21 January 2013Northern Star Shines, Director...

21 January 2013
Northern Star Shines, Director Resignation
Excellent Initial Flow rate – 185bopd
Antares Energy (AZZ) has achieved an outstanding flow rate from the Cozart-19 well at
its Northern Star project in the Permian Basin, Texas. Cozart-19 has flowed in excess of
185 barrels of oil per day with 100 mcf of gas per day. This is on par with wells at the
proven Southern Star project, which is 4,450 net acres and valued in excess of $200m.
Northern Star is 12,400 net acres so the size of the prize could be in excess of $500m if
this rate can be sustained and the result can be replicated in subsequent wells. The
Debnam 22 well is scheduled for fracture stimulation in Q1 2013 at Northern Star.
The Ray-6 has flowed at 290 barrels of oil equivalent per day at the Southern Star
project, which is above our modelled average of 218 barrels of oil equivalent per day.
Antares recently increased its regional footprint at Southern Star and the first well at the
new acreage, Robinson-1, is awaiting fracture stimulation.
Long standing COO and Exec Director, Matt Gentry, resigned from the Company under
benign and mutually agreed circumstances.
View: Positive
The Company had previously achieved a decent result at Northern Star from its Archer-
16 well (117 barrels of oil per day); however, after a rod failure the well was shut in for a
period of time and, when it came back on to production, performance was lower than
expected. No such failure has occurred at Cozart-19 so the risk of performance
degradation is reduced; however, remains a key risk. Whilst this is only one well, we
have re-rated the value of the acreage from $2,000/acre to $3,000/acre. This has
resulted in a small increase to our price target from $0.76/s to $0.79/s.
Southern Star wells continue to perform at expectation and the benchmark of US$220m,
achieved at sale on neighbouring acreage of roughly equivalent size and quality, remains
valid. This number is supported by our modelling of the asset (A$206m). Southern Star is
now held by production, meaning that it is marketable to a larger audience and also that
the steepest part of value creation curve has been accomplished. Given this, we would
not be surprised if Southern Star was in the scope of larger companies looking to
consolidate in the region.
The excellent result at Northern Star could be enough to make Antares a willing seller of
Southern Star. If this were to occur, this would allow repayment of debt and
redeployment of capital to the asset that is yet to journey up the steep part of the value
curve. This could see an outcome where AZZ becomes a Company with no debt, $125m
in cash (pre tax) and an asset that could be worth in excess of $500m. There is no
guarantee of a sale and we highlight that this scenario, whilst worth contemplation, is
speculation on our part.
Recommendation: Buy
We retain our BUY recommendation and our unrisked valuation of $1.05/s remains
largely unchanged (prev $1.01/s). Argonaut has risk-weighted the valuation by 25% to
arrive at a target price of $0.79/s (prev $0.76/s).

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