junior oilers 10/11 may

Junior oilers 10/11 May

Oil and gas prices have shown remarkable resilience at a time when experts were predicting their demise. Nymex crude closed Friday at $27.82 up two dollars for the week. Dated brent closed at $25.23 again up almost $2 dollars. Nymex Henry Hub gas prices closed at $5.81 up a whopping 55 cents for the week. This is good news for Aussie gas producers in the US including FAR, AMU and particularly PSA. All had been expecting northern summer declines.

According to an article by Mark Shenk on the Bloomberg website, damage to Iraqi oil facilities will delay the full resumption of Iraqi output until January. This plus OPEC production cuts and an unexpected decline in US crude oil inventories are thought to be powering the oil price. Restocking of inventories of natural gas in the United States is behind the strength of natural gas prices there.

Of the 33 stocks on the watch list 10 rose, 16 fell and 7 remained the same. The number of declining stocks is up from recent weeks but most are simply trading within a narrow range and few are showing signs of trending down. The exceptions, ie. those that have been trending south, are Carnarvon, Empire Oil and Gas , Horizon and for some inexplicable reason Roc Oil and Arc Energy.

The winners include Amity Oil, up seven cents for the week (9%), Hardman Resources up five cents (10%) and Petsec Energy up nine cents (15%). The sector¡¯s ¡°hot¡± stocks are clearly AYO and HDR and there is some anecdotal evidence that investors are moving out of other oilers, such as PSA and into Amity, and Hardman. Though there was still good support for PSA with the stock near its recent highs of 66 cents ahead of its AGM this Tuesday, volumes were small.

I can understand the interest in Hardman given it is about to embark on the next round of drilling off Mauritania and a swag of press releases are now overdue on for example the develoment of Chinguetti. But I would suggest people exercise some caution before switching large sums into Amity.

AYO

Amity has risen some 27 cents from this year¡¯s low of 58 cents registered on 12 March. That¡¯s a pretty good run already, almost 50%. It has risen in anticipation of AYO¡¯s active northern summer drilling program and increasing gas sales. Amity¡¯s Managing Director has also managed to get AYO some good local press coverage and broker support.

Amity¡¯s first well Cayirdere has been declared a commercial success and this has contributed to the recent strength of the share price Attention now moves to Adatepe the next well in the series and a potentially bigger gas target than Cayirdere just 6 kms from the producing Gocerler field.

My personal view is that AYO share price is now very much a hostage to further drilling success and that in order for the shares to move closer to a dollar Adatepe will need to be a success. The next well after that is the wild cat Yesiltepe which is targetting large potential reservoirs of oil and gas. Yesiltepe is a rank wildcat with a wildcat¡¯s low probability of success. After Yesiltepe it is on to Whicher Range in south west Australia.

My own trading/investment discipline with regard to the oilers is generally not to hold them during a drilling program. I have lost heaps when I have strayed from that strategy. We have just witnessed in the offshore Perth Basin how drilling failures savage stock prices. And these Perth Basin wells were given a high probability of success.

Yet the punters keep coming back for more and I am sure there will be AYO supporters out there who for their own reasons will take me to task for suggesting that with regard to AYO, some profit taking ahead of the next wells might be the prudent course of action.

The article in the Weekend Australian on Whicher Range is a bit of a beat up as far as I am concerned and a tad misleading. This field was first discovered in 1968. Four wells and lots of work overs since then and the operators still have been unable to produce commercial flows of gas from the Willespie Formation.

And even if the next well is more successful what sort of prices will the gas attract to make the whole exercise worthwhile? AYO will clearly have to undercut current suppliers to attract customers. And gas prices in Australia are already the lowest among OECD countries.

Amity is an interesting play but one that has to be treated with some care. The positives are its gas reserves and production, its association with a Turkish State authority which gives it a degree of protection in the market and its activist Managing Director, stockbroker Tony Barton, who has been able to get good publicity for the company. And publicity often translates into share price support.

But in the end AYO has to sell its gas in competition with other gas suppliers into a market that is only slowly changing its energy profile. And AYO has not had the sort of success in marketing that many would have hoped for and so cash flows are not as good as expected. In fact Amity has had to contract a Turkish company, Tamgaz, to market its product and that requires paying a commission, though AYO has not revealed how much that is.

