hartleys update

Sun Resources Limited Speculative Buy
Production Plus Potential
Dr Brad Farrell (Exec Director, Chairman)
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Date
5 March 2008

ASX Code
SUR

Share Price
7.8cps

Valuation
17-23cps

Market Cap (fully diluted)
$17.6m ($19.6m)


Issued Capital (fully diluted)
225.1m shares (251.4m)


Cash (as at 31 December 2007)
$2.5m


Management

Matt Battrick (Managing Director)

Top Two Shareholders

Suparell Pty Ltd (10.16%) Williams Super Fund (6.26%)

Resources Analyst
David Wall Ph: +61 8 9268 2826 [email protected]
Share Price Performance
Sun Resources Limited (“Sun”,”SUR”,”Company”) has recently been awarded an exploration license over block L20/50, onshore Thailand in partnership with operator, Carnarvon Petroleum Ltd (SUR 50%, CVN 50%). The block is adjacent to two successfully producing fields; Sirikit, the largest onshore field in Thailand; and Na Sanun East, where recent success by CVN has seen its share price increase more than 7 fold in a year. The Joint Venture (“JV”) with CVN is targeting to drill a low risk entry well on the L20/50 block in late 2008. Even moderate success at this well would be significant, as it would fund the ongoing program. The upside potential of the block has company making implications for Sun.
SUR also has a mature, producing portfolio of conventional assets in the USA. Production from these assets has recently increased to over 1mmcfe/d net to Sun, which equates to around A$2m net revenue p.a. With high impact exploration assets in Thailand, Australia and Malta, and downside risk limited by producing assets in the US, we rate Sun Resources Limited as a Speculative Buy.


Investment Highlights
L20/50 Targeting One Well in 2008 – The Joint Venture is targeting to drill a twin to an existing discovery well in late 2008. The existing well, Nong Bua 1, was drilled by Shell in the 1980s. Oil was encountered but did not flow to the surface on test. It was considered uneconomic to use artificial lift in a low oil price environment. At current oil prices, artificial lift, such as a pump, makes this a low risk entry into the block. It also de-risks other activity in the area as the presence of hydrocarbons has been proven. The block is analogous to the nearby Sirikit field and also to the Na Sanun East field. Sirikit has an estimated ultimate recovery (“EUR”) of 380mmbbls. Joint Venture Partner, Carnarvon, is currently flowing 10,000bopd gross from Na Sanun East, with a view to increasing this to over 15,000bopd by year end.
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Forecast FY08 Net Revenue ~A$2m – Sun has interests in three producing assets in onshore USA: Flour Bluff (SUR 20-24%); Lake Long (SUR 10%) and Project Margarita (SUR 20-37.5%). These core assets underpin the share price at ~12cps and provide significant cash flow to fund the further development potential of several of the assets. The Company is aiming to double net revenue in the next financial year as a result of these developments.

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US Upside – Project Margarita has one well planned for April 2008 and 7 deep prospects with upside potential of over 400bcf. These prospects are planned for farm-out, with drilling targeted for Q1 2009. Flour Bluff has a seismic program planned for late 2008, followed by drilling in H2 2009, aiming to increase reserves by 25%. Sun also has two exploration prospects in the US; Redback (SUR 37.5%) and Meek (SUR 10%). Redback is planned for drilling in Q4 2008, pending farm­out, targeting up to 107bcf and 19mmbbo. Meek is scheduled for drilling in Q2 2008 and is targeting 16bcfe.

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Huge Malta Potential in Limbo (SUR 20% reducing to 5%) – Two large giant reef prospects, with multi billion barrel potential, are currently in limbo pending the resolution of border disputes between Malta, Tunisia and Libya. Progress is being made slowly by the Joint Venture Partner, Anadarko. Anadarko is farming-in to earn 75% by funding 2D seismic and two wells, at an estimated cost of around US$120m. This gives an indication of the potential of this sleeper for Sun.



Hartleys Limited ABN 33 104 195 057 (AFSL 230052)

Background

Sun Resources Limited is an ASX Listed Company with interests in the USA, Thailand, Australia and Malta. The Company currently has producing assets in the USA. Sun plans to use the cash from these projects to fund further low risk, conventional projects in the US, and also higher impact exploration targets in South East Asia. Consistent with this strategy, the Company applied for, and has recently been awarded, an exploration license over block L20/50, onshore Thailand (SUR 50%), where it hopes to drill a well in late 2008.
The Company has significant technical expertise which has been used to assist the US Joint Ventures to double production of its Flour Bluff asset at minimal cost. Sun has also recently appointed a new MD, Matt Battrick, to oversee expanding operations in both the US and Thailand. Mr Battrick has extensive experience in Africa and the Asia Pacific region, both operationally and commercially.
Figure 1: Sun Resources Project Locations

