junior oilers 16 february

Junior oilers 16 February

War jitters, international terrorism, weak economies, stock overvaluations particularly in the US, just won’t go away. Uncertainty is the bane of the share market. It will be with for some time to come. The Australian market has held up well until recently but now it looks like our turn has come. How broad our fall will be, how deep and for how long is anybody’s guess.

The junior oiler sector is not immune to trends in the wider market and when these trends are compounded by a series of high profile drilling failures as they have of late, the shares respond accordingly. They fall.

The downturn in junior oiler stock prices this week was widespread. By Thursday’s close, only four of the 32 oilers I track were higher for the week, CUE, BUY, ICN and OSH.

A day later, following the titillating news just after the market opened on Friday that Mentelle 1 had encountered hydrocarbon “shows” in the first reservoir target, four more oilers, all Perth Basin partners, were also up for the week, AWE, NWE, ARQ and VOY.

Sentiment is obviously pretty lousy for the junior oilers and unfortunately Twin Lions and Tui have not helped. Volumes are down across the sector. People seem to be moving to the sidelines to see what happens next. And any hint of selling pressure in a stock, even for no obvious reason, brings out more nervous sellers. Witness the sell down of PSA in a couple of hours last Thursday.

And that is a pity because the underlying value of revenue producing oilers does not appear to have changed. If anything given higher oil and gas prices a number of cash flow positive stocks like AMU, CUE, AYO, OSH, BPT, PPP, ARQ, ROC and PSA look particularly undervalued. And some asset rich companies like AWE and HDR with seemingly assured cash flows ahead of them, have not had their future value yet reflected in their share price. There are in fact some good buying opportunities emerging with these companies for those with a longer term view.

The rest of our juniors are still very much situation stocks subject to the success or otherwise of the drill bit and the need from time to time to raise more capital.

AWE

The failure of Twin Lions hit the Perth Basin joint venture partners hard though the news from Mentelle 1 has temporarily stemmed their losses. AWE fell 15 cents on the Twin Lions duster then initially held up well following the Tui disappointment. A further fall of three cents on Thursday was overtaken by a rise of eight cents on Friday post the Mentelle announcement.

Next week’s share price action for AWE and its WA286P partners will be entirely dependent on the results of the wire line logs run over Mentelle this weekend. The signs are encouraging though as ROC Chairman said oil shows are one thing producing the stuff is another.
A good result at Mentelle would provide the fillip the junior oiler sector badly needs. Interesting that although the well probably drilled to target depth during market hours on Friday there was no further news from the partners. ROC seems for once to have had its way on news releases ie. no further news until the logs are run. We don’t know for example whether the oil shows continued past 1332 metres which is where the drill was when the first announcement was made. We don’t even know which reservoir the announcement referred to though many assume it is the Irwin River Coal Measures that were water wet in Twin Lions. And no mention of oil water contact which appears to suggest it is below the level of Cliff Head which one presumes is good. All we can do is wait and hope. Love to hear from any Hotcopperites from Perth with some more information.

NWE

NWE fell 3 cents on the TL result and fell below 8 cents this week. But volume was small compared to the previous two weeks. On Friday, after Mentelle, NWE clawed back a cent and a half during the day but closed a cent up as punters exited before the weekend. That may prove to have been a mistake. NWE’s immediate fate now depends on the results of Mentelle as its future viability is very directly tied up to a successful Perth Basin drilling campaign.

HDR

HDR hit a year high of 62 cents in early January but then went into reverse, one of the few stocks to actually fall ahead of Twin Lions. It continued its downward spiral this week closing on Thursday below 50 cents for the first time since mid November. HDR though not a participant in Mentelle benefited from the news and closed up a fraction at 50 cents.

It seems only the resumption of drilling off Mauritania will arrest HDR’s slide and that is months away. HDR seems set to go lower still. News to come from HDR includes revised reserves estimate for Mauritania due this quarter, a plan of development for Chinghetti due mid year and confirmation of the year’s drilling schedule. These releases might slow the downturn but only drilling will attract a return of the buyers. Of course a take over offer would change everything. Remember WPL paid $1.10 for its HDR shares after the initial Chinghetti discovery.

