Junior oilers 17/18 MayOil and gas prices continued strong this...

Junior oilers 17/18 May

Oil and gas prices continued strong this week with Nymex crude closing Friday at $29.14, $1.32 up from the previous week¡¯s close of $27.82. Dated Brent settled at $26.33 as against $25.33 a week earlier and Nymex Henry Hub natural gas price closed at $6.12 up another 31 cents from the previous week¡¯s spring high of $5.81.

The time it is taking to get Iraqi oil back into production, OPEC production cuts and inventory restocking in the United States account for the higher prices but unfortunately they have not led to any significant renewed interest in our oil and gas sector.

Of the 33 stocks on the watch list, 13 rose, 12 fell and 8 remained the same. This has been the pattern of recent weeks. Best gainers were Pancontinental Petroleum (35%), Oil Search (11%) and Amity Oil (6%). Other winners included ROC Oil and on very small volume, Horizon and Drillsearch.

Pancontinental rose on the back of news that Woodside had farmed in to leases adjacent to those PCL¡¯s holds offshore Kenya in East Africa. Some two million PCL shares traded on Wednesday at 1.6 cents which should have been a signal that some strong buying was ahead. This happened on Thursday when 11.5 million shares traded at prices up to 2.2 cents. The shares held up reasonably well on Friday to close at 1.9 cents, a gain of half a cent for the week. Jingemia in the Perth Basin also went into production testing this week with rates being ramped up to 2000 bopd. PCL has a small, 1.278% interest in the discovery.

PCL is a bit of a dog and if you didn¡¯t spot it and get in on Wednesday for a quick profit on Thursday you may have missed the boat this time around. (Apologies to Andrew Svalbe)

Amity, at 90 cents, was strong in anticipation that its current well Adatepe would be successful. Results from the well should be known early next week and a good gas find should see the shares reach a dollar. A duster and its probably back to 80 cents

The losers included, Empire Oil and Gas (almost 50%), Petsec Energy (12%)and Pan Pacific Petroleum (4%). EGO plummeted on the disappointing news from Eclipse and one has to wonder what sort of future if any the company has.

Petsec fell following its AGM on Tuesday though as usual price movements were on small volume. Two of PSA¡¯s West Cameron wells have been shut in for completions impacting on June quarter revenues. Production should resume from all three wells next week.

Lack of drilling activity seems to be Pan Pacific¡¯s problem though it has also just completed a capital raising.

Arc Energy was off a cent despite testing beginning on Eremia. Hardman reached 58 cents during the week but closed at 57 cents. It needs to break decisively through 56 cents before we can be certain the pre drill anticipatory rise that has seen the stock advance 17 cents since its mid March low, is making another upwards leg. HDR looks like it could do that this coming week.

There was a flicker of interest in First Australian Resources and Bounty Oil and Gas last week though it didn¡¯t last. FAR has its AGM this week in Perth. FAR needs to inform the market of its liability for cost overruns at Banjo when the rig stayed on site because of a hurricane. It also needs to be a bit clearer on which of its many interests will be accorded priority this year. FAR¡¯s shares remained at an all time low.

If the punters decide to show an interest in BUY¡¯s 25% interest in Leafcutter which HDR will drill in the Woodada production license next month, BUY¡¯s shares could appreciate quite quickly.

Australian Worldwide attracted interest this past week with what looked like institutional investors picking up lines of stock at 76 cents. Three and a half million shares traded in the last two days of the week. I think the buying reflected more a realisation that AWE¡¯s significant assets are undervalued at these prices than the announcement that production testing was underway at Jingemia. But the publicity would not have done AWE any harm. AWE does not resume drilling until later in the year.

And the buying in AWE is a reminder that institutional interest in the juniors really doesn¡¯t kick in until a stock¡¯s market cap reaches $100-$150 million. So comments from time to time on these boards that institutions are taking an interest is usually a reflection that a broker has listed a junior as a speculative buy for clients rather than an investment. And on a similar topic most of the oilers we cover are just too small for broker manipulation, seems to me it is the daytraders and others who play strange games with stocks like PSA.

