spec buy - quote only

QUOTE
from Westpac Broking site
"Mosaic Oil NL (MOS)

Churchie Appeal Enhanced

Recommendation 06/12/2005: Speculative Buy

Investment Rating
MOS might develop into a significant oil and gas producer if it can unlock the potential of its SE Queensland acreage. The company believes that large Permian age gas reserves have been masked because mud drilling techniques have blocked sands. The company is drilling using nitrogen to protect reservoir quality. MOS' gas has high condensate and LPG yields and its exploration prospects and fields are close to infrastructure and markets. The company does not yet have the quality of earnings on which to base a valuation. MOS' future lies largely with drilling activity and the ability to market gas to customers. Recent production increases suggest things are heading in the right direction. MOS is a speculative situation and not for conservative investors.


Event

There is mounting evidence for the prospectivity of MOS' SE Queensland properties. Much has been made of the potential of the Permian Tinowon sandstones in the recent past, but less so of the Triassic Basal Rewan sandstone, a younger geological unit approximately 150m shallower. Of note, ORG last week reported that its Myall Creek 5 well flowed gas at 21mmscfd (~3,500boepd). This large flow of gas is 600m across the border from MOS' 49% Churchie Field and was drilled underbalanced (U/B) using nitrogen. This technique is used to protect reservoir formations easily damaged by drilling mud. Myall Creek 5 is only 90m south of Myall Creek 2, a well which could not be tested after being drilled conventionally.

Full Event Analysis

Impact

MOS has gas contracts with STO and CS Energy for a combined 6.5PJ/ annum for five years. A new five year contract with STO for up to 17.5PJ (8.575PJ net to Mosaic) of gas from the Churchie Field will begin at the end of December. Gas from the wholly owned Downlands, Waggamba and Silver Springs areas is being supplied into contracts including with CS Energy. MOS says contracts support base revenue of $16m and EBITDA of $5m going forward. This assumes an oil price of US$45/bbl compared to our long term forecast of US$60/bbl. We retain our FY06 and FY07 earnings forecasts of 0.2cps and 0.3cps which assumes annual revenue of $18m. We upgrade our recommendation to Speculative Buy after the recent share price pullback from $0.25ps levels.


Recommendation Impact
(Last Updated: 06/12/2005)
Upgraded.


Event Analysis

This is not MOS' first encounter with Rewan hydrocarbons. MOS is already producing Rewan gas from its Tinker field and Rewan oil has been recovered from its Rockhampton High-1 well. The presence of oil in both the Permian Tinowon and Triassic Rewan in the Rockhampton High-l is encouraging for commercial potential and upgrades the prospectivity of the Freneau play immediately to the south. The main significance of the Myall Creek 5 well is that it represents the first commercial flow of gas from the Basal Rewan Sandstone within the Churchie/Myall Creek Field.

The Permian sandstone package on MOS' Churchie acreage has a gross thickness of 60-120m compared to 20-40m for the Rewan. Rewan has higher net pay and better reservoir qualities meaning it is just as attractive. ORG's efforts have clearly highlighted the potential for MOS and Churchie partner STO to drill shallower targets.

MOS is also encouraging on other fronts. Revenue in 1Q06 hit record highs of $4.77m reflecting both higher prices and late receipts despite a 25% decline in production to 111.4kboe. MOS realised an average oil price of A$85.49/bbl compared to A$72.56/bbl in 4Q05. The oil is high grade and attracts a premium to the Tapis price. Lower production reflected delayed installation of a compressor at Churchie, maintenance shut downs and loss of production due to a buyer having a shut down. The Churchie compressor was installed late in September and in conjunction with other work in the 100% owned Silver Springs area, higher 2Q06 production is expected.

The immediate upside is to fully utilise existing facilities, LPG plant and pipelines through increased gas and oil production. The focus will be on exploitation of existing producing fields and increasing reserves to support new gas contracts. Farm-outs may be considered to accelerate production and cash flow. MOS had $8.2m in net cash at the end of September after $6.3m was received through options exercised. Self funded expansion should maintain MOS' debt free position as it further develops its Surat-Bowen Basin fields. The Waggambah 1H well can now proceed after a five month delay due to a blockage. Horizontal drilling of the Tinowon hydrocarbon zone is expected in January 2006.

Elsewhere MOS remains committed to its 6% Hurricane play on the North West Shelf. Operator STO seeks to secure a rig to drill Hurricane-2 and appraise the possibility of an oil leg down-dip from Hurricane-1. The latter intercepted a 76 m gross gas column. MOS reports that a notional 120m oil column would correspond to 80mmbl of oil in-place. On that basis, Hurricane has the potential to be worth 10-20cps to MOS. Several other prospects and leads are logical follow up activities irrespective of the success of Hurricane-2. MOS also retains its 28.6% interest in the Kimu gas field in southwest PNG with an estimated 386 BCF of recoverable gas resource net to MOS. The asset has option value if regional gas developments including the PNG Gas pipeline to Queensland and a potential petrochemical plant in Port Moresby approach commercialisation. The PNG pipeline will pass approximately 120km from Kimu." END QUOTE
A good read for those not following MOS.