report on arq

Arc Energy Set to Bounce (ARQ)
Following a spectacular rise on the back of exploration success in the Perth Basin and the establishment of strong operating cash flows during 2003-4, Arc Energy has traded in the doldrums for just over 12 months.
A positive start to Cliff Head oil production (6% owned) is set to be followed by a couple of high profile exploration wells which could add substantially to my estimated valuation target of $1.83 per share.
Arc is pumping out strong cash flow which it is
reinvesting in exploration. StockAnalysis estimates
EBITDAX for 2006 at $95 million and that number
should rise to over $105 million this year, providing
plenty of ammunition for exploration and M&A growth.
The Moondah well, which is currently drilling, is capable
of adding about $1 per share to my valuation for Arc if it
contains 35 mmbbls of recoverable oil, while success
at Frankland could add about 10 cents to my valuation for Arc’s 6% interest. I believe that the company presently carries little speculative value
for these wells, so success would add to its share price.
This week, the company kicks off an onshore drilling programme with 3 development wells to ensure that cash flow is optimised from existing fields. It then plans to hit several exploration targets, including the onshore to offshore, Red Hill prospect, where
discovery could add about 35 cps to my valuation.
In mid 2007, Arc will commence a 6 well exploration programme in the Canning Basin, where potentially large accumulations of oil and gas have been mapped by seismic and nearby well data. This is an exciting programme since the region is crying out for cheap
energy. Gas in this location could be commercialised for power generation, possibly incorporating a mini LNG facility, while a larger discovery could support rapid
development of a small scale LNG export facility. Oil and condensate could be exported from nearby ports to refineries in Singapore or Australia.
The company also plans 2-3 wells in Yemen
during Q1 2007 where Oil Search and others
have had recent success.

Valuation
StockAnalysis estimates a base valuation of
$1.30 per share for existing hydrocarbon
reserves and net cash. Risk adjusted exploration
potential adds 53 cps, taking my target valuation
to $1.83 per share.
Recommendation
Arc is a well run company, whose earnings
should approach 26 cps this year. StockAnalysis
feels comfortable with a long term buy
recommendation for Arc as it embarks on a high
impact exploration programme in Australia’s
Perth and Canning Basins in and also in Yemen.


Vol 3, Issue 14
July 26th 2006
Arc Energy (ARQ)