unformatted huntley report

This is the huntley report. Unfortunately I don't have time to re-format it so its a bit hard to read.

Investment Rating
HDR's strategy is to secure large prospective acreages in greenfields areas and add value prior to farm-out. The exploration portfolio includes offshore Guyane and Eritrea, onshore Uganda, the Timor Sea and the Falkland Islands. Focus is on the Atlantic Margin Areas in deepwater operations. It is hoped the assets can generate value-add similar to the company's Mauritanian interests. In JV with Woodside Petroleum, HDR's 19% Chinguetti Field will see first oil in 1Q06. If all goes to plan, Chinguetti will be followed by the Tiof development which could boost annual equity production to in excess of 10mmbo by late CY08. This would see HDR generating after tax earnings approaching A$500m, assuming a US$60/bbl oil price. HDR is a suitable oil exposure for aggressive, growth oriented investors with a stomach for exploration and tangible sovereign risk.


Result Description
• Symptomatic of cost pressures across the sector, Chinguetti's expected capital costs have risen again from US$625m to US$705m with US$45m contingency, a far cry from the original US$400m estimate. Operator WPL says the rise is mainly due to the increased cost of drilling production wells plus additional sub-sea flow line fabrication and installation costs. This aside, Chinguetti is now substantially operationally de-risked with first production likely in 1Q06.
• Tiof reservoir and development studies are ongoing and a development decision is likely in 4Q05. We have modeled first Tiof production from 2H08.
• Approximately half the total Mauritanian acreage or 22,000sqkm of 3D seismic has been shot. HDR has a continuous drilling program through to the end of 2005 and well into 2006 encompassing wells both inside and outside the core WPL operated PSC areas.
• By 1Q06 HDR's price should reflect the likely successful transition from explorer to producer as the risk profile, excluding sovereign, is reduced. In the longer term, Tiof's commissioning could see HDR on a prospective PE of three beyond FY09 assuming oil prices hold. The high impact international exploration campaign with 12 wells to be drilled by June 2006 also appeals.

Impact
• We have lifted our HDR valuation 72% to $2.74ps as a result of increasing our long term oil price forecast from US$35/bbl to US$60/bbl and A$/US$ from 0.72 to 0.76. We use a discount rate of 15% to account for Mauritania's sovereign risk.
• We upgrade our FY06 earnings forecast from 5.7cps to 11.0cps following our long term oil price upgrade to US$60/bbl. HDR is unhedged. Our FY07 forecast is 31.0cps. We upgrade our recommendation to Buy due to our oil price induced valuation lift.

Recommendation Impact (Last Updated: 06/10/2005)
Upgraded.
Last Price Market Cap
$2.16 $1,423 (million)
52 Week High/Low
$2.56 - $1.38
Sector
Energy


Intrinsic Valuation
$2.75


Risk High
Company Beta 0.88
Sector Beta 0.98


Year 2004 2005 2006 2007
NPAT ($m) -47.7 -10 72.6 205.4
EPS (c) -9.3 -1.5 11 31
% Change -- -- -- 181.8
DPS (c) -- -- 0 0
Franking (%) -- -- 0 0
Dividend Yield (%) -- -- 0 0
PER -- -- 19.6 7

Source: Aspect Huntley analyst estimates

2 Year Price Chart






________________________________________Event Analysis

Offshore Mauritania - WPL Operated Exploration Blocks1

PSC5 A PSC B CEP2 PSC C2 PSC C6

Bl. 3, 4, 5 Bl. 4, 5 Bl. 4 Bl. 2 Bl. 6
Australian Equity Interests (%)
Woodside (Operator)3 53.846 53.846 47.384 48.000 37.578
Hardman Resources 24.300 21.600 19.008 28.800 22.422
ROC Oil Company 4.155 3.693 3.250 3.200 5.000
Other Equity (%)
Mauritanian Govt.4 - - 12.000 - -
BG Group 13.084 11.630 10.234 - -
Premier - 9.231 8.123 - -
Fusion Mauritania A Ltd 4.615 - - - -
Energy Africa - - - 20.000 -
Petronas Carigali Overseas SB - - - - 35.000

