where to from here

I’ve been following AED for a while and just bought back in again during yesterday’s weakness.

Great Auk was a disappointment but it was an exploration well and had to be drilled to meet lease commitments. It being unsuccessful shouldn’t detract from the main focus which is getting oil out of Puffin.

The way I see it, AED has plenty of oil at Puffin but it has been having a lot of problems trying to get it out.

The current situation is the NE area is producing around 270,000 barrels per quarter. At the current oil price and exchange rate that is about $AU22M revenue per quarter. AED’s share is $8.8M versus production costs of about $17.9M. So it has an operating loss of about $9M per quarter. Add admin costs and it is closer to $10-$11M.

If AED can increase production it will be make a profit as costs are basically fixed, ie. new production will almost all go to the bottom line.

Puffin 12 was drilled with the expectation that it would add to production but that was a disappointment. When that well was drilled in December it encountered thin sands. The oil price was at the bottom of the cycle at that time, low $30’s, so it was deemed not economical to sidetrack and drill a new horizontal section. I think if oil prices rise in the future this well may be re-entered and completed as a new producer.

The immediate hope for an increase in production lies with the SW portion. The company is planning to connect the SW portion of the field after the success at Puffin 11. Puffin 13 will test up-dip to Puffin 9 and the expectation is that the oil continues there. I think if P13 is successful then that and P11 will be completed as producers and be connected to the FPSO. It is only about 10 kms so it would be a feasible tie back; quick and low cost.

The company said in the last quarterly report that options for the current drilling program included an appraisal well up-dip to P9 or the re-entry and completion of P11 and P2. That tells me they are confident of production from this area, they have 2 wells capable of producing and are hopeful of a third with P13.

P11 and P13 could be producing at 10,000 bopd each (maybe more). At those levels we would expect say 20,000 bopd for 75 days per quarter (accounting for some down time) and that comes to 1.5M barrels at $AU80. AED’s share is 40% X $120M = $48M. Deducting the current loss of $11M leaves about $37M gross profit per quarter. That would equate to earnings of about $1 ps on an annualised basis.

If P2 is also brought online and we can manage to get 30,000 bopd then additional revenue will be $180M X 40% = $72M net to AED.

I know this company has promised a lot in the past and disappointed many, but with a new partner and cash in the bank, it could be a sleeper if P13 comes in.

I understand many have lost money on this and there are valid reasons for it to be trading at a discount to cash, but it is certainly worth a punt from these levels.

P13 is to spud today and I expect it to reach target within the next 2 weeks.