There you go.Is TShirt about or on the roof again.BHP Billiton...

There you go.
Is TShirt about or on the roof again.

BHP Billiton had a go and Santos is doing it. Getting involved in the oil and gas industry off the coast of Vietnam, that is. Now it is the turn of Perth-based junior Neon Energy (NEN) to have a fly, in its joint venture with Italy's Eni in Vietnam's Song Hong Basin, with the first of two exploration wells (Cua Lo) due to spud later this month or early next month.

While Santos has notched up some real success through its Chim Sao oil/gas project off southern Vietnam, that was not the case with BHP and its Dai Hung (Big Bear) oil project back in the 1990s.

BHP made the mistake of relying too much on Russian/Vietnamese estimates on Dai Hung. It turned out to be less than big, and more of a dog than a bear, costing BHP $300 million and the embarrassment of having to retreat from what was meant to be a new frontier for its petroleum division, which at the time was overly dependent on the ageing Bass Strait joint-venture for its oil.

From Neon's perspective, BHP's failure in Vietnam did come to some good. While Dai Hung was very much BHP's focus at the time, it did drill an exploration well in what is now Neon's Block 120 in Song Hong Basin. And the 1993 well encountered a 6m oil column sitting above 32m of oil shows.

So it can be said that Neon's Block 120 has a proven oil system. The Eni-led joint venture (Neon holds 25 per cent) plans to drill a well in Block 120 in August.

The Ca Lang and Rua Biem prospects come with an (unrisked) prospective recoverable (best) resource estimate of 460 million barrels and 611 million barrels, respectively, and recently processed seismic data has identified a third lead.

But first up, it is the Cua Lo gas prospect up in Block 105 that will be put to the ultimate test by the drill bit. Cua Lo has a best gas-in-place estimate of 3.9 trillion cubic feet, with a high side estimate of 13.9tcf. It sits 40km southwest of China's producing Dongfang gasfield and it has to be said that hopes are high that it will hit gas.

Whether or not any gas encountered proves to be commercial will be a question for later testing. What can be said is that Neon's financial risk of failure is limited thanks to the free-carried component of the deal under which Eni came into the joint venture for its 50 per cent interest, with Singapore's KrisEnergy holding the remaining 25 per cent interest.

Neon's (gross) free carry on Block 105 is $US25m ($26m) and on Block 120 it is $US20m. It means that should the two wells cost a combined $US75m as analysts suspect, Neon's exposure will be well short of $US10m.

Needless to say, Neon's leverage to the upside on success in either Block 105 and Block 120, or both, is extreme. Best known for its current cashflow mainstay from modest oil production in California, Neon was yesterday trading at 27.5c a share for a market value of $148m, against which it is holding cash of $23m.

Canaccord has placed a 78c a share target on the stock on the basis of the Vietnam program and the ongoing cashflow generation ability of the Californian oil business, which has unconventional oil and gas potential.