Hi benloganWhile yesterday’s half-yearly delivered disappointing...

Hi benlogan

While yesterday’s half-yearly delivered disappointing news of lower margins on sales and a headline figure of a lower NPAT, I still found a lot to like in the report.

Those higher costs I think are a short term feature. Geoff Towner mentioned four contributors to that situation in the Open Briefing later in the day:
1. the higher amortisation rate (a consequence of the purchase of the big Kansas White Eagle landholding; 2. booking a loss from ARW; 3. the increased staffing of AMU's partner on the ground; and 4. higher operating costs associated with higher energy prices.

Lets look at each of these …

The higher amortisation provision will continue for a while. My understanding is that US accounting standards require accelerated amortisation (ie faster than the life of asset would suggest). I take this to mean that the accounting provision lowers the reported profit but doesn’t detract from cash flow. But this higher provision is a reflection of the increased value of assets they have acquired, to my mind this in not a ‘problem’ or a reflection of any weakness in the business. What’s more, as that asset is one that looks like it will deliver ever increasing volumes of production and sales revenue from development drilling, workovers and wildcat drills, this is nothing to worry about.

The loss attributable to ARW's operation I see as a short term issue. I remain optimistic that ARW will get their act together and actually become a profitable producer. But plug in your own view on this one.

The higher cost from the rapid staff growth of their US partner is only a short term negative in my view. It also seems more of a transitional issue. At last year’s AGM presentation and discussion in Melbourne, it was apparent that the US office expansion was needed to deal with the huge number of prospects they had identified and wanted to lock in for AMU, and that the office was generating a huge number of targets for AMU to drill or acquire. As the pipeline of prospects works through, I am certain the revenue generated will hugely outweigh the added costs - with the results that margins will fall.

Finally, on the higher operating costs from increased energy prices, this factor is essentially self cancelling. Higher energy prices mean higher revenues (which would surely outweigh the higher cost), so I am not worried about this one.

Underlying the AMU results is that their production of oil and gas is increasing at impressive rates (and with some of the recent Lavaca County gas well successes – like that cracker from Hoffer #1 - and will be a lot more so in the next quarter/s) and that they have found a lot, lot more oil and gas than they are producing. As a result their reserves are increasing too at an impressive rate. Their 2P reserves are now 14.3Mbbls and 11.9Bcfg - that is close to 16Mboe (which at a conservative market value of US$15bbl represents about A$310M). Given their forward drill program and their success rate so far, I am certain their record of substantially adding to their production and reserves will continue.

At current prices, I reckon AMU looks excellent value as a low risk stock with a ton of upside (mind you, I was saying that when it was north of $1.20, so what do I know). However, as with any stock you buy, set your stops and stick to them – preserving capital is the golden rule after all.