Source: Sun Resources Limited

Principal Assets
Thailand

L20/50, Onshore Thailand (SUR 50%)
The exploration permit over L20/50 was awarded to Sun and Carnarvon Petroleum Limited, in January 2008. The large (3,947 km2) block is located in the lightly explored Phitsanulok Basin, onshore Thailand. This basin contains the largest onshore oilfield in Thailand, the Sirikit Oilfield, which has produced over 180mmboe and has an estimated 200mmboe reserves remaining. Sirikit is currently producing 20,000bopd with 55mmcf/d gas and 275t/d LPG. The field produces mainly from conventional, high quality sandstone reservoirs.
L20/50 is on trend with the Sirikit field, and an historic well, Nong Bua #1 discovered hydrocarbons in sandstone reservoirs in the 1980s. The oil did not flow to the surface on test and it was considered uneconomic at the time to use artificial lift due to the low oil price environment. L20/50 is also analogous to the Na Sanun East field, where JV partner, Carnarvon, has enjoyed recent success from fractured volcanic reservoirs. Whilst these reservoirs are not particularly well understood, Carnarvon has had sustained production for almost a year with decline rates performing to predictions. Current production from Na Sanun East is ~10,000bopd gross, with production from one well alone being 4,000bopd.
The existence of a discovery well on the block substantially de-risks this investment for Sun as analysis suggests that artificial lift will be capable of flowing oil to the surface. It is proposed that a twin to the existing well may be drilled late in 2008. This would provide immediate cash flow for Sun, enabling funding of the aeromagnetic survey and seismic program, which are due to start in June 2008.
Sun has a significant equity interest in the block and is planning to fully fund its share in order to retain maximum exposure to the excellent prospectivity that this opportunity represents.
Figure 4: L20/50 Onshore Thailand

Source: Sun Resources Limited
USA Producing Assets

Flour Bluff, Gulf Coast Texas (SUR 20-24%)
The Flour Bluff Gas Project is a redevelopment of 3 semi depleted gas fields. Significant infrastructure is in place so that successful wells can be tied in to sales quickly and cheaply. A 5 well work-over program was recently completed, doubling production to ~3.7mmcf/d and 53bopd. Sun’s 3P certified reserve from Flour Bluff is 17.3bcf and 0.327mmbbls oil. A further 20bcfe of contingent and prospective resources (10bcfe each) has also been identified in the field.
A Phase II development project is planned for 2008 with the aim of increasing production and reserves by 25%. 3D seismic will commence in H2 2008, followed by infill drilling in H2 2009 (see figure 2).
Figure 2: Flour Bluff




Hollywood, Lake Long, Louisiana (SUR 10%)
The Hollywood prospect was successfully drilled between May and July 2007 by the SL328#9 well. Hydrocarbons were encountered in two zones, the Middle and Upper Hollywood sands. The Middle Sands were completed, with the gas from the Upper Sands left “behind pipe” for a later date. Production commenced in September 2007 and was steady at a rate of 3.15mmcf/d with 65boc/d at the end of the December quarter.
Potential gross volumes are 3bcf gas with 140,000 barrels of condensate. The Joint Venture hopes to increase production to 4mmcf/d and 100boc/d. Hollywood has an estimated project life of around 3 years.
Project Margarita, Gulf Coast Texas (SUR 20-37.5%) Figure 3: Margarita Prospects
Project Margarita is a JV with prospect generator, Wandoo Energy LLC (“Wandoo”). Wandoo has exclusive access to a 530km2 3D seismic database in a South Texas County. There are several plays at shallow and deeper levels, with the deeper levels largely unexplored.
A shallow wells project was carried out from December 06 to July 07, with a 100% technical and 50% commercial success rate from 6 wells. Two gas fields (Agavero and Dona Carlota) and an oil field (Milagro) were discovered and tied in to sales in September 07. Production is forecast to stabilise at around 1.7mmcf/d and 45bopd. A further 1-2 shallow wells are planned in 2008, targeting ~2.5bcfe per well, with the first to spud around April.
There are seven deeper prospects providing significant upside potential of 200bcfe mean. These are planned for farm-out in Q2 2008, with a deep well targeted for Q1 2009.
USA Exploration

Project Redback, Gulf Coast Texas (SUR 37.5%)
Redback is another JV with Wandoo in Southern Texas. The project is on trend to analogues that have produced over 6tcf to date.
Seismic was recently completed, in December 2007; 5 prospects have been high graded with gross upside potential of 107bcf gas and 19mmbbls liquids. These prospects will be farmed out in Q2 2008, with Sun aiming for ~20% interest post drill. Drilling is targeted to occur in Q4 2008.
Meek Prospect, Gulf Coast Texas (SUR 10%)
The Meek prospect has been identified by another US prospect generator (not Wandoo). It represents entry into a potentially lucrative relationship that exposes Sun to a wider range of opportunities in the USA. The prospect has a gross potential of 16bcf and 0.29mmbbls liquids. Drilling is scheduled for Q2 2008.
Offshore Malta (SUR 20% reducing to 5%)
Figure 5: Malta Permits

