sunday petsec ramp ¡¦ $5.00 or 50 cents?

Well we are fast approaching the moment of truth for Petsec which should begin the next phase of its 2003 drilling program this week with the first well at Vermilion 258 in the Gulf of Mexico. According to my information the Transco rig should have completed its prior drilling commitment and become available to Petsec this weekend with drilling starting as early as mid week. That info is about a week old so as usual there could have been some slippage.

There are three things that will determine Petsec¡¯s share price going forward, gas prices (Henry Hub spot), drilling success at Vermilion (gas), and drilling success in the Beibu Gulf (oil). If gas prices continue their upward climb, if PSA gets at least 30 bcf at Vermilion west and if the Beibu Wei 12-7 exploration wells come up trumps we are going to see a massive rerating of this stock which could take it north of $5.00 in 2004.

If none of these things come to pass then PSA is heading back to 50 cents or worse but will retain that wonderful cash flow from West Cameron and Ship Shoal for at least another 18 months to two years.

And those two established projects alone look like giving PSA an all time record high profit in 2003 of $21 -$22 million. So even in the most unlikely circumstance of disappointments at Vermilion and China, Petsec will live to drill another day. .

But I don¡¯t think we are going to see three disappointments out of three. Lets look at each in turn.

Gas prices in the United States are up 25 % this past week despite a whole heap of positives, eg full storage levels, that were supposed to keep a cap on gas prices this winter. On Friday night alone they jumped 54 cents and winter has only just begun.

The fact is, the demand and supply situation in the United States is very bullish for natural gas prices and the onset of winter and the heavy snowstorms that have hit the most heavily populated parts of the east this weekend have just demonstrated that.

Those short natural gas are scrambling to cover their positions adding to the price pressure. There are a host of other reasons why gas is said to be heading into double figures and these can researched at the yahoo CWEI page that sushi 1 put us on to. A really great site.

For Pestsec and for Novus, the only two Australian companies significantly exposed to the US gas price, a rise in the price from $4.00 an mcf ten days ago to $6.24 an mcf at the close of last week is akin to a rise in gold from $400 to $624 for a gold producer. At the most recent price PSA is pulling in around $140,000 free cash flow a day up $60,000 a day from just a few weeks ago. (I depend for these figures on PSA to be continuing to produce at around 17 mmcf a day which are the last publicly announced flow rates.)

These cash flows are humungous and yet the market really hasn¡¯t woken up to Petsec¡¯s financial bonanza. Last Friday¡¯s average trade was about 6,000 shares or say $5,700 a trade so it is mostly small retail investors and traders that are pushing the stock up. Once we see some serious money come into the demand side we will flash past a dollar in an instant.

The second price determinant is Vermilion . Petsec hopes V 258 will be the answer to the reserves issue that some here cite as a constraint on market interest. (the stock has only been a four bagger this year!!!). Vermilion will drill four shallow sands before re entering the main target the ¡°G¡± sands first discovered by Forest Oil in 1988. The ¡°G ¡° sand is the prolific producer in the leases to the north and south of V258. Petsec does not believe that they are in any way connected saying the distances between them are just too great. Lets hope they are right.

It seems certain that PSA has at least 8 bcf all ready in the bag with this well given that that is what Forest discovered 15 years ago. And with gas prices moving to a higher long term plateau, you would think even 8 bcf would justify a field development given that that represents about $US 30 million (at a $4.50 gas price) or more than enough to cover the cost of two wells and a production platform (all up $US 12 million). But PSA are obviously hoping for more, much more.


I contacted Forest Oil in the United States in the hope I may be able to get some info out of them about their 1988 drilling program but they told me they had handed all the files back to the MMS) and that there was no one around who worked on that project who could talk to me.That¡¯s OK. It just reminded me that when PSA won the lease they would have also got access to all the info on it that was available.

In fact Forest Oil¡¯s files are probably available for public perusal now. But the point of mentioning this is that Petsec have a very good data base on this lease including 3 D seismic and all the logs etc done on the Forest Oil well. You really can¡¯t ask for much more than that to guide you where to drill.

The third price determinant is China. China to me looks like a real winner. But don¡¯t believe me just have a look at what ROC¡¯s John Doran had to say in their last activity statement. Mention China to Doran and he can¡¯t keep a smile off his face. Even if the exploration well disappoints there is the appraisal well on the Wei 12-8 field (all ready discovered) which also includes an exploration element in that it will test a sand not previously tested at this field.

We haven¡¯t had a really good oil find since Chinghetti (Hovea is tiny by comparison) but I think that is about to change. And just think of the media attention that the first Australian drilling offshore China seems likely to attract. If you are not in one of the jv partners all ready (ROC 40%, HZN 30%, FAR 5% and PSA 25%) you risk missing out on a great project that all up could have 200 mmbls of oil in place.

Anyway I rest my case. I am not sure what PSA shares will do tomorrow.

Maybe PSA will surprise me and go live with an updated website and some broker information but then again maybe not. They will come in due course because the company has said they would and thus far, over nearly two years following this stock they have never told me anything that didn¡¯t come to pass¡¦¡¦eventually.

Petsec holders you don¡¯t have long to wait now!!!! It is going to be an interesting week.