the only way is up for hardman

The only way is up for Hardman - May 27 2004


How quickly things change. A little over three years ago Hardman Resources (HDR) was trading at just over 40c per share and back in those days the only real interest in the stock was from day traders and those addicted to ASX chat rooms.


Since then Woodside (WPL) has taken a significant stake and the company’s interest in the Mauritania oil and gas fields has seen its share price rise to over $1.60 with the country’s major brokerages also now taking more interest.


This is hardly a surprise as the relative minnow may soon become the number three oil producer in Australia, just ahead of Santos (STO) and with drilling due to start in July/August this year it appears things are about to really hot up for the West Australia-based company.


To date Hardman has a 100% success rate drilling Miocene channel sands in offshore Mauritania with its joint venture partners Woodside, Roc Oil (ROC) and Fusion discovering four new gas and oil fields in the area over the past three years.


This superior track record has resulted in this year’s significantly expanded exploration program, and Hardman has budgeted for participation in up to 11 appraisal and exploration wells in the area from the second half of 2004 onwards.


While questions were raised about a possible takeover, and exactly how the company was planning to raise the cash necessary to fund this extensive drilling program, the company answered these with a share placement and rights issue.


A cool $100m profit on the sale of a Mauritanian gas field to British Gas also helped out of course!


Even before Woodside took its 10% stake in July 2001, the message boards were abuzz with speculation that HDR was ripe for a takeover, and they have hardly stopped since.


However, the company’s executive director Scott Spencer insists the rumours are just that, rumours and they have never amounted to anything in the past.


According to Spencer, Woodside took its 10% stake at an opportune time, just after the Chinguetti discovery, in order to safeguard the prospects of its joint venture partner and to ensure it wasn’t vulnerable to takeover.


Now three years on, UBS estimates that the company has potential exposure to 1.1bn barrels of gross recoverable oil upside.


Two successful exploration wells have already been drilled targeting the Tiof prospect with initial reserve estimates at around 329 million barrels, although Spencer estimates the reserves could be as high as 400 million barrels.

Macquarie analysts have taken a closer look at Tiof and according to their estimates, if the reserves are 250-500mmbbl then the field would be valued at $0.50-$1.49, bearing in mind that the share price is currently hovering around the $1.60 mark, that’s a lot of potential upside.


OK so some of this potential is obviously already factored into the share price, Macquarie has included the Tiof field risked at 50% into its valuation range of $1.25-$1.74, with the other $1.00 coming from the company’s stake in Chinguetti, Jingemla and its exploration and cash position after the placement and rights issue.


Chinguetti alone is seen as a possible "company maker" with reserves estimated at around 125mmbbl, Macquarie says, reason enough for it to initiate coverage with an Outperform recommendation.


Shaw Stockbroking considers Hardman and Woodside the picks of the sector, and the broker has a target of $2.00 on the stock. Shaw expects the stock to be trading around $4.00 in 2-3 years time, if the company hasn’t been taken over by then.


Deutsche Bank also recently initiated coverage on Hardman, with a Buy recommendation, and a $1.80 price target. Its net asset value on the company is $1.10, based on the Chinguetti project and current technical reserves, however, if all wells meet the analysts’ expectations, they calculate they could be worth around $2.08 to the company’s share price. Adjusted for risk, this comes down to 69c.


The analysts see the stock as offering "the best, albeit riskiest leverage to the upcoming exploration program in Mauritania."


While the risks associated with drilling for oil are always high, the analysts point out that Woodside has already achieved a 57% success rate in this emerging hydrocarbon province of which Hardman has a 21-24% stake, depending on the well in question.


Despite all this potential upside, some are concerned over the company’s lack of any underlying production base as it has traditionally been a pure exploration play.


Spencer says that’s exactly why the company bought into small reserves in WA; to give it some production experience to help it better manage the coming growth phase.


CSFB and UBS have taken a more conservative outlook on the stock, rating it a Neutral.


Which ever way the upcoming drilling program goes, one thing’s for sure; the excitement that has surrounded this company over its extremely eventful past is certain to grow and grow over the coming months.

Cheers,
xmagx