more drill success, not reflected in price

Last week AMU released its weekly drilling update, putting production numbers on recently successful wells.

It spelled out that two of those wells are flowing at rates of 100 bopd and 100-120 bopd. On both of these AMU have a 60.5% working interest, so that roughly translates to attributable production of somewhere between 120-130 bopd. On a monthly basis that will add another 3600 to 4000 barrels of oil to their production or just over 28,000 barrels over the balance of this financial year.

With oil prices north of US$40 a barrel, that should see added revenue from these two wells alone of around US$1.12 million. As these wells are very cheap to drill and bring on line, a big chunk of that revenue will stick to AMUs bottom line.

The other successful well noted in the weekly report was a small gas producer, delivering around 150 mcf a day to AMU. With Henry Hub gas prices sitting around US$6 mcf, this represents around US$900 a day. Over the remaining six+ months of FY2004-05, at these prices this well will will bring in over US$173,000. Given the operating cost of these gas wells are damn all, I reckon at least $150,000 of this will be clear to AMU.

So basically AMU's weekly drilling report is saying 'our recent drilling will add around US$1.25 million to our profits - and that is just over the next 6 months!'.

On top of that, the announcement noted the deep gas well in Halletsville South, Lavacca County is getting close to target depth. This is pretty exciting territory, with serious company making potential. The last two successes on this ground are flowing at rates that, according to AMU, will drop A$750,000 EACH to their bottom line. So more of these Halletsville South successes will mean big dollars for AMU. (As an aside, the AMU annual report indicates they expect this ground to deliver 12+ producers - work that out for juicy profits down the track!!)

Adding to the recent good news (although looking at last week's slide in the share price you would never know) was an announcement of more progress on the biodiesel side of AMU's business. Basically it confirmed that the 2nd biodiesel plant was going ahead shortly, that the ARF arm would be hived off as a separate company, AMU would retain 37% and be repaid the A$6.5 seed capital they have put in, and the new company was expected to have a market capitalisation of A$104 million on listing. (That by the way is just based on 2 biodiesel plant and at least 5 are planned across Australia).

When you add all that up, throw in that this recent drill success and 16% production increase must have increased AMU's 1P and 2P reserves to at least 14-15 million (alone worth US$154-165 million), mix in the ton of wells planned over the next few months, and add around A$40 million for the ARF side - it suggests to me that AMU is still way below fair value.

With around 154 million fully paids now on issue (all 33+million AMUOBs now converted, swelling the bank by about A$8.25m), I reckon their net asset worth is somewhere around A$250+ million. On the current number of shares that represents a net asset backing per share of around A$1.62. I know that is a rough and ready estimate, but it gives some idea of what the company's underlying real worth.

Of course, the company is not standing still on the production and reserves front. And the current drill program looks like it will have plenty to deliver in higher oil and (especially) gas production. I expect AMU's production profile to keep growing in impressive leaps over the next year or two.

My prediction is that production (with an increasing share of value from gas) tothether with its ARF interest, will transform the company from its current state. My call, watch AMU grow from its current A$100m market cap to a A$300m company by end 2006!


(I hold so of course I am biased.)