Report from Patersons to Client Advisers> Stock CUE Energy...

Report from Patersons to Client Advisers


> Stock CUE Energy Resources (CUE $0.22)
> Date 6th April 2005
> Valuation: $0.36
> Recommendation - SPECULATIVE BUY
> Event: Steps to realising value
>
> Details:
>
> * Our valuation on CUE DOES NOT yet include any value for probable gas
> sales from the Oyong development.
> * The principal reason for this is the gas sales contract is yet to be
> securitised (i.e. payment from the State-owned power station guaranteed by
> a letter of credit from a reputable bank).
> * We expect the oil at Oyong to be produced quite rapidly (we would
> not be surprised to see the initial production rates be higher than the
> 20,000 bopd gross).
> * The cashflow from the oil project will initially be used to fund the
> gas part of the project (gross US$112m, oil representing some 60% of the
> capex).
> * We continue to think that CUE represents real value at these prices,
> with significant value upside.
>
> Impact:
>
> * We expect three things need to be addressed before the market will
> re-rate the stock - oil production rates at Oyong/gas securitisation,
> capital costs for the Maari oil development, and the size of the Jeruk oil
> discovery.
> * We estimate that CUE has proved and probable reserves of some 6.9m
> bbl, net cash of $30m. This implies an EV/BOE of A$7.99 (EXCLUDING Jeruk!)
> - CUE is amongst the cheapest E&P stocks.
> * CUE has a 15% stake in the Sampang PSC (contains the Jeruk oil
> discovery). A gross oil column of at least 379m suggests a very large
> accumulation is likely. CUE has back-in rights (premium is 10 times the
> 1st well cost and 5 times the 2nd well cost - CUE's share estimated US$37m
> payable out of future gross oil entitlements). While not yet conclusive,
> data thus far suggests a large discovery (in the order of 300-400m bbl
> potential). The size of the field is yet to be confirmed by 3D seismic,
> however, it is around 12-14 km long and some 4km wide. Note we have
> included Jeruk in our valuation at US$0.90/bbl for some 250m bbl - which
> we believe is very conservative.
> * In valuation terms, CUE is trading at 5.2 times 2006 expected NPAT,
> and 3.5 times 2007 NPAT - which EXCLUDES Oyong gas, and any upside from
> Jeruk.
> * If gas is included, CUE could generate gross cashflow of around
> A$35-40m in 2006 and 2007 - i.e. the stock is trading at less than 3 times
> possible 2006 cashflows.
>