Santos Boosts Central PetroleumFNArena News - October 04 2012By...

Santos Boosts Central Petroleum

FNArena News - October 04 2012

By Eva Brocklehurst

Central Petroleum ((CTP)) has burst into the front ranks of market attention this week with its announcement that it has hooked a big player, Santos ((STO)), to farm into its
tenements. Central holds onshore acreage in the Pedirka, Amadeus and southern Georgina basins, and the Lander Trough, located primarily in the Northern Territory.
The Amadeus play consists of 175,000 square kilometres of known accumulations of shale oil and gas and the area has shallow and deep drilling targets. Central's Surprise-1H
well, its foremost in this area, has recently received a 3-month extension from the Northern Territory Department of Mines and Energy for an Extended Production Test. This
extension is necessary after the well performed within prognosis and justified further testing.

The 2m acres in Amadeus' EP115, which includes the Surprise discovery, is not part of the Santos farm-in. However, with current P50 resource estimates (estimate associated with
a 50% probability) ranging from 4m barrels (mmbbls) to 110mmbbls of oil in place, even if a 10mmbbl commercial discovery is confirmed, it could be a company-maker for CTP.

Broker DJ Carmichael noted, if the 10mmbbl is confirmed, it will confer around $150m on a net present value (NPV) basis for CTP (assuming $15/barrel cost) and almost underpin
its current market capitalisation. Central plans a resource estimate of the field by year end.

The other area of the farm-in, the Pedirka Basin, contains shale and coal, appearing to be both oil and gas prone. DJ Carmichael has previously modelled the Pedirka valuation
based on the Simpson East prospect with a P50 oil in place estimate of 106mmbbls. The broker's NPV, risked with 100% probability of success, is $210m for Amadeus, ex
Surprise, and $77m for Pedirka.

Santos has farmed into these two basin acreages, in up to 13 permit/applications. It will spend up to $150 million to earn a 70% interest in 19.8m acres, which will mean a net 14m acres to STO. Santos will become the operator of the joint venture during exploration and in the event that they are developed. Central will benefit from a free carry, assuming

Santos agrees to advance at each of the exploration stages. This will effectively fund the exploration requirements of the permits which would otherwise be obligations on Central
shareholders. Central also retains an interest of at least 30pc of the permits/applications.
Under the farm-out agreement STO will fund exploration by investing an initial $30m, with options to invest a further $60m in stage two and a further $60m in stage three. The
agreement remains subject to CTP renewing the relevant permits.

Central chairman Henry Askin has hailed the Santos farm-in agreement as finally providing a clear and funded pathway for the exploration and exploitation of the company's
opportunities. DJ Carmichael believes the deal is highly value accretive at around $11/acre, substantially higher than CTP's previous enterprise value per acre multiple of $2.

It provides a significant endorsement of CTP's assets and upside potential to its share price.
The broker noted Central plans to retain a material interest of 70% in its permit areas and a takeover premium to the company's share price could be applied. The shares were trading at 13.5c on Friday and ticked up to 16.5c on the announcement yesterday.

Central is DJ Carmichael's top pick in the Australian shale space and it expects a significant re-rating will occur on the back of the Santos deal. The broker has maintained its
Speculative Buy recommendation with an increased price target of 40c compared with 31c previously. Moreover, DJ Carmichael believes the STO farm-in will ensure the
exploration commitments for the Amadeus and Pedirka basins are met without CTP having to raise additional capital. It also suspects that a second farm-out deal could be at a
significantly higher multiple than the STO transaction.

Speculation of a second player joining forces with Central has circulated immediately the Santos venture was known. Central has stated that it is in discussions but nothing material has, or necessarily will, emerge at this stage.

DJ Carmichael believes a second farm-out could be executed during the current quarter. It noted the positive response to the company is in no small part due to its significant and focused acreage and the announcement shows its pragmatic approach, allowing STO to operate in its permits.
"We believe future success of STO's drilling program will be value accretive to CTP and could also lead to CTP being an attractive takeover target due to CTP's significant and
focused acreage position (44m acres) and (managing director) Richard Cottee's history of developing world class assets," the broker maintained.

DJ Carmichael suggests this flagship deal could lead to further consolidation of the central Australian basins. STO recently increased its interest in the Mereenie oil field to 100%.

This field is located next to CTP's permits in the Amadeus Basin and Santos plans to execute a significant horizontal drilling campaign.