site visits, page-7

Not a nice day out there but this is worth releasing anyway.

It's a cut and paste of Euroz's initial report after their trip to the US

Enjoy the red and see if you can pick up some cheap stock.

Cheers Belkin
Sundance Energy (SEA $0.43) – Buy


Price Target: $0.84/sh


Reason For Update: Company Update following Site Visit

Comment:

All three project areas in the US were covered during our recent site visit. Projects in North Dakota and Colorado were visited, whilst floods in Indiana prevented access. SEA’s North Dakota acreage is clearly a company making project for SEA, providing the lions share of its production and cash flow for near to medium term – we have focused this asset in this research note.


North Dakota, Bakken Shale Project


SEA holds 18,000 acres in the Williston Basin with varying interests up to 100%, averaging 40-50% across the whole acreage. The majority is held in the Phoenix and South Antelope Prospects.
Drilling and production activity in the Bakken has been increasing at a fast pace over the past few months. With that has come an influx of majors in and around SEA’s acreage (Hess, Marathon, ConocoPhillips etc) and significant R & D expenditure.
Bakken horizontal well results have been improving in the Williston Basin as drilling and completion techniques are being refined, similar to what we saw with SEA’s previous asset in the Woodford Shale.
The Bakken Shale is a blanket formation providing a low risk development for SEA, rather than exploration.
Our travels through the Basin included all SEA’s acreage and the prolific Parshall field operated by EOG Resources. We also met with Halliburton and SEA’s key consultant geologist to discuss completion techniques and various geological models. Key points are:

- The Parshall field ~ 20 miles north of SEA’s acreage is the benchmark of Bakken production with the first 30 wells averaging ~450 bopd for the first 18 months.

- Completion techniques currently involve swell packers and sliding sleeves with typically 5-8 frac stages per well. Horizontal wells are usually 10-12,000 ft deep with 4,500 ft or 9,000 ft lateral sections.

- Initial production (IP) results are quite misleading given that the “flush” production within days after the frac is often the highest producing rate. An average over the first 30 days is a more accurate measure of a wells productivity.

- For example: SEA’s Jones-16-14H well IP’ed at 971 bopd and averaged ~400 bopd for its first 15 days.

- At this stage the reserves / well estimate is 350 – 900 kbbls. Our guess is that the higher end of the range will ultimately be realized like most non-conventional plays.

- At current oil prices, reserves of 40 - 50 kbbls / well is needed to be economic.

- The capex required to fully complete a well is currently ~US$5.25m. We estimate this is likely to increase by ~10% as the cost of steel filters through.

- Bakken oil is good quality, consistent, sweet 42° API. The average historical received price is ~US$10/bbl discount to WTI.

- Productivity of the Bakken is variable throughout the Basin, but a sweet spot does appear to be in and around SEA’s acreage position.

- SEA has >100 wells well sites on its acreage at this early stage – this will grow considerably as the move to closer spacing eventuates.

- The Helis operated activity (South Antelope Prospect, SEA 7-50%) is forecast to be at least one well / month for the foreseeable future.

- Any concern with permitting for the Phoenix Prospect (Indian Reservation, SEA 50-100%) has been alleviated through the permitting of the first well, scheduled to commence drilling in August.



Below is a table summarizing the current and near term planned activity on SEA’s Bakken acreage.



Indiana, New Albany Shale Project


SEA holds ~50,000 net acres in three prospect areas in the Illinois Basin with interests ranging between 45-50%.
Progress has been slow due to lack of services, weather (flooding) and a longer de-watering period from the production wells to date.
Three wells are currently producing 15-30 mcf/day each. Following the installation of submersible pumps, 2-3 months of data will be needed to assess sustainable flow rates.
SEA has indicated it needs > 100 mcf/day from its New Albany wells to be commercial.
Longer lease periods in Indiana (10 years, v’s 3-5 years in most others) has meant less urgency on these projects.
Forward activity involves 2 vertical and 1-2 horizontal wells at its Chrisney and Whisky Run Prospects in the current Q.
Expenditure is expected to be US$1-2m in Indiana for FY’09.
We have reduced our valuation on Indiana to a nominal $5m (from $10m) to representing the slow pace of the projects.


Investment Case:

The North Dakota Bakken oil shale project is the hottest play in the US currently. SEA is the only Australian listed player with a meaningful position. As wells are drilled, completed and produced (up to 15 planned by year end), we anticipate SEA’s share price will begin reflect the substantial growth in value that is unfolding from the Bakken.

Importantly, SEA’s acreage has now been completely circled by positive Bakken oil well results, some >1,000 bopd within 10km. Companies involved

surrounding SEA’s position include Marathon, ConocoPhillips, Hess, Whiting Petroleum and Continental Resources.

SEA will drill its first 100% Bakken well at the Phoenix Prospect in August. This will be the first well drilled on the Indian Reservation for a number of years and has set a precedent for further permitting. We view the commencement of an operated program as a potential share price catalyst given its potential increase to cash flows substantially and be recognized in the region as an operator.

We have upgraded our NPV by 39% to $1.04/sh following our site visit, primarily based on further confidence in our assumptions and an increase to our oil price assumptions. Our forecasts assume ongoing development of SEA’s Bakken acreage over the next 10 years. Key assumptions used are: 8 horizontal wells completed per H, average flows of 200 bopd/well for first H, then 15% decline per H, capex per well US$5.75m, reserves per well 0.35 mmbbls, US$100/bbl long term from CY’10, a 45% average interest and a 20% project risking.

Based on the assumptions above, >1,000 bopd net production to SEA is achievable by year end from SEA’s Bakken acreage netting >US$40m annualised cash flow. This would take SEA into the midcap league of Australian listed oil producers. An EV of $100m would be feasible at that point, 3x the current EV.

SEA is extremely leveraged to oil price and production rates from its Bakken acreage. We have set out a sensitivity table below to summarize:


At the spot price flat (US$141/bbl) and 300 bopd average per well for the first 6 months before decline (both of which are possible) our valuation is $3.28/sh, but at US$50/bbl and 100 bopd our valuation is -$0.53/sh.

SEA is fully funded for all planned activity. Our forecasts assume 14 wells will be drilled in North Dakota for FY’09 a total of US$30m, accounting for the majority of expenditure (US$35m across all assets). Debt for further development will be an option next year once reserves and cash flows are proven.

Our price target is $0.84/sh, which factors in a further 20% risking to the Bakken assets to account for the delivery risk. The real test for SEA will be the drilling, completion and performance of its first 100% operated well – Chase 21-30H.



Euroz Securities declares that it has acted as underwriter to and/or arranged an equity issue in and/or provided corporate advice to Sundance Energy during the last year. Euroz Securities has received a fee for these services.


This analyst also declares that he has a beneficial interest in Sundance Energy.