By my calculations SAE should be clearing a profit of about...

By my calculations SAE should be clearing a profit of about US$25 per barrel on this heavy oil after royalties and costs, at current price levels (which most analysts believe are sustainable). Given the initial test on their horizontal well, they should be able to pump 300 bpd from it easily (we will know this figure more accurately from the next test very soon). With the 14 well development drill programme about to start, this means that the co should have no difficulty getting production up to their stated target of 2,000 bpd (and probably much more). At 2,000 bpd the co will be generating free cash flow of US$15m pa. Given the number of wells in the programe, and the ability to expand the programe given the size of the field, this production level is probably sustainable for five years or more. Thus the market would attach a PE of 5-7x for this production.

The co has said that reserves for this field are likely to come in at 5m barrels + (again we will know the figure soon). As the development progame progresses, this figure is likely to rise. Thus, I think both cash flow and reserves on this field point to a valuation of around US$70-100m. ie for the North San Arno project alone, SAE should be valued at around 60c to 80c per share, and I think this is fairly conservative. The sustainable test and reserve numbers should be out very soon, and this gives a firm underpinning to the stock at much higher levels than the current sp.

SAE has a very large prospect inventory and a clear indication of a discovery at Yowlumne. It has also developed its own engineering and project team. The senior management is also proven. With its iminent cash flow and project planning already advanced for other prospects, one has to believe that a significant speculative premium, or enhanced PE valuation, will be added to the San Arno project valuation once the Arno figures are out and market wakes up to the stock.

In other words, I think this stock is worth an easy $1 per share. In my view it is probably the best buy in the junior oil sector. I have been adding to my position.