signals positive for poseidon

Hey guys,

Just to re-inforce our positive view on Poseidon, I thought I would post this new research report my broker at Patersons just sent to me.

In light of the negative posting and blatant down ramping occurring yesterday from punters who obviously know nothing about O&G, this report should clear a few things up for the Nervous Nellies who read too muich into the lack of comment from the company....Anyway enjoy the read.....


Signals Positive for Poseidon

Investment Highlights

ConocoPhillips exercises right to additional 9% in WA-314 and WA-315. KAR announced that its JV partner ConocoPhillips (COP) exercised an option to acquire an additional 9% in exploration permits WA-314 and WA-315 by funding 80% of future JV expenditure up to US$125m. This takes equity interests across all three permits (including WA-398) to 60/40 for COP/KAR. The decision appears a positive indication as to prospectivity of the JV exploration permits, including the ongoing delineation of the Poseidon discovery. A key outcome of the announcement is that KAR is further funded through additional drilling in the permits, which will allow it to meet JV contributions – keeping up with large JV partners through exploration commitments is a primary risk for small O&G companies and has been well mitigated by KAR.

Drilling progress at Poseidon-2 ongoing. While the JV has been very limited in the information released to date, it would appear that Poseidon-2 has intersected a solid interval of Plover formation. Given that cores were cut from 5061m and that this is typically commenced well within the target zone, this indicates a minimum of ~200m of Plover to the planned TD at 5300m. We reiterate that minimal information is known to date, with estimates of permeability and porosity based on wire-line logs and MWD tools at Poseidon-1. The JV is unlikely to further define the size and nature of the discovery until the well has been tested and all results have been analysed from Poseidon 1&2 and the upcoming Kronos-1 well.

Near-field drilling to provide upside. COP’s decision highlights the prospectivety of the permits, with the ongoing 3D seismic survey to mature drilling targets for the proposed 2010 program. Further success could result in additional volumes being tied into a potential development – dramatically improving project economics.

Successful appraisal of Poseidon crucial to KAR value. KAR’ s modelling of a 7tcf FLNG development provides a net NPV of US$6.9b or ~$18/sh. Its share of capex is estimated at US$4.6b suggesting that substantial funding initiatives involving further sell-down of its 40% interest, equity and debt funding would be required. The key issue is what KAR’s final net interest in a developed project would be. In addition, any project valuation would need to factor in a number of commercial risks associated with the project. However, in the first instance we have valued KAR’s interest in the discovery on a discovered/undeveloped basis using a conservative $A0.50/mcf in the ground. Based on further progress towards delineation of a substantial gas resource and what looks to be significant near-field opportunities we have further de-risked our value for the discovery. We have upgraded our recommendation to a speculative BUY with a price target of $9.27/sh.

Long term value above and beyond Poseidon. In addition to its Browse basin interests, KAR has an enviable portfolio of high-impact exploration acreage in the Bonaparte Basin, Peru and Brazil. Its 5 x blocks in Brazil are located in the Santos basin, home to the giant Tupi and Carioca fields and immediately adjacent to the recent Piracuca discovery, estimated at 550mmboe in place. KAR has identified 3 main leads of 100-200mmbbls of oil or multi tcf of prospective gas resources. Potential drilling is scheduled for late 2010/early 2011 following further 3D seismic acquisition/processing.