Mosaic Oil NL (ASX:MOS) has now drilled two successful horizontal wells. Productivity and profitability are set to rise dramatically as key problems that beset Mosaic in the past are being solved. The company's present success is underpinned by: a) The use of a large rig for horizontal drilling at Waggamba where there is proven oil and gas. A large rig with lifting power of up to 350 tonnes has been used and no serious down hole problems have occurred in two deep (over 3 kms) wells (Waggamba 4H and 5H). b) Long 300 metres horizontal sections. Mosaic has now drilled two 300 metre horizontal sections in Waggamba's Permian oil and gas reservoirs. Such long sections promise more stable and long-term production from Waggamba's conservative recoverable 2P reserves of 6.4Pj gas and 900,000 bbls of oil that could generate $20 million of gas sales and $100 million in oil sales. 3P reserves point to possibly $400 million of sales revenue from the Waggamba area alone. c) Successful gas well at Silver Spring. In May Taylor 18 was drilled and a previously missed gas compartment in the Taylor gas field was discovered. Taylor 18 is flowing at commercial rates over 1.5 million cubic ft/day and 40 bbls oil per day and so will provide gross revenue in the next 12 months of over $3 million. Another Taylor well is being planned. d) The successful Waggamba 4H well points to doubling revenue by late 2008. At present rates Mosaic's share of gross revenue from the one Waggamba 4H well will exceed $5 million in the next 12 months. Already Waggamba 5H has drilled a 300 metre horizontal section and testing is due. If this is successful and Waggamba 6H and 7H are drilled. Mosaic's should receive a boost of $20 million a year from Waggamba alone. e) Over $23 million of cash reserves. There is no need for Mosaic to go to the market with such sound cash reserves. Farming out selective targets such as Jawstone and Waggamba has also conserved some cash. Now small oil targets close to Mosaic's 300 kms of pipelines can be drilled. The risk/reward of drilling a number of these targets is attractive and several are slotted for drilling (such as West Boggo Creek). The dramatic rise in the oil price means that a one million barrel oil target that could generate $20 million of revenue at an oil price of $20/bbl can now generate revenue in excess of $200 million at an oil price of $100 per barrel. Any success with such targets would have a huge impact on a company capitalised at $80 million. f) An 18-month rig contract. With increasing revenue Mosaic will drill about one well per month for the next year. The time when Mosaic drilled only four wells a year is past, and in fiscal 2009 twelve wells are scheduled. Such a large increase in activity indicates that the whole financial structure and investment attraction of Mosaic Oil are changing rapidly.
MOS Price at posting:
0.0¢ Sentiment: Buy Disclosure: Held