OK, it's time for my semi-annual review of STU.At the moment,...

OK, it's time for my semi-annual review of STU.

At the moment, with a share price of about $1.30, they are a $82m company.

They have $2m cash, no debt and about 2.6 mmbo of reserves, plus a little bit of stranded gas at Kiwi and Worrior that I'll ignore as valueless.

Normally, I'd give their reserves my in-thre-ground number of A$30 a barrel, but Stuart's hedging strategy makes things less simple.

This is out of their annual report ... if I make mistakes, can someone please correct me.

They are locked in to selling 180 000 barrels of oil for USD27 until 30 June next year, and then 8000 barrels a month for USD26.

The accountants think this hdging strategy cost Stuart $15m, so the simplest way is to take my standard A$30 number and then subtract the $15m in hedging costs.

That crunches out to $78m-$15m, or $63m worth of oil in the ground.

Is this realistic ? Well, lets cross check by assuming they produce 750 000 barrels in 2005/6 (this is below their estimate, and they've been pretty darn good at hitting their numbers).

We thus get 530 000 barrels of unhedged oil, and 180 000 barrels of hedged oil.

Hedged oil nets us A$40, costs are call it A$30 a barrel, so the hedged oil should contribute $1.8m to the 2005/6 bottom line.

With USD60 oil, unhedged oil nets us A$80, costs are call it A$30 so the unhedged oil should contribute $26.5m to the bottom line.

Thats ummm call it A$28m net free cash flow in 12 months, so the $63m number doesnt look too bad.

Thus, for the company to be fairly valued, the exploration country would need to be worth about $15-$20m.

Right now, I'd value it at about half of that, given the value that farmin deals seem to give Cooper Basin acreage.

Thus, I dont think they are undervalued ... but there is a but.

The critical feature for the Australian oil sector at the moment is a lack of rigs. Everyone has targets, almost everyone has money, but people dont have rigs to put holes in the ground.

Stuart have taken a leaf out of ARC's book, and have taken long-term leases on not one but two rigs. This will allow them to drill, and drill, and drill.

OK, their targets arent great - they tend to be either small oil targets (ie 113 has 10 targets with a total of 18 mmbo original oil in place - this will crunch down to 250 000 barrel or so targets), or gas ... and gas relies on finding a lot of it, to be able to link straight to the EPIC pipeline system and avoiding Santos entirely.

Stuart have 800 or so bcf of gas targets, which should reduce down to 500 or so recoverable, if they can find it.

Gas has a better hit rate than oil in the Cooper, so with 2 drill rigs being funded by Worrior cash, they should be able to end 2006 with enough gas to make it worth connecting to the EPIC system by themselves.

Basically, I expect Stuart to drift as people go to the sexier oilers (ie COE). But once they get hold of the rigs, expect a new drill every 3 weeks for a year.

Ian Whitchurch