norwest valued at $0.10

Norwest Energy receives 12 month share price valuation of A$0.10 from Hartleys
Wednesday, July 18, 2012 by Proactive Investors
Norwest Energy (ASX: NWE) has received a speculative buy recommendation from Perth broker Hartleys with a 12 month price target of A$0.10 as the company prepares to fracture stimulate its Arrowsmith-2 unconventional gas well in late July. Norwest Energy (ASX:NWE) has received a speculative buy recommendation from Perth based broker Hartleys with a 12 month price target of A$0.10, almost double its last traded price of A$0.057.

The following is an extract from the report.


Perth Basin Next to Rerate on Unconventional Activity

Norwest Energy is set to perform the first high impact shale gas focussed fracture stimulation program in the Perth Basin in late July. This is expected to be at least a technical success and likely to flow gas.


Large unconventional acreage position in the Perth Basin

The company holds a net acreage position of 182,000 acres along with an additional 212,500 acres under application in the northern Perth Basin where potential for hydrocarbons is favourable. We estimate that around 90,000 acres of Norwest’s acreage is in the shale gas window and could contain 2.1Tcf of recoverable gas.

The upcoming frac program is designed to prove up the shale prospects in three sequences; the Kockatea shale, the Carynginia formation and the Irwin River Coal Measures, plus the tight gas potential of the High Cliff Sandstone.


Perth Basin and Wessex Basin conventional potential overlooked

Norwest has a number of conventional targets with 107 million barrels of recoverable oil potential in the Perth Basin, both onshore and offshore, plus conventional targets with 67 million barrels of recoverable oil potential in the Wessex Basin in the UK.


Initiate with a Speculative Buy – price target 10cps

To date, Perth Basin players have lagged the share price performance of the more advanced (in exploration terms) Cooper Basin and Canning Basin players.

As such, technical success at Arrowsmith-2 could see at least a two fold increase in share price, as has been experienced by companies in the more advanced Basins.

We have a price target of 10cps for Norwest. Our price target only includes the risked values of EP413 and two conventional near term prospects. Success at Arrowsmith-2 could see upside value of 24cps alone.


EP 413

This permit could be transformational for Norwest. It contains the Arrowsmith prospect which is soon to be the subject of a multi zone hydraulic fracture stimulation program performed by Halliburton.

The permit covers an area of 125,530 acres, the south eastern portion of which is prospective for shale gas in the Carynginia and Kockatea sequences (plus IRCM and HCSS tight sands). We estimate that the permit has the potential to hold around 5.6Tcf of unconventional gas in place.

Norwest is targeting a number of different horizons at Arrowsmith-2. The primary targets are the gas potential of the Kockatea Shale, the Carynginia Formation and the Irwin River Coal Measures. Hydrocarbon shows have already been identified at each horizon following an extensive logging program completed in 2011. In addition to this, Arrowsmith-1 flowed gas at a peak rate of 4 million cubic feet per day from the Carynginia Formation before rapid declines in flow rates and pressure.

We have overlain the US Energy Information Association (EIA) estimate of prospective Carynginia shale in the Perth Basin over the permit map and the north east corner of EP413 contains prospective acreage. As such, the Arrowsmith 2 well is in an ideal location to test the Carynginia.


EP368 AND EP426

Empire is the operator of the permits but will transfer operatorship to Origin to conduct a seismic survey over the North Erregulla prospect.

The permits are contiguous and straddle the North Erregulla prospect. The North Erregulla prospect was originally drilled in 1967. Wireline logs and drill stem tests proved there was a 3 metre column of live oil in the Wagina formation.

The purpose of the survey is to mature the North Erregulla prospect for drilling.

The North Erregulla prospect is estimated to hold 22 million barrels of recoverable oil in the Dongara Sandstone and 3 million barrels of recoverable oil in the Arranoo Member. In addition to this, the HCSS could hold 100 billion cubic feet of gas.


TP/15

TP/15 is an offshore permit following the coast of Western Australia from Dongara- Port Denison.

The location of the permit is advantageous because wells can be drilled from onshore using deviated drilling techniques or via jack up in shallow water.

The current highest rank prospect is Xanadu which Norwest estimates could contain 98 million barrels of oil in place with potential for 28MMbbl of recoverable oil.


WESSEX BASIN

Norwest has two onshore (PEDL238 - 50%, PEDL239 - 75%) and one offshore permit comprising five blocks (P1928 - 65%) in the Wessex Basin, Southern England, adjacent to the 500mmbbl Wytch Farm oil field.

Norwest has already identified five structural leads within the offshore acreage and six leads over the onshore acreage.

The Company recently acquired 2D seismic over the Razorback prospect in order to reduce exploration risk prior to making a drill or drop decision on the permit.


VALUATION

Given the early stage of unconventional exploration in the Perth Basin and the lack of significant quantities of data, it is difficult to place a reliable value on the acreage based on potential DCF. Our chosen valuation method is the NPV/potential resource method.

We prepared a single well economics model assuming an initial flow rate of 5 million cubic feet per day, operating costs of $1 per thousand cubic feet of gas, well and completion costs of $8 million and an ultimate recovery of 5billion cubic feet. This results in an NPV/mcf of $0.89.

We have assessed the value of a Norwest share as $0.51. This value includes the risked values applied to most of Norwest’s prospects.