Drilling success, particularly if AYO was to strike oil at Yesiltepe would of course change the economics of AYO completely, but that to me is a gamble I am not prepared to take. And I would caution hotcopperites to take with a grain of salt those who seem to suggest on this and other boards that further exploration success is just a formality.

Anyone with an interest in Amity would be well advised carefully to study the company¡¯s detailed Third Quarter activities and cash flow report. AYO has actually had negative operating and investing cash flows in both the December (minus $3.5 million) and March quarters (minus $2.5 million) and revenues from product sales don¡¯t cover current costs of exploration and evaluation, development, production and administration.

The company still had a healthy $15 million in cash at the end of March but has been burning through this cash at a rate of $1 million a month over the last six months.

HDR

What more can one say about Hardman Resources that hasn¡¯t already been said. Clearly it is about to go for its mid year run ahead of the resumption of drilling. This week it had difficulty breaking through resistance at 56 cents but once through that I think 70 cents is quite possible. All we need is for the press releases to begin to appear. This is one which I am holding for the pre spud price rise though the potential gains from holding through the drilling program are very attractive.

PSA

PSA¡¯s strange share price pattern continued this week. It was up nine cents to 65 cents in the last hour of trading on Monday then fell away during the week until pushed back up to 65 cents in the last hour of trading on Friday. Volumes if anything were a bit lighter than in previous weeks. Buying seemed to be in anticipation of some news ahead of the AGM.

I understand some hotcopperites plan to attend the meeting. I will be going and if anyone can¡¯t go but would like some questions asked let me know. Will try and post a report on the AGM on Wednesday.

What has happened to this company?

CVN

Carnarvon Petroleum has 40% of the Wichian Buri oil field in northern Thailand. Canadian company Pacific Tiger is the operator and joint venture partner. Although the field contains large and potentially highly profitable reserves of oil, the joint venture has experienced enormous difficulty in getting the wells drilled so far to flow at anything like the rates originally predicted. Current rates or around 315 barrels a day in the March quarter are a long way from the hoped for 1,000 bopd.

The market has grown tired of waiting for Carnarvon to prove itself and has marked the shares down accordingly. They closed at a year low of 3.2 cents on Friday. Carnarvon shares have lost half their value since the heady days of late last year. Volumes have also declined and there were several days in April when the shares did not trade at all.

Carnarvon maintains that the SWIA JV in Thailand is profitable , achieving a cash operating surplus of US $344,000 in the March quarter, an 85% increase over the previous three months. The increase was attributed to the increase in oil production from the three phase II development wells.

The JV has now drilled six wells into the producing ¡°F¡± sands of the Wichian Buri field. The three wells in the Phase II development were supposed to have used different drilling technology and be of a different angle and well bore size to the original wells and thus be significantly better producers. This does not appear to have happened and accounts for the market¡¯s disappointment.

The JV originally planned a further series of wells in Phase III focusing on the northern extension of the reservoir. Like Phase II this would have cost around US $2 million money which the JV does not have. According to CVN¡¯s March activities statement timing for Phase III has not been finalised but subject to rig availability and funding could commence during the December quarter. These wells had originally been planned for mid year.

In the meantime the JV looks like it is going to drill the Huai Phai prospect in the hope of discovering recoverable oil which will provide the cash flow desperately needed by the JV. At Wichian Buri the JV will continue to try to improve the operating performance of the oilfield and understand its production behaviour. The field also includes two sands, the ¡°E¡± and ¡°G¡± sands which have yet to be tested and could yet be the saviour for the Wichian Buri field.

One of the problems for Carnarvon is that despite a careful husbanding of resources, including a cost cutting program, operating and investing cash flows for March were again negative, reducing Carnarvon¡¯s cash on hand from $1,068,000 to $622,000. A capital raising of some sort seems almost inevitable before the end of the year.

Despite the shellacking Carnarvon¡¯s management has taken from some quarters, I think the company should be given some credit for the way it has handled the disappointing results from the Wichian Buri field and the way it has persevered in an effort to turn the situation around. I wouldn¡¯t be recommending that investors return to the stock just yet but I think it would be premature to write the company off. It is well worth having on one¡¯s watch list.

As usual the foregoing is designed to stimulate discussion and an exchange of ideas. See an expert before investing in the speculative end of the market. This week I took advantage of some volume in Cooper Energy and exited my holding for a small loss. I have used the funds to increase my holding in PSA and HDR.

Disclosure: I hold BUY. HDR, FAR and PSA