gas discovery & red creek mark2

Thanks to the ed who found the offending word I can post in full the text of my post of yesterday.

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AMU continues to deliver the goods - but still the market appears to either not understand their business or doesn't believe their prospects.

The news released yesterday should be cause enough for investors to revisit this stock and reappraise the sense of buying in.

Why might this be so? For starters, lets take today’s announcements about the Lago well and proposed Red Creek step-outs.

First, electric log evaluations of the Fort #21 well on the Lago Prospect - in which AMU have an 11.25% interest - show 24 feet of net gas sands with what appears to be excellent porosity. Additionally, strong gas shows were intersected deeper in the well, and these are to be tested at a later date. Fracturing and production testing are planned from July 12 following completion.

Don't you just thrill to those words 'production testing' and 'following completion'! To me it conjures up visions of lots of gas being sold through the local Henry Hub at those satisfyingly high prices. Surely this is set to add some significant dollars to AMU's already solid revenue stream. And what's more, wells in this area have a very rewarding (ie long) life. Check out the Texas Rail Road Commission website for more info, but I am sure a 20 year life would not be out of the question. Spells to me plenty of dollars reaching into the future and a nice high NPV to be sure.

The announcement's comment that 'Further step-out wells may be drilled to develop this significant discovery' also points to a bit of excitement being present in the AMU camp. No doubt the more conservative will wait and see what the fracturing and production testing will deliver. But a highly positive outcome seems likely.

Now for the second of yesterday's announcement - that two step-out wells will be drilled on the Red Creek Rash Barrett prospect. For those whose memories need refreshing, this was the site of a very nice little producer that is flowing in excess of 85 barrels of oil per day (and which AMU picks up a nice 60% of).

And why should the step-out wells be any different.

The point about Red Creek is that AMU have some very comprehensive 3D seismic for it, a highly experienced and regarded local operator, and have taken plenty of time to review where they should poke some more holes. Also, these wells are shallow and exhibit very short payback periods, and typically have very long lives. Even small licks of oil in these situations are very profitable. And step-out wells by their nature are much lower risk.

So again it looks to me as if AMU is about to drill into another bank account. Not sure what working percentage they will have for the two step-out wells (previous RB was 60% and they generally have a 51% interest I recall). But doing some crude speculation (pun intended), if one comes in at 70 bopd at a 51% interest, this is a nice 35 bopd or around 13 000 barrels a year to add to their solid current oil and gas flows.

(Of course two from two would be even better, but conservatism has taken hold of me on this one. But time will tell).

And this brings me to the final (at last I hear you say) comment. Just look at AMU’s growth in production for oil and gas over the past year. Growth I might stress that is sustainable going forward.

I have posted on this before and done some speculative numbers, so I wont go through that again. But in summary, they are currently dragging in close to 800 bopd plus gas equivalent of another 50 bopd at least. At current oil and gas prices (despite oil's drop from record levels earlier this year) this suggests they are on track to pull in gross revenue of A$15 million over FY2003-04 on current production alone. And this is likely to deliver EBIT of around A$7m and a net profit of at east A$4m. And all this on top of FY2002-03 which is sure to deliver a nice net profit.

What’s more, we can now add the potential gas from Lago, highly likely additional oil from Rash Barrett and (soon to come) the results of the current Mississippi well (targeting the highly oil prospective Cotton Valley formation).

All up, this little oiler has a lot going for it and in my view has nowhere near the recognition in the market that it deserves. With its current market cap a derisory multiple of expected earnings and net profit, it looks appealing from here.

There is a further dimension to the appeal of AMU in its net asset backing and bio-fuel prospects, but lets leave that for another day.

Yes I hold AMU so of course I am biased.