SAE are building reserves.....medium term oil playHigh impact...

SAE are building reserves.....medium term oil play


High impact appraisal wells target oil in California
Buy for re-rating to mid-sized producer
$0.43

Event

Salinas Energy (SAE) is an Australian company with a California, USA focus on oil development that has had initial success with its strategy to target 10 to 100 million barrel (Mbbls) accumulations of oil in the Salinas and San Joaquin Basins in Southern California. SAE was formed out of the rejuvenation of the former Renewable Energy Corporation when the company disposed of its former interests and acquired several significant stakes in large petroleum leases over areas adjacent to fields with large, long-standing production supported by intense infrastructure that supplies the huge Californian market. SAE is run by well-experienced petroleum professional, John Begg, who was previously the Managing Director of successful oil and gas developer, Voyager Energy, which was taken over by ARC Energy (ARQ) in late 2005.

SAE's strategy is to build its net 2P reserves to 20 Mbbls within 3 years on the way to becoming a vibrant mid-tier oil producer. SAE is targeting onshore fields where it can acquire an initially large and controlling interest and where there is good infrastructure and markets for petroleum and the areas generally have good 3D seismic control and the presence of relatively small oil accumulations that have been regarded by the oil majors as too small for their scale of operations. SAE is targeting conventional, under-exploited areas with reservoirs, which have exploration targets that will have strong flow rate potential that can be developed in association with local experts. SAE regards California as a very attractive area to operate in as besides offering the standard, low sovereign risk conditions of the USA, it is a prolific oil and gas province with over 280 producing fields with a production of over 260 Mbbls per year with extensive oil and gas infrastructure. With the oil majors controlling much of the ground and being totally production focused, exploration has tended to decline significantly despite development of modern technology.

SAE has quite rapidly built up a portfolio of nine areas where it has interests of 25% to mostly 100% that are leased on standard terms of royalties to the owner of the mineral rights of about 25%. The company has had early success in the South Buena Vista project with its drilling of the North Yowlumne No 1 well, which was drilled to a depth of 13,103 feet and encountered an oil-saturated column of about 100 feet which flowed light sweet crude of 32 and 36 API oil. SAE believes there is potential for over 100 Mbbls of recoverable oil and SAE has secured follow up potential for this in surrounding areas, where it is leasing a total of about 26,000 acres to target multiple opportunities for fields of 10 Mbbls to a maximum of 100 Mbbls.

SAE is also viewing its 100% owned San Ardo area as an early production opportunity, being in a heavy oil field where it has had success in its first appraisal well (Lombardi No 1) with independent experts assessing a recoverable resource of 3.3 Mbbls to 7.5 Mbbls on the basis of an 80 feet thick oil column. While the oil is very heavy (about 11 API quality), which will require production using higher cost steam techniques as are used routinely in the adjacent producing fields, SAE needs to do more work to refine the extent of the field and is planning seismic work ahead of further drilling by the end of the year. SAE has also started drilling another well at the Windgap prospect, where SAE is operator and is earning a 42.5% interest in the North Tejon field. This Windgap No 42-36 well is targeting a relatively small gas/condensate accumulation of recoverable resources of about 60 billion cubic feet of gas and 6 Mbbls of condensate and is on its way to being drilled to a total depth of about 12,500 feet, being currently at about 8,750 feet and setting casing. SAE has other targets in the other leases it has in the North Tejon area at relatively shallow depths of 5,000 feet to 13,000 feet.

SAE has plans to drill at least five wells over the next six months or so, with additional wells planned depending on the results of some of these wells. With well costs of around $US 0.4M or so, SAE has sufficient funds to participate in an active appraisal program over the next few years as it currently has cash of about $16M.

Impact

We see SAE as one of the most attractive Australian oil and gas companies amongst the lower risk growth situations in the oil and gas sector as we regard its development strategy focused on California as a sensible one with manageable risks that have a better than average prospect of successful outcomes. We can see SAE achieving success that leads to the likelihood of the company being able to achieve a significant re-rating over the next few years as it becomes a viable mid-sized oil producer in the Australian share market from its USA activities. Accordingly we recommend SAE as an attractive situation for investors with an appropriate risk profile seeking growth from the successful building of a substantial reserves and production base.

Prepared by Peter Russell