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Aspect Huntley

MOS owns 50% of the Wallumbilla LPG plant, 100% of the Silver Springs gas processing facility, compressors at Churchie and Downlands fields and 290km of pipeline. Tariff income stems from re-delivery of Santos gas. MOS may increase production if potential at its SE Queensland acreage is realised. Large reserves have been masked by mud drilling blocking gas flows. Nitrogen drilling protects reservoir quality. Gas has high condensate and LPG yields, leases are close to pipelines, construction costs are low and development times short. The future lies with exploration and gas marketing. Farm-ins to accelerate exploration have yielded mixed results. Cooper Energy’s 5% stake adds corporate interest. Not for conservative investors.

MOS is well run but has operated on the smell of an oily rag. Limited funds have hindered exploration and development. The consistent profit track record is a plus but the quantum had little bearing on valuation. Now flush with cash, it can perhaps for the first time begin to do justice to its Surat-Bowen leases which are rich in potential.

Over the next three years MOS will spend $35-40m in the Surat-Bowen Basin. Over 30 potential targets are identified. The company is looking to double production and revenues from 2008-2010 excluding any contribution from successful exploration. Production lead times are short and development costs low.

Our $0.18ps valuation and Speculative Buy recommendation are unchanged. Long term assumptions remain a US$70/bbl oil price, an A$/US$ exchange rate of 0.80 and a 10% discount rate. We increase our FY08 earnings forecast by one third to 0.8cps thanks to a lift in near term oil price forecasts. Our FY09 forecast nearly doubles to 0.7cps. Both are subject to exploration write-offs on the expanded drilling campaign. Our numbers assume 50% of spend is expensed.


Recommendation Impact
(Last Updated: 01/05/2008)
Speculative buy


The 100% owned Taylor-18 gas development well will follow Waggamba-4H before the first oil exploration well, Armstrong-1, spuds. It is one of several planned exploration wells. MOS is also looking to add to its targeted 10 wells for 2008 with new farm-outs under discussion. The 2008 drilling program represents risk weighted mean case resource potential of 8mmboe or total upside of 18mmboe. Corresponding NPVs of $130m or 18cps and $282m or 39cps are meaningful for a company with a fully diluted $80m market cap.

3Q08
3Q08 production rose 5% to 103kboe. A strong performance from Silver Springs/Waggambah increased gas production 7%. The previous quarter was affected by a shutdown by a gas customer. Liquids and LPG output was similar to 2Q08. Net operating cash flow after exploration was a healthy $3.2m although included funds received for sales made in the December quarter previously delayed. Net cash at end March was $23.5m. A remaining $0.6m still outstanding at March 31 has also now been received.

RevelsCat MAY be buying tomorrow