new strachan report 19 may

Looks like some healthy debates in the other threads. Here's some more fuel for the fire....

Stockanalaysis report 19/5/2010 Issue 9 Vol7 Pgs6-7

Recommendation: Texon is a speculative buy with a value target of over $1.10 per share, based on 3 mmbbls of 2P oil reserves and value for its Eagle Ford Shale and Olmos upside targets, fleshed out by AWEs bid for Adelphi.

The company is presently cash constrained, but so was Antares 12 months ago, since when its shares have risen from 10 cents per share to over 80 cents, prior to the recent pullback.

Applying a look-through value, implied by AWEs bid for Adelphi, of 70 cents per Mcfe or A$4.20 per BOE of contingent reserves to Texons Eagle Ford Shale and
Olmos oilfield, produces a value for Texons interests of $0.94 per share for just those assets.

PRODUCTION
Texon presently manages daily production in which it has a net revenue interest of around 140 bbls of oil plus 1.7 mmcuft of gas. Currently, production generates revenue of about $2 million per quarter to the companys account.

Most of this production is generated by 6 producing wells on its Leighton oilfield, along with some legacy gas production from earlier successful exploration wells. The company holds high equity interests in its McMullen County permits, averaging 79% working interest (WI) over its Leighton Olmos oilfield and 95% of its northern Sutton permit as well as 96.6% over the entire Mosman-Rockingham permit.

DEVELOPMENT
The company is now focused on developing an estimated 9.6 mmBOE, including 5.2 mmbbls of estimated recoverable oil to the companys account at the Olmos Formation level underlying an estimated 3,400 acres of its McMullen County permits at a depth of approximately 2,650 metres. The Olmos overlies the Eagle Ford Shale Formation (EFS) below 3,200 metres, which underlies Texons total permit holding of 4,869 acres.

EAGLE FORD SHALE
The company estimates that its EFS holdings have potential for recoverable reserves of about 37 mmBOE, which is line with estimates produced by other operators in the area. As more data and better well completion techniques are developed, it is apparent that horizontal wells in the EFS can deliver total production of around 4 - 6 Bcfe
or between 600,000 and 900,000 barrels of oil equivalent, with initial production rates of up to 2,000 BOEPD and typically 1,200 to 1,500 BOEPD. Most of the production is delivered within the first 3 years of production and payback can be achieved in less than 8 months.

Texons part of the EFS appears to be very oily. Neighbouring operator Swifts recent well, located just 2.4 kilometres from Texons boundary, produced initial flows on clean-up of over 1,100 barrels of oil plus 1.1 mmcuft of gas per day. Initial flows through production tubing are likely to be as much as 40% higher than these choke constrained rates.

StockAnalysis models a well with initial production of 1.1 mmcuft/d plus 900 bbls of oil per mmcuft at an initial oil price of US$80/bbl and a gas price of US$5/Mcf. Each
well is estimated to deliver 3.5 Bcfe over a 10 year life and 4.3 Bcfe (715,000 Boe) over 15 years. Gas from the field has high energy content and thus attracts a 30% to 40% price premium to Henry Hub gas price. This modelling delivers an estimated NPV of US$3.70 per Mcfe or $22/BOE, because the production is dominated by the value of the oil. NB. To align with Texons standard, StockAnalysis converts a barrel of oil to 6 Mcf, applying energy equivalence whereas industry norms now use a one to 12 conversion to more closely reflect pricing parity.

OLMOS OILFIELD
Texon plans to develop an additional 25 well locations over its Olmos oilfield, possibly by applying funding support from the CBA to lift production towards 2,000 BOPD, at which point the company would be largely self funding. Work by neighbouring operators has shown that horizontal Olmos completions can deliver 8 to 10 times the
oil recovery at 5 times the initial flow rates for about 4 times the cost of a typical US$1.4 million vertical Olmos completion. Ultimately, once secure equity funds are
available, some horizontal completions in the Olmos are likely.

FUNDING
Funding for development of oil and gas from the EFS, where completed wells with 1,200 metre horizontal sections can cost US$7 million, is likely to be found using a combination of farm-out support and ultimately debt funding, though pure equity can be an alternative.

VALUE
Texons exploration risk matrix delivers a fully diluted risked value of $1.52 per share. Funding dilution of one sort or another, either farming out or adding equity, will reduce this risked value, but even if it is halved, this would still be an attractive $0.75 per share, on top of the value for existing reserves, which would add a further 20 cps if new equity were to dilute value per share.