the psa story for hyperdimension

Extract from junior oiler report of earlier this year

"Given the potential for PSA to outperform this year I though it might be useful to look at the company in some detail. I visited their Sydney office a couple of weeks ago and picked up some back copies of their annual reports. The following potted history drawn from those reports might be of interest to those that follow the stock. I should say at the outset that I have a stake in the company.

Petsec Energy is really the story of two companies, the Petsec before its US subsidiary Petsec Energy International (PEI) went into Chapter 11 bankruptcy protection and the Petsec that regained control of its US subsidiary on the completion of a Plan of Reorganisation in January 2001.

Petsec has been around for years. I think it was first capitalised in the mid sixties. It has dabbled in both oil and gas and mineral exploration and up until the late 90¡¯s still had an interest in Climax Mining. Terry Fern PSA¡¯s Managing Director was also MD of Climax and is a major shareholder of both.

The defining moment for PSA was when it decided to sell up its Australian exploration assets and try its luck in the Gulf of Mexico. This was in 1990. It had no cash flow and an exploration budget of $US10 million

It proved a good move for Petsec. From 1990 to 1997 PSA enjoyed seven continuous years of growth in reserves, production and cash flow . The company achieved its growth through exploration success (39 hits from 42 wells drilled) on generally small (10-20 Bcf) lower risk targets. In the early days on one lease, Main Pass, PSA even made money out of extracting gas from reservoirs into which a major had originally injected gas to extract oil.

The company¡¯s success was reflected in its share price with PSA reaching more than $7.0 in late 1997 from a low of what looks like 15 cents on my Etrade chart in early 1994.

But by 1997 competition in the gulf had increased, lease bonus payments were more expensive and drilling and development costs soared. These adversely affected the economics of the smaller lower risk prospects. Petsec¡¯s US operating subsidiary PEI accordingly decided to go after a number of higher risk higher potential prospects and sought some strategic alliances with bigger partners. It also went into debt.

But events conspired to wreck PEI¡¯s plans. Although it had some drilling success in 1998 the finds were small and a number of wells had costly mechanical difficulties. Expenditure reached $US 125 million for the year but cash flow dried up as oil and gas prices fell out of bed. Oil reached $US 11 a barrel and gas $US1.80 per MMcf. PSA¡¯s debt soared to unacceptable levels.

In early 1999 PEI sold a 50% working interest in a number of production and exploration leases to Apache for $US 68.3 million thus reducing its debt which nevertheless remained high at $US 109 million. It scaled down its drilling program for the year and went back to chasing lower risk plays. In 1999 PEI participated in eight out of ten successful wells drilled by its joint venture partners. But the jv spent more money than PEI had budgeted for and by year¡¯s end PEI was still in financial trouble.

To cut a long story short in April 2000 PEI placed itself under the protection of the US courts. A plan of organisation was put in place which saw many of PEI¡¯s assets sold off to repay debt. Petsec lost control of PEI while the courts were sorting out its finances. PEI emerged from the process in January 2001 and PSA regained control of an entity that had 5 leases and its valuable data base intact. PSA had no debt and some $26 million in cash. The plan was to start all over again in the gulf with the original game plan, ie. a conservative approach focussing on smaller low risk reasonable reward plays.

PSA didn¡¯t do much drilling in 2001 other than participate in an unsuccessful onshore well in Louisiana. But it did bid for leases in the March 2001 auctions acquiring ORRIs in a number of leases including Ship Shoal 184 and 191, where Llog subsequently successfully drilled four wells in 2002. PSA now receives a monthly royalty cheque from Llog of an estimated $A 300,000-$400,000.

In March 2002 PSA bid for and obtained its West Cameron lease 343 and later an interest in adjacent West Cameron lease 352. It drilled three succesful gas wells in October 2002 from an already established platform in 352 and brought all three wells into production in January 2003.

By both design and good luck the success at West Cameron has been a major step forward for PSA assuring it of a substantial net cash flow depending on future gas prices, of $A3 to $A4 million a month over the next two years which will allow it significantly to expand its activities.

Since January 2001 PSA has expended $A23 million or thereabouts on exploration and drilling, acquiring new leases and establishing a production platform at West Cameron. But this investment will pay off handsomely this year.

The future looks good for Petsec. In February of last year it joined with a number of other small Australian partners in the Beibu field offshore China and the first well drilled intersected a nine metre oil column. ROC the operator is currently putting together a plan of development for the five established oil discoveries on the lease. ROC also plans to drill in November a large prospect identified by recent seismic which could significantly add to the reserves.

According to recent information the development of the Beibu field might be delayed by the Chinese partner (CNOOC) which in some respects might be welcome by the market if not the jv partners as it puts back expenditure commitments. PSA has a 25% interest in Beibu reducing to 12.5% if, as seems likely, CNOOC takes up its option for 50%.

PSA has plans for another two to three wells this year on its West Cameron leases. The first well should spud in June. As I understand it the plan is to increase reserves there and to bring any discoveries into production as the current reservoirs are expended. The targets have been defined with the aid of data from the last round of successful drilling on the leases so the chances of success are high.

Later in the year PSA intends to drill at least one prospect on its recently acquired Vermilion leases which I understand the company is quite excited about. This is a higher risk/reward play than West Cameron so the company make look for a farm out.

Petsec is just as vulnerable to the vagaries of the drill bit as any other explorer but given its knowledge of the Gulf you would have to rate it a good chance of
bringing off a successful 2003 exploration program.

There are question marks about the reserves at West Cameron which the company rates at 25 bcf based on p3 reserves whereas an independent analysis puts them at half this figure on a p2 basis. But only production experience and the data derived from that, can indicate the size and life of the reservoirs. So far they have maintained excellent pressure and daily production rates are up from an initial 30 mmcf a day (18 mmcf net to PSA) to 38 mmcf per day (22 mmcf net to PSA). (Currently 28 bcfpd or 16 bcf pd net to PSA)

What makes PSA so attractive at current prices is the prospect of very significant free cash flows from West Cameron over the next two years. If the company, mindful of its former near death experience in the Gulf, can use these funds wisely and profitably there is every chance it could regain some of its former glory. Certainly that must be the goal of management."

The above is a bit dated but you will get some of the history of a company that is well on the way to a sound recovery.