sp valuation & analysis

Since many people have been predicting the SP to fall to 20c or nothing at all, I think a balanced assessment of the current SP is required. The stock price surged over 70c with the August 2009 announcements "Bounty PEP11 Sydney Basin Funding and Update" and "New Hydrocarbon Plays - Offshore Sydney Basin".

It then fell to 30c due to lack of news flow and concerns about regulatory/environmental approval. In August 2010, detailed announcements regarding drill planning sent the SP to 50c, which spiked to $1.10 upon drilling site selection, drilling approval and commencement of drilling. We have already seen a retracement from $1.10 to $0.69 due to panic and profit taking prior to drilling results. This was also helped along by certain HC posters insisting that the well was already a duster as it would be plugged and abandoned, and would not go into prodution despite being an exploration well only. This is already a massive 60% retracement, which I haven't seen on any other oil and gas stocks prior to results. You would expect that part of the SP fall has already been accounted for. On the upside, many of the ST traders would have already left this stock during this period and investors are unlikely to sell off their holdings, which should limit the damage to SP.

It is not fair to compare the PEP11 result with MEO's recent failure. The current drill result does not affect the chances of gas discovery in any of the other prospects. In fact, the situation is much the same as in August 2009 - with a few major differences.
- Elimination of Blue Whale Prospect as potential source, which should help guide the location of the next drill
- There are more than 10 other identified prospects with a higher chance of success than the one drilled (see my "perspective" post earlier
- The last progress report stated that another well was to be drilled - I expect an ennouncement either this morning or in the near future regarding planning of the next well
- Advent now holds 85% of the exploration permit instead of 15%. (More on this below)
- Extensive planning is already in place for at least 4 other drill site
- Regulatory approvals and environmental approvals have been granted
- Any future drill will only require a rig and funding (note that this funding is only required to cover drilling as planning and approvals have already been achieved)

Clearly it can be seen that significant progress has been made in this project, which should be reflected within the SP. Failure of the first well (which I now believe was simply a trial & required to cover Advent's obligation to BUY - more on this later) does not undo any of the progress that has been made. Therefore it makes no sense for the SP to drop as significantly as people are predicting. In particular, there's a fair bit of scaremongering from non-holders speaking of the 10c-20c range. They must be dreaming because the stock was already in this range before ANY material progress was made in PEP11. It is clear to me that the intrinsic value is definately above 50c (highly conservative estimate, probably much more), and it would recover to this level regardless of the level of overreaction on open.

The following is an excerpt from the August 2009 report (which sent the SP to 70c)

Currently Bounty holds 75% of PEP 11 and is the nominated operator. Day to day operations are
however conducted by Advent Energy Pty Limited (?Advent?) a subsidiary of listed MEC Resources
Limited (?MEC?) (ASX Code: MMR) Advent has an option to increase its interest in PEP 11 from its
current 25% to 85% by funding and drilling the first exploration well in PEP 11 as part of the exploration
work commitment required by the terms of PEP 11. Advent carries out day to day operations as Bounty?s
designated agent. Bounty will be free carried through the first well but will then be required to contribute
15% towards all further exploration and development.

MEC has over recent months made a number of announcements showing material progress towards
providing the required strong technical underpinning for a wildcat drill test of the undoubted petroleum
potential in PEP 11.The permit covers 8,100 square km of the offshore Sydney Basin.

With the required technical groundwork for a drill test substantially completed, MEC has now announced
a critical step towards funding the well. MEC has entered a mandate with one of the world?s leading
petroleum finance groups; Pareto Group of Norway. Norway has massive offshore gas developments and
is the European leader in gas exports.

Bounty summarises the steps so far:

? Seismic surveys by Bounty in 2004 and highly advanced seismic analysis and other surveys
conducted by MEC have proved that gas is being generated and expelled from the Permian age
coal and related sequences in the offshore Sydney Basin within PEP 11.

? MEC has:
ƒ identified the Fish Prospect, a massive structure containing the gas generating
sequences with estimated prospective recoverable gas resources of 9.2 trillion cubic feet
(at P10 probability level) (920 million barrels of oil equivalent) and additional gas
potential in the Permian ?Triassic age sequences totalling 16.3 trillion cubic feet for the
permit (including Fish).
ƒ selected a drill location to test the Fish Prospect with a jackup drill rig.
ƒ announced on 29 May 2009 that it had issued tenders for a rig to drill the Fish Prospect.
ƒ announced on 11 August 2009 that in addition to the completion of the well design and
testing program for the Fish Prospect it had identified seismic anomalies on adjoining seismic lines indicating the possibility of larger gas accumulations in younger Quaternary
aged sediments further east of the Fish Prospect with analogies to the giant Marlim gas
field offshore Brazil.
ƒ announced the Pareto Group funding mandate on 14 August 2009.

Commenting on PEP 11, Bounty?s CEO, Mr Philip Kelso said:
?Bounty sees the funding arrangement announced by MEC as an extremely positive step towards drilling
the Fish Prospect in PEP 11.Once the technical basis for testing in the offshore Sydney Basin had been
established by MEC they commenced the challenging task of funding. The technical strength of the
project presented by MEC has now attracted Pareto Group who have raised US $25 billion for a range of
international oil and gas majors in the last 3 years.

This step by MEC provides confidence that funding and drilling of PEP 11 will now proceed. If the Fish
well is successful in discovering commercial gas offshore from New South Wales there is the potential for
a major re-ordering of the New South Wales gas market and for establishment of an LNG export project
based in the Port of Newcastle simply because the gas volumes would be much larger than could be
utilised in the State which currently consumes 890 bcf per annum. Such a development of clean burning
gas would also have the potential to supply energy for power generation in the Hunter region.

Bounty looks forward to progress towards completion of MEC?s funding for the well?

The report initially indicates that the Fish prospect (which is nowhere near the Blue Whale prospect that was drilled) was the initial drilling target. This is already reflected in the independent expert report which gives it the highest chance of success and estimated reserve of over 11Tcfg. The Fish prospect is still the jewel in PEP11's crown and will be a major factor (but not essential) of PEP11's success.

However Advent could have been trying to maximise value for themselves by spending as little money as possible to free carry BUY for the first well. By removing their obligation to BUY and taking majority ownership of PEP11, Advent is now free to make major decisons besides perform "day to day operations" as BUY's designated agent. This is an advantageous position for MMR/GBA/BPH but BUY will suffer most. The stock price will always be based on speculation and there is now much greater potential for Advent than before. My comments are just my own interpretation of SP value based on announcements and events; as always, DYOR.