If after the current round of Perth Basin drilling HDR is in the 40-50 cent range it would be good buying ahead of further African drilling. Last year the shares sat around 60cents for a long period ahead of the second round of drilling. They got as high as 80 cents pre drill but never bettered that subsequently

ROC

ROC hit a recent high of $1.63 on 17 January but then followed its Mauritanian partner HDR down, closing at 1.31 on Thursday. Twin Lions cost the stock 8 cents though it recovered 3 cents the next day to end that disappointing week at $1.35. Mentelle’s good news this week could only lift ROC back to the previous week’s close. ROC’s asset base is pretty good and its cash flow from the Saltfleetby gas field in the UK is strong but the company continues to be out of favour in the market despite China, Mauritania and now the Perth Basin. Seems to me that they don’t do enough to promote themselves with analysts and brokers given what they have got to promote.

ARQ

ARQ has steadily fallen from a recent high of 72 cents at the end of December. ARQ dropped from 67 cents to 60 cents on Twin Lions and fell another 3 cents ahead of the Mentelle news and despite the good results from Hovea 5 and 6. Post the Mentelle announcment and the Hovea 5/6 update, ARQ jumped a pleasing 6 cents to end the week at 63 cents. At these levels ARQ, with its established cash flow and Perth Basin success at Hovea. represents value buying. Shares magazine in its March issue described ARQ along with four of its Perth Basin partners, AWE, NWE, VOY and ROC as winning shares. Hard to question that as far as ARQ is concerned. And there is always the possibility that a larger predator will show up again wanting a piece of the Perth Basin action. ARQ is only 10 cents higher than when TAP bid for it last year and it is now a much stronger company.

VOY

VOY was heading further down this week getting dangerously close to half its 32 cent high on 9 December when Mentelle rescued it. With some $4 million in the bank, an established but small cash flow, a 5% interest in Jingemia and a 5% interest in both W286P and TP/15, Voyager has cash and assets to sustain its share price at current levels and beyond. A good result from Mentelle could see it regain all of its recent losses particularly as VOY has pinned its flag to the Perth Basin mast by concentrating its efforts there.

BUY
Bounty Oil and Gas fell four cents from 14 cents to 9 cents after Twin Lions but it clawed some of that back this week, closing up one cent at ten cents. Volumes have been very small suggesting that selling pressure is not as strong as with some of the other Perth Basin jv partners. Although BUY does not have an interest in WA286P it could see some further appreciation in its price given its interest in neighbouring leases.


Other Stocks

HZN

In his January 28 edition of the Oil and Gas Bulletin, Quentin Cameron recommended HZN as that week’s top bargain. This on the grounds that Horizon had done some clever deals, interalia bringing OSH into Bosavi and getting a stake in Kapul in return, two PNG wells for the price of one. He also praised HZN’s entry into Maari (NZ) which he said had now proved up a commercial find. (Interesting to see that Danny Hill through Westgold Resources also got a piece of the Maari action so maybe QC is right about that.)

But this week it seemed HZN’s Chott Fejaz well was likely to disappoint and the report on Bosavi indicated that the secondary Toro sandstone was water wet. Bosavi is drilling ahead to the primary Iagifu sandstone . HZN’s shares have accordingly lost some of their earlier fizz and retraced from 13.5 cents to 10 cents this past fortnight.

HZN under its new leadership has chased high risk/high reward wells, a stratefy which hasn’t worked so far. It has spent a bundle of cash in the past 18 months, particularly at Makino and Huinga, with not a great deal to show for it. Apart from its new NZ interest the only other assets likely to produce revenues at some future date are the Beibu field offshore China and Bayou Choctaw in Louisiana. HZN must be running pretty low on cash right now but as the company does not issue quarterly cash flow reports that’s hard to confirm. It would not surprise me if they sold off Bayou Choctaw at some point to replenish the coffers.

HZN is no longer one of my favorites. Promises too much and delivers too little. Probably not its fault but Huinga was an absolute disaster and am not surprised to learn they may quit the block. AWE has already done so.

Of interest though HZN’s recently reported it had applied for a new exploration/development block in China and was following other prospects there. I wonder if it is going to take any of its Beibu partners with it. I know ROC sees Beibu as its entry into bigger and better things there. If there is anything that could revive HZN’s fortunes it seems likely to be China.


CVN

Carnarvon’s share price continues to fall and for good reason. The company is yet to report production rates for January even though I understand they usually receive them from the operator,Pacific Tiger, on the tenth of each month. The lack of information only fuels speculation that the flow rates have not improved since the disappointing December rates were released. I hope I am wrong and there are other reasons for the delay but whatever the situation, the support for CVN is evaporating. The shares slipped below four cents during the week before closing at 4.1 cents on Friday.