Discoveries to Date
Chinguetti - Mean Recov. 123mmbo
Tevet - Potential Mean Recov. 50mmbo
Tiof/West - Potential Recov. 289mmbo
Banda - Indicative 1-4TCF (170-670mmboe)



Chinguetti Costs Keep Rising

Symptomatic of cost pressures across the sector, Chinguetti's expected capital costs have risen again from US$625m to US$705m with US$45m contingency, a far cry from the original US$400m estimate. Operator WPL says the rise is mainly due to the increased cost of drilling production wells plus additional sub-sea flow line fabrication and installation costs. It wasn't long ago we saw costs increase by $25m due to the drilling of five sidetrack wells not originally planned. On the positive side, Chinguetti is now over 88% complete with drilling finished and all production wells flow tested. Installed capacity will deliver nameplate offload facility output of 75,000bopd. Drilling results generally matched or exceeded expectations and 2P reserves remain in line with the independently verified figure of 123mmbo. This is in addition to the potential for 50mmbo at the nearby Tevet discovery within tie-back distance. Remaining risks are the final FPSO commissioning and fabrication and installation of flowlines. This aside, Chinguetti is now substantially operationally de-risked with first production likely in 1Q06.

Tiof a Different Fish but Progressing

Tiof field appraisal has confirmed HDR estimates of over a billion barrels of oil in place but recovery factors remain uncertain. WPL reported a potential recoverable reserve of 289mmbo but the figure was calculated before the flow test result from Tiof-6. The well exceeded expectations encountering a 124m gross hydrocarbon interval (10-40% net pay) with an impressive maximum flow of 12,400bopd and 11mmscfd of gas. Tiof is located only 30km to the north of Chinguetti, is five times the aerial extent, but differs in geological complexity. Reservoir and development studies are ongoing and a development decision is likely in 4Q05. We have modeled first Tiof production from 2H08.

Exploration Fizzles so Far

It is hard not to view the additional Mauritanian exploration program as a bit disappointing to date. Following the initial flurry of success involving Chinguetti and Tiof, there has been only one discovery, Tevet, from six holes drilled. Most recently the Sotto and Espadon holes were dry. Sotto was south of Chinguetti and Espadon was close to Tiof. Yet it is important to bear in mind that only 16 exploration wells in total have been drilled in a basin the size equivalent of the Northern and Central North Sea. Over 140 prospects have been identified across all eight blocks in Mauritania with more than 40 of these potentially each containing in excess of 100mmbls. Approximately half the total acreage or 22,000sqkm of 3D seismic has been shot. HDR has a continuous drilling program through to the end of 2005 and well into 2006 encompassing wells both inside and outside the core WPL operated PSC areas.
It was intended that around six to eight new exploration wells with targets in the 100-200mmbo range would be drilled in the WPL operated areas this year. Drilling of Tevet-2 in PSC Area B is underway to both appraise the Tevet discovery and target a deeper exploration prospect beneath the existing reservoir. To date, Tevet-2 has intersected a 1.5m gas interval above a gross oil interval of 37m, similar to Tevet-1 2.5km to the north but is yet to intersect the deeper target. All major discoveries to date have been in the shallower Miocene rocks. A discovery in the deeper and older Cretaceous could significantly enhance prospectivity overall. Colin-1 in PSC Area A is intended to test another Cretaceous prospect. The JV participants have also approved the Labeidna well in PSC Area B. Like Tevet, Labeidna is within tie-back distance to Chinguetti. Discoveries within tie-back distance allow potential cost savings and shorter development times.
The first well to be drilled in the Dana operated Block 1, Faucon-1 is intended to be drilled south of the WPL areas around November. The target is in excess of 300mmbls. This is likely to be followed by an as yet undecided prospect in Block 6.