Sun holds a 20% interest in two contiguous permits offshore Malta. As a result of a farm-in agreement with Anadarko, this will reduce to 5% on the basis that Anadarko will fully fund a 2D seismic program and the drilling of two wells.
The blocks contain two large reef mound prospects, Chianti and Limoncello, which are estimated to have mean recoverable oil potential of 455mmbbls and 968mmbbls, respectively. These prospects are on trend with producing analogues in Libyan waters.
Activity on the blocks is suspended due to a border dispute between Malta, Tunisia and Libya. Progress is being made, albeit slowly, with Anadarko leading the negotiations. An agreement between Malta and Tunisia was signed in February 2006 and it is hoped that a similar agreement will take place with Libya. There is currently no estimate of when the dispute may be resolved.
Anadarko is one of the largest independent oil and gas companies in the US with a market cap of US$29b and booked reserves in excess of 2.5 billion boe. Anadarko prides itself on its technical ability, with several successful operations in technically complex fields, including deepwater and unconventional reservoirs.

Other Assets

Sun holds interests in two offshore Western Australian permits, WA-254P and WA-257-P. With its primary focus in the USA and SE-Asia, Sun’s position in relation to these blocks is currently under review.
Sun also holds an interest in the Bondi-Coogee project in South Texas. The Raun#1 well, drilled in November 2007 on the Bondi prospect encountered minor gas shows and was plugged and abandoned. The Operator has recommended that the Coogee prospect not be drilled subsequent to the results of the Raun #1 well.

Financial Analysis

Sun has A$2.5m in cash and forecast revenues of $A2m in FY08, which it is hoping to double in FY09 from its US assets alone. The Company has 225.1m ordinary shares on issue and 26.3m options exercisable at various prices between 10cps and 45cps.
Valuation

Our valuation is done on a risked basis given the resource potential, probability of success (“POS”) and approximate NPV per bbl/mcf of the different tax regimes in which Sun operates. This gives a risked valuation range of 17cps to 23cps, with an unrisked upside potential of 272cps. This valuation is based on current ordinary shares issued only.
Sun’s two main producing assets in the USA, Flour Bluff and Margarita, underpin its share price at around 12cps. This effectively puts a floor on the downside risk associated with the Company. Flour Bluff has an upside development leg to it which has been rated as a low risk proposition due its the proximity to already producing wells. Redback, on the other hand, has been given a more industry standard rating for POS of 10%, but has significant unrisked potential to the Company of over three times the current share price.
Valuation of the Thailand asset has been done on a conservative basis of 20mmbbls of oil in-place. There is currently no indication of the potential at the existing discovery well, and there will not be any estimate until the aeromagnetic and seismic programs are complete. Sun’s high working interest in Thailand means that any success there will have a significant impact on the Company.
Sun’s Malta prospects have been significantly discounted, with a 1 in 200 chance of success, given the current state of the border disputes. The un-risked valuations give an idea of the potential impact of these prospects on the Company if the disputes are ever resolved.


Table 1: Risked Valuation


Source: Sun Resources Limited, Hartleys Estimates
* Oil and Gas resources listed are potential resource recoverable, net to Sun

Conclusions

Sun’s asset portfolio has an attractive level of diversification with: mature producing assets in the USA; development options for its producing assets, which could double revenues in the next financial year; exploration opportunities in the USA that have the potential to double or triple the share price in the short-medium term; company making potential in the recently awarded onshore Thailand block, with drilling possible late this year; and a sleeping elephant in Malta that also has company making potential. Sun is looking to emulate the success of Carnarvon, who delivered up to a 7X return on investment during 2007, whilst at the same time has limited downside risk exposure through increasing levels of production in the US. These factors make Sun an attractive investment in this end of the market and we rate Sun Resources Limited a Speculative Buy.


Hartleys Corporate Directory

Research
Helmut Engelhard Senior Industrial Analyst +61 8 9268 3052 Nikki Ermongkonchai Industrial Analyst +61 8 9268 2837 Andrew Muir Resources Analyst +61 8 9268 3045 David Wall Resources Analyst +61 8 9268 2826

Corporate Finance
Richard Simpson Managing Director & +61 8 9268 2824
Head of Corporate Finance Grey Egerton-Lead Director-Corporate +61 8 9268 2851 Warburton Finance Martin Pyle Director-Corporate Finance +61 8 9268 2821 Paul Fryer Assoc Director-Corp Finance +61 8 9268 2819 Dale Bryan Corporate Finance Manager +61 8 9268 2829 Ben Wale Corporate Finance Executive +61 8 9268 3055