Short term it looks like CVN will continue to disappoint, and be disappointed, as it tries to overcome the down hole problems that are preventing it from increasing flow rates from the six wells drilled so far in its Wichian Buri field.

The medium term answer seems to be to drill more wells and I understand CVN is actively working on the next round of drilling scheduled to commence mid year. This program will cost another $US 2 million similar to phase 2 though whether Gemini will cough up more money or not remains to be seen. CVN, with its 40% interest in the field, will need to raise all or part of $US800,000 depending on what Gemini or somebody else kick in. A rights issue or new capital raising would have to be at a discount to the market, say at around 3 cents and it is this likelihood that finally persuaded me to take my losses and depart Carnarvon this week.

It is a pity because Carnarvon has the oil in the ground with estimated reserves now up to 11 mbo and that set to increase as the E and G sands are factored in. I believe CVN will production test those sands following negotiations with Gemini over the consequences the development of the E and G sands would have on Gemini’s royalty payments. The perforation charges are already in the test well so they are ready to go. But for the time being I can’t see any upside in CVN and will sit on the sidelines.

PPP

Pan Pacific Petroleum has some 218 million shares on issue capitalising it at some $15 million at a share price of 7 cents. It closed Friday at 7.2 cents after being as high as 8.4 cents earlier in the week when it was revealed that there was at least some oil in the lower F sand in the otherwise disappointing Tui well. But that was a long way from the 14.5 cents it reached prior to Tui.

One of my strategies is to buy stocks at distressed prices after the announcement of bad news and PPP is close to being in this category. PPP had nearly $5.5 million in cash at the end of the December quarter and has a steady income from gas sales of some $800,000 a quarter after production costs. After two dusters last year, Argos and Immortelle, it had a recent small oil find at Taunton and will drill two exploration wells Hyssop and Montgomery 1 both in the Carnarvon Basin in March /April.

I think PPP has been oversold and is good buying at current prices in anticipation of the next round of drilling. And there is also the possibility that the additional seismic called for after Tui revealed a ten metre oil column in excellent reservoir in the lower Kapuni F sand may confirm the prospect of commercial oil in the lease with further appraisal drilling. I’ll be looking to enter PPP this week.


PSA

Petsec Energy reports on a calender basis so a press release on its annual report for 2002 is due out soon. I am hoping PSA will wait until early March to release its accounts so they can report not only on the large capital expenditure of last year but also on the revenues they now receive as a result of it. I am expecting five weeks of West Cameron production and the January and February cheques from Ship Shoal to give PSA a net cash flow of $4 million plus.

That’s $4 million plus for five weeks production. Thereafter revenues are estimated by the company to be between $3-4 million a month depending on gas prices. There is no other junior oiler on the boards that has that sort of cash flow not even Amity. (And PSA doesn’t have to close down for religious holidays!!). Don’t think we will see PSA stay at current prices for much longer.


CUE

There are a number of CUE supporters on this board who think CUE is considerably undervalued at its current price of 5.3cents. A more in depth look at CUE suggests they may be right.

With 334 million shares on issue CUE currently has a market capitalisation of $17.7 million. With a profit of around $A3.5 million last year it has a PE ratio of five, not that this in fact means much for junior oilers. Their revenues are so volatile. But to the extent that we use P/E’s at all five is probably about right for a junior oiler. So no suggestion there that the company is undervalued. The value of CUE is in its recent discoveries and potential future revenues. Further drilling success would just be icing on the cake.

The short term problem for CUE, as for AWE, is that it is now an asset rich company but remains cash flow poor. Unlike AWE which has project funding in place for BassGas, CUE does not have the cash in hand or alternative financing arrangements agreed, for its share of the development costs of the Oyong and Bilip oil and gas discoveries. And it will have to find money to pay for its share of two new wells in the Sampang PSC (Mangga and Wortel) due to be drilled mid year. These will cost around $US 1 million each or $US 300,000 all up for CUE

At the end of December CUE had $NZ 4,195,000 in cash but is continuing to spend more money on exploration and evaluation (eg.seismic) as well as development, production and administration costs, than it receives from oil sales from its one producing asset, the SE Gobe oil field. For example CUE had gross revenues of $NZ 1.7 million in the December quarter but is foreshadowing exploration and evaluation expenditure alone of $NZ2.7 million in the next quarter. The fact is while expenditures are increasing revenues are stagnant and cash on hand is depleting.