PSA AGM

Enough has been said on Hotcopper to pretty much cover the main points of the presentations at the Petsec AGM on Tuesday. For me it was reassuring that the company will continue to focus on old producing gas fields (or in the cases of China old oil discoveries) which hold exploration potential and access to existing infrastructure which reduces development costs and increases returns.

As West Cameron experience has shown these old fields can be hugely profitable and small finds of 10-20 bcf are, at today¡¯s prices, the equivalent in economic terms of the 100-150 bcf finds that PSA was chasing in the GOM when gas prices were less than $2. Without further discoveries at West Cameron, Fern expected a field life of between two and three years at current rates and some years of much reduced rates.

The company continues to suffer from a disclosure problem with it not really being made clear at the AGM that two of the three wells at West Cameron had been shut in for some weeks for completions and the start of production from the next reservoirs and that this would have a material affect on revenues for April and May. Production for these months will come largely from one well.

I suppose for an oil man, this is just a normal part of production scheduling from a multi sand discovery but the market should have been told how long the wells were down and what April revenues were. The wells, complete with new compressor units to up production, will go back into production next week. Hopefully the company will announce this and give some idea of flow rates.

The two wells that had been shut down had produced 1.5 bcf from a previously untapped water pressured sand the UP2. They will now produce from the UP1 which is the main producing sand on the field.

The company¡¯s newly acquired Vermilion leases look very promising. So much so that there is now no talk of bringing in partners, or at least that was the impression I had from the small group discussion post AGM. There are two prospects on the leases one to the west and one to the east straddling all three leases. The latter contains the eight bcf discovery of 1988 and will be drilled first. If that well confirms the earlier discovery it will in itself pay for the Vermilion program and further wells will be drilled to test other promising bright spots. The two Vermilion prospects currently targetted contain a potential 53 bcf gross unrisked mapped potential which I assume is about 30 bcf recoverable.

In Vermilion PSA will have to bring in two rigs to test the prospects and build production platforms if the wells are successful . There is an old producing field on adjacent lease Vermilion 245 on which the operator, Chevron, has drilled some 38 wells and produced 200 bcf of gas. I understand some of the platforms on that lease could possibly be used to drill PSA¡¯s prospects but I had the impression from Fern that Chevron would rather give the lease back than sell it. Something to do with avoiding a potential environmental liability.

That said as Vermilion 245 would very neatly complement PSA¡¯s current Vermilion leases and fits with PSA¡¯s strategy of working over old fields, I wouldn¡¯t be surprised in Fern kept working on Chevron.

Fern was asked (was that you 1 bp?) about Woodside¡¯s potential interest in the shallow fields PSA was chasing and replied that Woodside had bigger prospects in mind. The same went for BHP and Santos.

On China, Fern said the primary reason why a field that could be brought into production in six to nine months in the GOM will take two to three years offshore China is due largely to Chinese bureaucracy ie.the need for CNOOC to go through many layers of decision making. Fern had no doubt that China would eventually be a good money spinner for the Australian companies involved (ROC operator, HZN, PSA and FAR).

The project would pioneer the development of small offshore discoveries in China and CNOOC was taking a great deal of interest. CNOOC had other small finds which did not interest the majors but which could be offered to the Australians, if Beibu is the success the joint venture expects it to be. Two of the five finds on the Beibu field are commercial now but the jv is hopeful of further discoveries. The 3 D shot last year has thrown up a number of additional prospects and two the 12-8-1 and 12-8-2 fields have already been defined by two wells drilled by previous leases holders. The jv estimates the 12-8 fields to contain 15 to 25 million barrels recoverable ¡°with the further benefit that several exploration prospects generated from the recent 3D seismic abut the fields¡±.

I have said before in these posts that China could be one of the big exploration stories for the end of this year and a potential saviour for two of the smaller participants FAR (5% interest) and HZN (30%). In fact on Friday, Horizon put out a more detailed assessment of the China project and is a good read for any one interested in the development.

