gas shows encountered, page-7

All,

This is a good sign without any doubt. Word of caution though, it is only a gas show at this stage, so until it is confirmed as a gas reservoir, we'll have to assume that it could simply be residual, non-commercial gas. We'll know the confirmed wirelogs by next week. If this well confirms the Middle Wilcox reservoir, I will be upgrading my target recoverable reserves from 250BCF to 350BCF.

"The Gilbert Freeman 2 well is producing at substantial rates while cleanup and return of the frac fluid continues. Results, which are in line with expectation and comparable to producing Rayburn wells, are expected to be available for reporting to the regulatory authority in the next few weeks."

The last few times they used substantial to describe the flow rate has resulted in rates of 7 to 10mmCFpd with about 200bcpd. In money terms, that's another 1mn per month in revenue to STX. By December, I'd have expected GF3, HGDU1 and D4 (assuming the latter two to be successful and gas bearing) to be all producing, raising their current year revenue to be around 70-80mn, with NPAT of around 20-25mn.

The market is a bit depressed at the moment, which is placing an artificially low ceiling on the share price. If they keep drilling successes after successes, and increasing their revenue and profit well after well, it's only a matter of time before it will be rerated. If D4 is successful as well, I'll further upgrade my reserve estimate for the full field to 400BCF. On a risked NAV term @50% risking (US9 for long term price assumption), 400BCF at Rayburn is worth 93c per share.

On an unrisked basis, it is worth 1.86 per share. Given the field has not been fully appraised yet, it would be irresponsible to use the unrisked number at this stage. But even with risking at 50%, the current price is very compelling - but all of us already knew that :o)

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