Prospects for the junior oilers

Junior Oilers this week


The prices of oil and gas have slipped in recent weeks though this is not likely to have a marked affect on the more speculative end of the oil and gas sector. With US elections out of the way which gave Bush command of both houses of congress and with the UN having taken action to send in the arms inspectors, pressure is now building on Iraq. Saddam Hussein is unlikely to cooperate to US satisfaction and war rhetoric will surface again possibly ensuring that oil and gas prices have seen their lows for the time being. Northern hemisphere winter may also hold up prices.

Well results

Cue Energy

At 0600 Friday, 8 November Bilip 1 was at 1464 metres and drilling ahead. In its 18 October announcement Cue said the first primary objective could be expected to be penetrated between 1500 and 2500 metres. So that should happen this week. A good result for CUE could see its shares significantly rerated. A disappointing result will be a temporary setback for a company that now has good cash flows (SE Gobe) and a significant discovery (Oyong) soon to reach development stage. Remember Wortel is to be drilled in Sampang PSC in December and could extend oil and gas reserves in this lease. Cue shares touched 6 cents prior to spud of Bilip but have fallen back recently albeit on small volume. Anyone thinking of taking a position in CUE should perhaps wait until the result of Bilip is out. A good result and CUE is on its way to being rerated, so good buying if you get in quickly enough. A bad result and you could pick up CUE cheaply ahead of the Wortel drill.

Carnarvon

Flow rates from the new wells should be announced this week. Wells 4 and 6 have flowed oil to the surface but not 5 which is closest to the earlier and recently fracced wells. Flow rates will be important because the JV needs to get enough cash out its 6 wells to pay off the Phase 2 development loan and fund Phase3 , including drilling the HP prospect. Otherwise CVN may have to go back to the market or shareholders for an injection of capital. Appears so far that WB reservoir is much better developed to the north where wells 4 and 6 have intersected thicker better structured sands. And then there are still the new E and G sands yet to test. It is possible that announcements won’t meet market expectations and daytraders may dump the stock but reality appears to be, from info already released by PTE on wells 4 and 6, that project is on track to exploit the significant WB reserves over the longer term. Shares have been in a sideways pattern for some time around 7 cents mark. Hopefully Carnarvon will include in flow rate announcement interpretation of what it means for the pace at which the project is to be developed, cash flows, need if any for new development wells in the northern extended section of the field, testing of E and G sands etc etc. May be a bit much to ask of a company that is put to shame by its JV partner in the public relations stakes. AGM on 14 November should be interesting. CVN could be good buying if market reaction to flow rate announcements send them back to 4 cents or less as IMHO project will be far from sunk by less than spectacular flow rates. Average for wells in Thailand is 150 –200 bopd.

Petsec Energy

Results of West Cameron 343 #A-18 well should be known early in the week. This well was considered a technically higher risk proposition than two previous West Cameron wells which have been completed as producers. WC#A-18 went ahead after the two previous wells confirmed the pre-drill seismic interpretations of the lease. It therefore stands a good chance of being successful and meeting its potential of 8 bcf of natural gas. This would give PSA 25bcf in the ground at West Cameron so far and with gas in the Gulf selling for $A7 million a bcf that’s $A175 million. If PSA ‘s share was $80 million of that over 5-8 years that would represent a very healthy annual cash flow from what will be a very low cost operation. In addition PSA gets a 7% ORRI from the Ship Shoal prospect whose first three wells will come into production this month and deliver revenue to PSA from December. And a fourth well is soon to be drilled at Ship Shoal. I have it on good authority that Llogg the operator has found oil as well as gas on these leases though only gas has been announced publicly. I have tried without success to get some idea of the reserves at Ship Shoal but both companies are keeping their cards pretty close to their chest. PSA shares have retraced from their year high of 31 cents to around 25 cents in line with the average 20% drop in the price of junior oilers over the past few months. With production next year from at least 6, and more likely 8, wells (and 4 of them did not cost PSA a cent in capital costs) PSA looks likely to be a market out performer in 2003. Shares have possibly been held back this year by run down in cash reserves and absence of cash flows but all PSA’s expenditure has gone into development wells and value of that in terms of revenue is soon to be realised. PSA has a reputation to rebuild after its disasters of only a few years back and probably does not want to shout about its recent good fortune but the now reorganised and refocused company looks likely to repay patient shareholders (though perhaps not those that bought in at $7!). Rivkins view that PSA could double or triple in price may not be too far off the mark.

Wells coming up.

