising shareholder returns over the medium to long term.
ARC ranks as the second highest energy stock by shareholder returns over the past decade, returning over 25 per cent compound growth.
The company's strategic goal is reflected in its asset portfolio approach, and simple corporate and commercial structure.
The strategy for the Perth, Canning and Bass Basin assets is to:
* Produce cash flow from new discoveries as quickly as possible;
* Drill as many exploration prospects as possible to replace and increase its reserves; and
* Add value to its existing assets by commercial and technical innovation.
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