CUE acknowledges in its annual report that SE Gobe production is in decline though workovers and air compressors can in some cases improve flow rates as they will this quarter. The field still has some 16 million barrels in the ground which at current production rates is good for another three to four years. CUE can expect annual gross revenues of between $NZ 7,500,000 to $NZ 8,500,000 for its 5% share of production over this period if oil prices hold up. But production and admin costs could account for up to half of this.

CUE’s potential company making asset is a 15% interest in the Oyong field in the Sampang PSC offshore Madura Island in East Java Indonesia. Santos estimates that Oyong contains 90 bcf of recoverable gas and a conservative five million recoverable barrels of oil from the estimated 80 million barrels in place. Santos recently signed a binding sales agreement with an Indonesian utility company for all the gas so Oyong looks like it will proceed to development. If a final decision to go ahead is taken mid year first sales are expected in Q3 2004.

Cue estimates that the development costs for Oyong will be around $US 100 million. This will cover three central gas wells and two horizontal oil wells, a production platform, either permanent or floating, and a gas pipeline. CUE is going to have to find $30 million of that, money which it obviously doesn’t have. I understand from CUE that at least three banks are interested in financing the project but it is not yet clear whether they will finance 100% or only a part. Cue does not want to go back to shareholders if at all possible. And obviously shareholders would not like to see a capital raising which in the current climate would probably have to be at a 10-20% discount to the market.

Cue may get some early cash flow from Bilip1, an oil and gas discovery 10 kms downtrend from SE Gobe. We are still waiting for Santos and Cue to provide reserve estimates for Bilip and information on development options. Pre drill estimates were 30-100 mbo recoverable. CUE and Santos met last week to progress these issues. I understand both companies would like to bring Bilip into production ASAP to take advantage of current high oil prices and that it is likely to be a stand alone well. I was also reminded that Bilip still needs to be properly production tested from its 16 metres of net oil pay.

Bilip is likely to be a prolific but short lived producer which would suit CUE with its 10% interest. It would quickly get back its share of the development costs which don’t look to be too onerous. If Bilip becomes a producer, oil could be trucked the 10 kilometres to the SE Gobe production facilities given that an access road has already been built

So putting all the above together CUE looks like it will have net revenues of some $NZ400,000 this year from SE Gobe which with cash in hand gives it some $NZ4.5 million. Expenditures on seismic, Bilip and two wells will cost it say $800,000 to $1,000,000 so it has these costs comfortably covered.even if it has to drawn on cash reserves. Oyong will cost CUE some $A45 million which it hopes will be covered by bank financing. If that comes to pass CUE, which is currently debt free, is home and hosed and will look very good indeed going into 2004.

If the banks only pay for a percentage of Oyong then CUE has to find some funds to make up the difference. And there’s the rub. If it has to go back to shareholders it has two problems. One it already has lots of shares on issue and two, in the current market it would have to make a placement around 4 cents. The alternative is to say sell all or part of its interest in Bilip or farm down its interest in Oyong. Whether it has to look at these options or not will depend on its discussions with the banks.

Shareholders prepared to ride out some short term volatility in the share price and perhaps even pick up some new shares at cheaper prices if a capital raising comes to pass, will eventually be rewarded. CUE now has some good assets which should provide it with a strong cash flows in a couple of years time.

And remember also that CUE has interests in two proven PNG gas fields Barikewa (with Santos) and Kimu (with OSH) which together represent 200 bcf recoverable to CUE. These come into play when and if a PNG/Queensland pipeline is built. Then there are the two wells to be drilled this year in the Sampang PSC, Wortel an Oyong look alike and Mangga (West Anggur) targeting a trillion cf of gas. Success in either well would really set CUE alight.

There are some on Hotcopper who think that CUE has now become a takeover target and that Santos will eventually buy them out. I personally don’t see that happening. CUE is just too small to warrant the effort and wouldn’t bring anything to Santos that the company doesn’t already have. But I guess you never know.

As usual the foregoing is to stimulate discussion and provoke an exchange of ideas. Please consult the experts and do your own research before investing your hard earned.

Disclosure: I hold BUY, CUE, COE, CPN, FAR, ICN, GBG, NEW, PSA and WON. This week I sold KRZ and CVN and traded PPP. Cheers JBC