It's a Gas But for Fiscal Uncertainty

An impressive gross gas column of 100m was confirmed by the WPL operated Banda-2 in May 2005. Only 20km east of Chinguetti, the Banda trap is four times Chinguetti's aerial extent in excellent quality reservoir channel sands. A 40% net to gross pay ratio has been determined and 2.4TCF of gas is estimated as recoverable. Similarly encouraging is Pelican in the Dana operated Block 7, 150km north of Chinguetti. A gas reservoir over a 370m interval has been intersected. The partners are evaluating new 3D east of Pelican to delineate future drilling prospects.
The likely threshold for an LNG development is around 4TCF (670mmboe). Despite significant gas resources at Pelican and Banda, the PSCs don't currently include gas commercial terms because at the time of drafting the focus was on oil. Negotiations with the Mauritanian Government are ongoing. Until terms have been established there is unlikely to be much gas exploration. British Gas (BG) certainly saw the potential when it purchased its US$132m stake in PSC's A and B in 2004. We conservatively value HDR's 16-24% owned gas interests and other Mauritania exploration at $150m.

Beyond Mauritania

Elsewhere discussions with potential farm-in partners to fund HDR's offshore French Guyane exploration program continue. HDR has a 97.5% interest in 65,000sqkm of deepwater basin with similar geological potential to Mauritania. Over 10,000km of 2D seismic has been shot with infill seismic scheduled for October. Drilling of the first exploration well is slated for mid next year. The company has also completed a 4,847km 2D seismic survey over two JV areas, offshore Falklands. HDR has a 22.5% interest in the licences covering over 30,000sqkm. A larger than expected prospect inventory has been identified and the first well is planned for early 2007. In onshore Uganda where HDR has 50% and is operator, 2D seismic has generated a number of prospects that may begin to be drilled before the end of the year.

Valuation

Asset ($m) ($ps)
Chinguetti 552 0.83
Tiof 925 1.40
Other Mauritania 150 0.23
Other Exploration 35 0.05
Net Cash and Options 152 0.23
TOTAL 1,814 2.74

We have lifted our HDR valuation 72% to $2.74ps as a result of increasing our long term oil price forecast from US$35/bbl to US$60/bbl and A$/US$ from 0.72 to 0.76. The sensitivity table below shows just how the share price can react to upward and downward revisions in the oil price. We use a discount rate of 15% to account for Mauritania's sovereign risk. A coup in the capital, Nouakchott on August 3 highlighted the risks. The new government has stated its intention to guarantee the integrity of existing contracts. However, investors need to accept that the ongoing risks are real and the vast majority of HDR's valuation is weighted to Mauritania.

Conclusion

HDR's adjusted FY05 loss of $28.7m was $19.5m worse than FY04 and poorer than we expected. It included a foreign exchange loss of $16.1m and increased write-offs reflecting unsuccessful wells Dorade-1, Capitaine-1 and Merou-1 in Mauritania and Marloo-1 in the Timor Sea. Higher business running costs also impacted due to new offices, recruitment and termination and retirement benefits. The headline result of negative $10m was in stark contrast to the pcp's profit of $91.1m and included a deferred tax benefit of A$28.1m. The FY04 result was boosted by asset sales. Over the course of the year cash levels fell from $327m to $148m reflecting heavy investment in the Chinguetti development, Tiof appraisal and testing and exploration. HDR intends to change its financial year end to December to bring it into line with peers.
We upgrade our FY06 earnings forecast from 5.7cps to 11.0cps following our long term oil price upgrade to US$60/bbl. HDR is unhedged. Our FY07 forecast is 31.0cps. We upgrade our recommendation to Buy due to our oil price induced valuation lift. By 1Q06 HDR's price should reflect the likely successful transition from explorer to producer as the risk profile, excluding sovereign, is reduced. In the longer term, Tiof's commissioning could see HDR on a prospective PE of three beyond FY09 assuming oil prices hold. The high impact international exploration campaign with 12 wells to be drilled by June 2006 also appeals.

HDR Valuation Sensitivity Per Share

US$/bbl A$/US$
0.60 0.68 0.76 0.84 0.90
30 1.36 1.20 1.07 0.97 0.91
45 2.42 2.13 1.91 1.73 1.61
60 3.48 3.07 2.74 2.48 2.31
75 4.53 4.00 3.58 3.23 3.02
90 5.59 4.93 4.41 3.99 3.72