re: annual reserve summary spiderman

Hi spiderman

you noted that while AMU's reserves are rising, costs are rising too, implying a cancelling out effect. However, I am doubtful that this position is true, for two main reasons.

Firstly, AMU has made a strategic decision to pursue a greater level of gas production, with the effect that gas revenue as a share of total gas/oil revenue has increased substantially. The significance of this is that production costs for gas are a lot less proportionately than for oil. From this I would expect AMU's total production costs would tend to reduce as a share of its total revenue.

Second, the polymer gel treatment AMU is pursuing on its White Eagle ground has had a huge effect on reducing production costs for those wells it has been applied to. Revisiting the relevant announcements will give an indication of the huge reduction in the barrels of water being produced, with commensurately huge reductions in production costs. My understanding is that this treatment will be economic for just about all of the remaining 300 or so wells on White Eagle. This prospect alone has the potential to make a serious dint in AMU's production costs, especially given the number of White Eagle wells relative to AMU's total number of wells.

Another reason, the significance of which is not fully clear yet, is the apparent improved success rate from its drilling. Recent drilling has had a much better success rate than previous years. Hence, the cost to AMU of increasing reserves has fallen. This could reflect a higher proprtion of development wells being drilled recently. Whether this continues would depend on the mix of development, step out and wildcat drilling in the future.

However I look at AMU, I still see a heavily undervalued company.