For me FAR seems the better leveraged play into this porject. Development costs are likely to be US $70-80 million which should be within FAR¡¯s capacity to pay. I would not like to see FAR farm down its interests any further.

ARQ and the onshore Perth Basin

In this fickle market it is probably the absence on any immediate drilling activity that is responsible for the softening in the share price of Arc Energy. On the other hand I notice one poster here suggesting a biggish seller is trying to offload stock, part evidence for this being the million shares turned on Thursday.

And then again the market may not have liked Arc¡¯s decision to sell its interest in Cliff Head, which even to me seemed a bit precipitate. The money in hand now may look small beer when Cliff Head is eventually brought into production. I didn¡¯t hear the radio broadcast so I missed Streitberg saying that the funds from the Cliff Head sale would not be used to retire debt. If that is so then why the dash for cash when presumably revenues from Hovea production and Eremia would be enough to fund future exploration? Something just doesn¡¯t quite add up here.

And that ¡®s a pity because on the face of it Arc looks set for a bright future. It already has Dongara gas. Even though this is producing at low levels because expenditure needed to maintain production has been withheld pending completion of Hovea production facilities, the potential revenue earner is there.

It has Dongara oil if anyone can get it to flow. Don¡¯t know whether Amsol is still trying or not, there were suggestions it was about to pull out of the project. Anyone know?

Arc has both oil and gas at Hovea though you don¡¯t hear too much about what they intend to do with the latter. And it now has Eremia in testing and at last report had flowed at up to 1,600 bopd before being constrained back to 1,000 bopd. The Hovea production facilities appear to be finished and processing 5,000 bopd of oil from both Hovea and Eremia.

The company has said that for the next month production through the facility will be constrained at 5000 bopd but has not said why. Is there a suggestion it has been tardy in seeking the necessary government approvals to expand production beyond 5,000 bopd?

And in addition to all the above Arc has bought a small interest in EP 413 (Jingemia) to obtain a seat at the joint venture table.

So Arc is looking pretty good. Revenues could be up to $8-$10 million next quarter, debt is covered by cash on hand and a five well exploration program is in prospect for later in the year on Production licenses L1 and L2. Arc seems to me like good buying should it weaken further over the next few months though as noted above there are a couple of issues yet to be fully explained.

Jingemia

Great to see production testing get under way at last at Jingemia. Flow rates are now at 1,250 bopd with a the plan being to get this figure up to 2,000 bopd. The test will last three months. Not quite sure what happens then but presumably if a commercial discovery is confirmed as expected some appraisal and/or development wells will be drilled.

The good thing about the activity at Jingemia and Eremia is that after the disappointments at Christmas in the offshore Perth Basin permits, it reminds us that there is oil in the Perth Basin albeit in small quantities but commercial none the less.

And if Leafcutter is successful we could see some interest return to the sector as a whole. As remarked on above, a find of some 16 mmbls of oil would certainly ignite BUY¡¯s shares given its 25% interest and be a filip to operator Hardman. And gas in the Caryginia sands would be a bonus.

Leafcutter is a shallow well of some 1,400 metres and will test lower Permian sandstones in zones similar to those that comprise the Cliff Head and Hovea reservoirs. If by this they mean the Dongara/Wagina sandstones I think someone here suggested they weren¡¯t present this far south. Perhaps the reference is to the Irwin River Coal measure and High Cliff sandstones. (The High Cliff sandstones were actually gas producing at Hovea). Can anyone help us out? Whatever the case the companies say it is the first test of the Beagle Ridge fault block but not being a geo I can¡¯t assess the significance of this.

The market has not shown any interest in BUY or BUYO but sentiment could change quickly. I think we could see BUY bid up to 10 cents at least ahead of Leafcutter.

As usual do your own research before buying speculative stocks and talk with some experts. Best advice I can give beginers is buy companies with increasing cash flows like AYO, AWE, BPT, PSA, ARQ for example but there are others. And don¡¯t hold stocks through the drilling of a well unless you fully appreciate the risk you are taking.

Disclosure: I hold BUY, BUYO, FAR, FAROA, HDR and PSA.