Australia has substantial natural gas resources with proved and probable reserves estimated at over 150 trillion cubic feet (Tcf).
Australia's economic demonstrated resources of crude oil are 1086 million barrels and 1618 million barrels of condensate. (Department of Resources Energy and Tourism's Release of Offshore Petroleum Exploration Areas Australia 2008).
Source: Senate Standing Committee on Economics, Answers to Questions on Notice, Resources, Energy and Tourism Portfolio, Additional Budget Estimates 2009, 26 February 2009. Topic: Oil and Gas.
In 2008-09, Australia’s crude oil production is forecast to total 27.9 gigalitres (175.505 million barrels per year). In 2009-10, Australia’s oil production is forecast to decline by around 6 per cent to around 26.4 gigalitres (166.069 million barrels per year). In 2009-10, Australia’s oil exports are forecast to total 17.2 gigalitres (108.197 million barrels per year) and imports are forecast to total 25.6 gigalitres (161.037 million barrels per year).
Source: ABARE: Australian Commodities, March Quarter, Volume 16 Number 1, Oil http://www.abareconomics.com/interactive/09ac_mar/htm/oil.htm
Australia has abundant iron ore, uranium, coal and gas resources, but limited reserves of crude oil.
For the past few weeks I have been trawling through recently released Quarterly and Annual Reports , Company Presentations, Investment Newsletters and Company Research Reports to compare the current value of NorWest Energy (NWE) with its’ peers, with some surprising results.
Initially, I investigated 25 small to mid-cap oil and oil/gas explorers and explorer/producers mainly based in Western Australia, as well as Santos and Woodside Petroleum for comparison. I dropped a few of the smaller explorers or explorer/producers from the list as they have not published 2P (or P50) recoverable barrels of oil equivalent (boe), so that I could compare the companies on a similar basis. Some companies have only published inflated 3P or P10 reserve estimates, or are only at the stage where they only have leads or target estimates. I have included 20 juniors, explorers, explorer/producers, producer/explorers and one upcoming company float.
Where companies have both oil and gas reserves, the gas reserves have been converted to boe figures, so that a direct comparison could be made on value per boe of 2P/P50 recoverable oil.
1 boe (barrel of oil equivalent) = 159 litres 1 mmcf (million cubic feet) of gas = 182 boe (barrel of oil equivalent) 1 bcf (billion cubic feet) of gas = 182,330 boe 1 Tcf (Trillion cubic feet) of gas = 182,331,000 boe 1 ML (Megalitre) of oil/year = 17.2 boe/day or 6,290 boe/year 1 GL (Gigalitre) of oil/year = 17,234 boe/day or 6,290,495 boe/year
Estimating share value based on current market value per barrel of oil equivalent (boe).
Only published 2P/P50 recoverable boe estimates were used in the calculations.
I used the following formula to determine comparative boe valuations.
$/boe = ((Number of shares x current share value) – Cash on Hand) / 2P boe recoverable reserves i.e. $/boe = (MCAP – Cash on Hand) / 2P boe recoverable reserves
The above formula assumes that the net MCAP is the value that the market places on the companies oil reserves and other assets that are required to support oil production. It is a quick calculation that I have used to compare the companies as detailed financial records are not always available.
I have included valuations from investment newsletters or other recent company research papers when I have found them. Hartley’s WA Oil & Gas: Explorer/Producer company research valuations were the main source of independent valuations. These reports were produced over the last six months and compare favorably with my quick estimation method. Share values have varied since these reports were produced.
As a general guide, from the research papers that I have read, 2P recoverable boe estimates for explorer and explorer/producer small to mid-cap companies are in the range up to $10/boe, producers and producer/explorers range form $10 to $20/boe. The company comparisons that I have provided generally fit within those price boundaries.
How does NWE compare?
NWE is significantly undervalued compared with its’ peers – estimated $0.12/boe for 117 mmboe (million barrels of oil eqivelent) 2P recoverable reserves. I have only included 2P recoverable estimates for their TP15 tenement. I have not included AC/P22 or EP143 (Jingemia) where they receive a 1.278% royalty; EP368 & EP426 (North Irregulla) where they have a potential 20% share of an estimated 28 mmboe resource; or their tenements in southern England which could have a large upside potential (yet to be defined). The above potential additional oil reserves would further dilute the value per boe, which would make their share price an even more compelling buy.
The following table estimates NWE’s share price based on the $/boe valuations of its’ peers.
NWE has by far the lowest $/boe valuation $0.12; and has the highest 2P recoverable reserves by a considerable margin (excluding majors Woodside Petroleum and Santos). NWE is significantly undervalued when comparing similar companies with smaller reserves (RFE, CUE and NXS). Their $/boe valuations are $1.26, $2.64 and $2.85 respectively (10.5 to 23.75 times greater valuation). Canning Basin Oil (CBO), an upcoming float, quotes a $/boe valuation of $5 to $15/boe (41.66 to 125 times greater than NWE’s $0.12/boe valuation!!). Once NWE develops TP15 and becomes a producer, their $/boe valuation should grow to $10 to $20/boe based on the current valuations of their peers. In Santos’s 2009 Guidance figures, it values their Depreciation, Depletion & Amortisation (DD&A) expenses @ $12.80 per boe. (Source: Santos 2008 Full Year Results – 19 February 2009.
NWE appears to be significantly undervalued. There is plenty of blue sky between their current $/boe value and that of their peers (i.e. explorers or explorer/ minor producers). Based on their peers’ resources and valuations, NWE should be trading anywhere from their current value, up to $2.00/share.
Please add to this analysis and as always DYOR before making any decision to purchase!
Good luck to all shareholders
Cheers
GrayNomad
NWE Price at posting:
3.0¢ Sentiment: Buy Disclosure: Held
