this is the latest tolhurst valuationFollowing a dramatic share...

this is the latest tolhurst valuation

Following a dramatic share price decline last week, MEO Australia?s (MEO)
shares suffered a meltdown today in response to the news that the
production test of Epenarra did not produce gas flow to the surface. Shares
lost 75% of value on high volume.
The markets now value MEO at just under $80m ? this in our opinion is a
very much an emotional response, played out against the backdrop of weak
overall market conditions, and markedly reduced appetite for risk.
This note is intended as a rational review of facts. While the sentiment has
clearly turned against the story and will likely continue pressuring the
shares in the near term, we believe that on a day like today taking stock of
where an investment story is and where it might go next is a valuable
exercise. In summary, after today an $80m buys the following:
? A 90% equity in an approved 3mtpa LNG project ? proposed to be located within
the Australian territorial waters.
? A 50% equity in an approved 3.5mtpa Methanol production project (in two
modules 1.75mtpa each) ? to be located next to the LNG plant.
? JV with two world-scale experienced partners: UK-based Petrofac Resources
(JV on NT/P68, the LNG and the Methanol projects) and and US-based Air
Products and Chemicals (JV on the Methanol project).
? NT/P86 ? a highly prospective exploration and appraisal permit (despite the
share price action suggesting otherwise), where MEO holds 90% equity. NT/P68
remains a likely source of gas for both the LNG and Methanol projects. The
drilling results to date have identified two gas charged reservoir levels: the
Darwin Formation (Epenarra) and the Plover Formation (Heron).
? Circa $65m cash on hand (sufficient to fund well number two, administrative,
and contingencies)
? Drilling rig slot and funding in place for the second well.
? Recently acquired interest in several Northwest Shelf exploration permits,
located in Australia?s best known hydrocarbon province, with some target
structures already identified.
In other words, the company sits on an existing gas discovery in two horizons
(located in a safe jurisdiction), with a strategy in place to commercialize any
confirmed gas ?including low quality (high CO2 content) gas that is abundant
in the region - via approved LNG and Methanol projects. The Northwest Shelf
permits add diversity to the portfolio.
We believe this is a bargain too hard to resist. We also suggest there is a
distinct air of a takeover target added to the investment case.
Given the absolutely depressed level of MEO?s shares, we maintain our Buy /
High Risk recommendation, while reducing our risked valuation to $1.46
from $1.84 a share. We stress that there has been no change in the risk
levels we assign to the LNG and Methanol projects as we believe the
prospectivity of NT/P68 as the source of gas for the projects has not been
Analyst ? Irina McCreadie
For further information contact your financial advisor
This information must be read in conjunction with the Analyst Certification and other important
disclosures at the end of this document.
Tolhurst Ltd ABN 52 003 237 536 A Participant of ASX Group. Australian Financial Service License No 238444 2
22 JANUARY 2008
MEO AUSTRALIA LTD (MEO)
Last Price Price Target Sector Risk Rating Short term <12m Long Term > 12m
$0.21 $1.46 Oil & Gas HIGH BUY BUY
compromised. The company did however spend over $50m (net) on Heron-2.
Typically appraisal spending is offset by certain reduction of risks (thus
lifting risked valuation). While Heron-2 produced many interesting
indications (gas present in Epenarra, gas in Plover may be of better than
expected quality, Elang flowing gas to surface), neither the confirmation of
gas quality nor the confirmation of productivity were achieved. We therefore
have no basis for moving probabilities (risks) one way of another.
We suggest that in the near term negative market sentiment will determine
the direction of the share price movement ? however we believe as MEO
moves to drill the second well in the current