An upgraded broker report from Shaws has just been added to the...

An upgraded broker report from Shaws has just been added to the AMU website which gives the company a big tick.

It places a short term value of 65 cents on AMU, a value of 80 cents in the longer term, classes it as in the outperform category and rates it a buy.

The report is a good read on why AMU remains a solid buying opportunity, although by its nature it is a bit conservative, and undersells the huge potential of the company.

AMU is already producing at a rate which will deliver 300,000 barrels of oil for this FY. Drilling success from its imminent Raccoon Bend drill program (5 back to back to start any day now, and a foreshadowed total of 10 wells on the prospect before Dec 04) will almost certainly deliver up to 50,000 barrels for the full 2004-05 FY. Drilling success on their other prospects like Red Creek is also highly likely to add to this during FY04-05.

At average received prices likely to exceed US$38 (ABN Amro recently upgraded their estimates of average 2004 WTI to US$39.50 and 2005 prices to US$40) this would deliver to AMU about US$13.5 million in revenue (almost A$20m). Given they were making a profit when oil was US$20 a barrel, this suggests profit from this side of the business could easily be in the US$6m+ area.

And to this you can add to this the net return from their recent deep gas drill successes - where AMU has already stated the 2 wells should drop between US$1.2 to 1.8m to their bottom line. (That by the way is making no allowance for any further success from the 10+ wells they have stated they intend drilling into that juicy prospect.)

Just these two areas alone look like delivering profits of about US$7.5m (A$10+m) to AMU. And on top of that there is the prospect of highly profitable biodiesel business arm - with each of the 5 planned plants likely to deliver profits to AMU of about A$5m. Construction on Adelaide is due shortly, and plans for the next plant at Picton in WA are bubbling along nicely too.

On top of all this, their net asset backing just keeps growing. According to the Shaw report, AMU's current reserves are around 8.1mmbblo - up on last year despite a year of production drawdown - and their is more to come as recent production history allows some significant additions of producing reserves to be added to this.

At current prices, these reserves must surely be valued in excess of US15bbl0 (after all, 1P and 2P reserves were selling at US$10 and $8bblo when WTI was trading at an average of around US$27)! that would give AMU reserves valued at US$121m or A$171m. Add some asset value for the highly profitable biodiesel arm and it is easy to see why AMU looks seriously undervalued at its current market capitalisation udner A$70m.

One to buy and put away for a while in my opinion.