AWE, NZO and PPP

Long awaited announcement this past week on the drilling of Tui in February next year did little for the share prices of the participants other than PPP which like SUN (but unlike FAR) also benefited from the confirmation of Apache’s drilling this month of Argos and Ceres in the Carnarvon Basin. AWE showed some strength towards the end of the week closing at 77 cents when it had been as low as 68 cents a couple of weeks before. Like Bosavi in PNG and Twin Lions in the Perth Basin, Tui is a potential blockbuster so shares in the participants should strengthen considerably in the run up to the drill. To me AWE is the safest bet and you get Jingemia, Cliff Head and Twin Lions thrown in whereas PPP possibly offers the better leverage. But PPP may get away from you if it has drilling success in the Carnarvon basin. PPP is good buying however if Argos or Ceres come up dusters and price reacts accordingly. NZO is much unloved in the market and is unlikley to rise to the heights it did prior to Hochstetter (fifty cents or so if I recall rightly) but should see some market interest and liquidity above what it is now particularly if there are any announcements in the interim about NZ government approval providing access through public land to its 70% owned thermal coal project (PRCC) or the development of the Kupe gas field where it has a 19% stake. Both announcements are expected before the end of the year.

NWE and Perth Basin Drilling

I like what this little oiler does. Seems its management are great deal makers and has started to put the company very much back on track after the disappointment of Puffin 6 devastatedthe stock. Failure of Morangie wildcat was good opportunity to get into this oone at around 8 cents as it seems almost certain to continue to strengthen now that capital raising is behind it and Cliff Head drilling approaches. (Six cents would have been a better entry some months back but you can’t win them all). Indeed value of Cliff Head stake alone as we currently know it is worth the current share price.
The January drilling in the Perth Basin is going to excite the punters in WA who love a good speculative flutter. Perth is home to the many wannabees in the minerals and oil sector and to the stockbrokers and analysts that follow them. Moreover its summer and the holiday season and there has to be plenty of rumours around the barbies on ways to make money to pay for those Christmas excesses. Results at Jingemia and Hovea will add to the excitement. (Disclosure: I am from Perth!) Should be lots of interest in AWE, NWE, ARQ ( possible further takeover bid) BUY (careful here capital raising must be on the cards soon) and VOY (already completed its capital raising and probably is next best leveraged entry to NWE.

AYO

Amity has announced an extensive 11 well drilling program over the next year but is suffering from concern about gas sales and possible fall out from a war on Iraq particularly if US forces use Turkey as a staging point which seems likely. Bad luck for the company to get caught up in the geo politics of the region. But fundamentals seem sound, Turkish elections are over and gas sales are on the increase. Possibly good buying for the brave. Competitors seem to be the Russian and Iranian gas mafia pretty formidable opponents one would have thought!!AYO should announce the spudding of Cayidere this week and Gocerler 4 is due to spud in December.

HZN ( formerly BLO)

Should be some firm news soon on resumption of drilling at Chott Fejaz in Tunisia which is scheduled for November. HZN also needs to get a farminee for Bosavi to be drilled in January in PNG which would be a monster if it came in on prognosis. This well will cost $US9 million to drill and HZN cannot afford its 48% interest. Be interesting to see who it gets to come along for the ride. Huinga JV partners meet on 14 November to review technical study of the drilling of the well and and discuss what to do next. A medium cost sidetrack into the Murihiku thrust seems most likely but that drilling will not happen until September 03 according to slides presented at HZN AGM. China (Beibu) is also now a long way off with interpretation of the recently acquired seismic to take six months (!!!) and next drilling not scheduled until the end of 2003. HZN has languished at < 10 cents lately and it is hard to see any reason why shares would be rerated in the short term. If Tunisia is a duster shares could be good buying at lower prices still in the lead up to Bosavi. If Bosavi comes in HZN will have hit the jackpot after a most frustrating year.



BPT, COE, STU

All good buying for their longer term interests in the Cooper, Eromanga and Otway basins and supported by South Australian money given Adelaide is where they have their hqs. BPT bonus options will list in November which looks like a good cheap entry into this revitalised stock, which announced another good find in the Bodalla leases this past week. But they need to have bigger hits to excite the sort of interest that would ignite their shares. Maslins would have done it for BPT but unfortunately it was a disappointment. (Maslins drill was a great example of the “acturtle” strategy at work, buy at 34 cents ahead of the drill and sell at 42 cents just before the spud for a quick virtually risk free 20% in less than a month). Don’t know much about Otway Basin potential but have that on my list of things to research.

Good trading. I hold AWE, CUE, CVN, NWE, PSA and NZO. JBC