ubs research view

I have left out the profit result discussion as there is nothing new there. But the comments on Simon Potter, WPL and the resumption of exploration are worth a read.

Once again, my apologies for the lousy editting. My children do a much better job!

New MD – First impression
UBS hosted an institutional briefing with Simon Potter in Melbourne on 10
February around two weeks after he joined the company. In that meeting we got
the impression that Simon believes Hardman has been acting as a $100m market
cap company, when it is now is in excess of A$1.3bn market cap. Simon’s first
tangible move at Hardman has therefore been to make the CFO a full time roll.
Previously the role was part time CFO and Company Secretary. Hardman is
now undertaking a international search for a new full time CFO.
In our view, Mauritania is a company maker for Hardman, and Simon clearly
realises this. However, he also acknowledges that things have to be done right.
Projects must be developed properly to maximise long term value, and if that
means Hardman may now sacrifice short term financial gain for long term value,
so be it. Hardman has good technical skills and Simon is keen to see the
company reinforce its in house capabilities. The Hardman employees involved
in Woodside’s Mauritania joint venture have been there since day one.
Cleaning up the asset base
While we believe Simon plans for Hardman to continue to be driven by
exploration growth, we also expect him to refocus the company. In particular,
we have been critical of the high number of frontier exploration areas that
Hardman has exposure to. While we can understand why the company is keen
to replicate the success of Mauritania, it must also be realised that this may
ultimately prove very difficult to achieve, and that perhaps the company is best
focusing on 2-3 core areas that offer the best geologic / commercial potential.
The areas that do not meet this objective should, in our opinion, be harvested
even if these areas have little ongoing costs to Hardman.
Outside of Mauritania, Simon appears to favour the acreage held offshore
French Guyane. Hardman claims Matamata has estimated potential of 2.5bn
bbls recoverable. Hardman believes it can potentially finesse this large prospect
to make it increasingly attractive to a quality larger cap company. Hardman is
considering applying new technology (an electro-resistivity survey) used by the
majors to help determine the hydrocarbon potential of Matamata prior to
farming it out. On this basis, Hardman could possibly farm down to around a
40% interest and most importantly also introduce a new value adding partner.
Previously the company may have sold down to 20%, without as much
consideration on getting the right partner. This could also possibly be done
more quickly than in the past via an innovative structure (asset swap?).
In our view, Hardman appears to be poised to get out of Gabon (Ascent
Resources sale agreement) and possibly Uganda. These are areas that are either
relatively immaterial, or present considerable commercial difficulties getting oil
/ gas to market. We further suspect Hardman wouldn’t be in the Timor Sea
either, but Marloo had been proposed before Simon joined. We further believe
if Marloo doesn’t come in, they will probably wind down activity in the Timor
Sea since the acreage has a short fuse. In fact, Hardman has applied for consent
to surrender AC/P25. The Timor Sea acreage was acquired from West Oil for
A$150,000 and its exploration licence is close to expiry. Eritrea also appears to
have been a wasted effort, as the Eritrean government recently failed to endorse
the PSC Hardman had negotiated.
Bell Potter Securities Research Email [email protected]
Website www.bellpotter.com.AFS Licence No. 243480 ABN 25 006 390 772 au
Hardman Resources Limited 15 March 2005
58
Woodside relationship
Woodside owns 10% of Hardman. The investment is held on an arms length
basis and Woodside has agreed to a consultative process with Hardman in terms
of any change to Woodside’s position in the company. Is Woodside a long term
10% holder in Hardman? We doubt it. In our view, the rationale for Woodside
investing in Hardman is not as strong today as it was in the past, where
Woodside acquired the interest for "strategic" reasons. We believe this was
done to block other parties from taking over Hardman and gaining effective
control of the Mauritania joint venture. Now that ENI has exited, and BG
International has moved in, it has changed the whole dynamics of the joint
venture. Alternatively, we also believe that Woodside remains very bullish on
the potential of West Africa and having 100% ownership of Hardman would
provide Woodside with increased leverage to future oil project developments
(Chinguetti / Tevet and Tiof) plus the longer term gas potential (Banda).
Forward Exploration Upside
We continue to look forward to the resumption of Mauritania drilling activity
around mid 2005 which we risk weight at an estimated 54 cps. This program is
proposed to include 6 – 8 wells after the Stena Tay undergoes a one month break
for modifications. The first exploration well is expected to be in the southern
most Block 1 (HDR 18%), and is likely Petrel with 100 – 250 mmbbls potential.
According to Block 1 operator Dana Petroleum this prospect has amplitude
velocity offset (AVO) anomalies. Sotto (HDR 24.3%) in Woodside operated
PSC Black A is also expected to test a new Miocene channel system that has a
strong seismic amplitude response in the primary target with 150 – 250 mmbbls
potential. Other Mauritania exploration wells remain to be confirmed, but may
also contain Woodside’s Fantar prospect (PSC Block A) subject to the 3D data
confirming a hydrocarbon flat spot (gas-oil contact?). It is even possible the 250
– 350 mmbl potential Merou prospect in PSC Block B (HDR 21.6%) may be redrilled
after that it found non commercial hydrocarbon shows in 2004, but may
have possibly been drilled on the wrong side of a fault that bisects the structure.