StockAnalysis Issue 20, Volume 13

Written under AFSL: 259730
22 June 2016
Issue 20, Volume 13
By Peter Strachan
Hot Topics
In This Issue
Oil & Gas reserves
StockAnalysis takes a look at
ranking petroleum companies and
contemplates . . .
Page 3
Market Moves
ADX hit by insto selling provides
opportunity
Midland Basin activity provides
support for Antares
Drilling result of the week
Signs of life in the mines from
Doray and Beadell.
Page 7
Soapbox
“A superb, vitally important and
comprehensive insight into the
future - it presents a new view of
economics, new ethics and
newest climate science.”
Page 7
Otto farms out to fund Kito - +40 cps
for success
Oil & Gas reserves
Ranking producers, developers and
explorers with Resources
Drilling result of the week
Doray adds mine life (so does
Beadell)
Soapbox
Nate Hagen on Resilience in the face
of peak everything
Indices and Prices
Market Moves
5,353.30
8,261.20
All Ordinaries
Energy Index
Brent AU$/bbl
68.288
AUS$/US$
0.7456
Welcome to the winter solstice edition of StockAnalysis.
It’s all downhill for the southern hemisphere from here and uphill for the market!
@@ @
1,701.88
Live Gold/AU$
As at close 21 June 2016
Pommy fund manager M&G has been selling down some of the 70 million shares it held
until recently in ADX Energy (ADX: ASX)! Perhaps a new-chum has arrived and without
reference to the company has simply decided to ‘shave a few off the top’ to keep
everyone on the ball.
Gold Live AU$
1800
This might prove to be a career limiting step for the young gun, especially once ADX gets
its ducks in a row to redevelop the 100% held, 28 mmbbl Nilde oilfield complex offshore
Italy, producing 10,000 BOPD into a rising oil price.
S&P ASX 200 Energy Index
8,750
8,500
8,250
8,000
7,750
7,500
7,250
7,000
6,750
6,500
0.760
50
0.720
45
0.700
40
0.680
Jun-16
0.740
May -16
Jun-16
May-16
Apr-16
Mar-16
Feb-16
Jan-16
4,800
Jun-16
4,900
May-16
5,000
0.780
55
Apr-16
5,100
0.800
70
60
Mar-16
5,200
75
65
Feb-16
5,300
Jan-16
5,400
AU$/US$
Apr-16
5,500
Brent Crude Oil $AU/barrel
Mar-16
All Ordinaries
Feb-16
Jun-16
May -16
Apr-16
Mar-16
Feb-16
Jan-16
1400
Jan-16
1450
ADX currently has an EV of about $3 million, giving it an EV/BOE of Contingent Nilde plus
Nilde Bis Resource of about $0.11. Even if the company farms out 80% of the project to
get it built, it would still have an EV/BOE of $0.54 at its current price, suggesting that it
has potential for a twenty fold, upwards value adjustment to 10 cents per share if the
stock is to fairly represent the NPV of its oil project!
Jun-16
1500
May-16
1550
Apr-16
1600
Mar-16
1650
Feb-16
1700
Jan-16
1750
Subscribers might spot the challenge here. Ongoing share sales by M&G as it continues to
dump stock in the market could prove to be a dampener. But hey, 70 million shares are
worth just $350,000. StockAnalysis thinks that M&G’s selling represents more of a buying
opportunity than a drag on the market.
Chairman Ian Tchacos obviously agrees and has seized the opportunity to pick up a lazy
million shares on the market earlier this month. StockAnalysis sees several subscribers
who would be willing and very able to buy the whole parcel if the season continues to pan
out well!
@@ @
Last week there was some very encouraging news out of the Midland Basin in Texas that
should be welcome for creditors of Antares Energy. Devon Energy sold 28,000 acres in
Martin and surrounding counties in the northern Midland Basin to Pioneer for US$435
million. Devon reported:
“In the northern Midland Basin, Devon agreed to monetize its working interest across
15,000 net acres in Martin County, Texas along with 13,000 net acres in eight
surrounding counties for $435 million. Current net production associated with this largely
undeveloped leasehold position is approximately 1,000 Boe per day, with oil accounting
for roughly 70 percent.”
Pioneer, a very successful company with permits that are adjacent to the Antares ground,
paid US$15,535 per acre for the Midland Basin interests, with some adjacent to the AZZ
permits. This price is about half the sort of pricing paid at the peak and is even more
remarkable since the permits have very little production of just 1,000 BOEPD.
Assuming a 20% discount to this metric for the Antares acres, gives this deal an implied
value of US$260 million for the 21,000 acres held by AZZ, which is in line with the sale
deal negotiated by the company’s previous management, but which was not
consummated.
Clearly, as the price of oil improves over coming months, values in the Permian (Midland)
Basin area will almost certainly begin to recover from the values reflected in the Pioneer/
Devon deal.
Location of permits in the Midland Basin held by Pioneer and Antares
Devon is a largely gas focused company that is blowing smoke, so the deal announced on
15 June represents a distressed sale price, all of which is positive for an excellent outcome
for Antares.
StockAnalysis believes that if the company’s Administrator, FTI Consulting does its job,
then Antares should be able to be refloated. Even after the hugely wasteful administration
process, involving the removal of a management team that was motivated and best
placed to deliver an excellent outcome for creditors.
Page 2
Peter Strachan © 2015/16 Pex Publications Pty Ltd
ACN: 59 077 704 146
Kito is a high risk target, but
StockAnalysis estimates a
value for success of over 46
cps for Otto’s retained 25%
interest.
Otto Energy ( OEL : A SX ) has farm ed out 2 5 % of its 50% interes t in drilling
the Kito prospect in Tanzania. Drilling is expected late in H2 ’16, targeting over 190
mmbbls of recoverable oil in the Best Case scenario. This two-well deal is worth up to
A$5.8 million, including A$3.1 million for recovery of past costs and a $2.7 million
carry on Otto’s retained 25% interest for what should be a A$3.4 million budget. In
the event of success, Otto will have a carry worth A$1.4 million for a second well.
Ranking petroleum companies
How much do we pay for Reserves & Resources?
This cohort of ASX listed petroleum
exploration,
development
and
production
companies
has
a
combined market capitalisation of
$44.8 billion and an enterprise
value of just under $61.3 billion.
StockAnalysis
calculates
that
together, these companies hold 2.8
billion barrels of oil Reserves on a
value equivalent basis and 8.29 bn
bbls of oil Resources on a value
equivalent basis.
Oil Search h a s c o n s o l i d a t e d i t s s e c o n d r a n k i n g , b a s e d a s m u c h o n t h e
success of its PNG LNG project and ongoing exploration and development appeal
as it is on the higher risk profile of its peer Santos, whose cash flow has been
imperilled by a costly CSG to LNG project, commissioning into a gas market that
does not currently support its debt burden.
The
lower
ranking
players
are
dominated by AWE Ltd, FAR Ltd,
Karoon a n d Senex, w h i c h j o i n s i t s
Cooper Basin peer Beach Energy as a
major, onshore Australian producer.
The tail of this list comprises companies
that are either pure exploration and
development
companies,
such
as
Carnarvon, Elk and FAR, as well as
those that are supported by some
operating cash flow, such as Sundance,
Cooper, Horizon, Empire, Tap a n d
Cue Energy.
Page 3
Peter Strachan © 2015/16 Pex Publications Pty Ltd
ACN: 59 077 704 146
Some smaller companies such as FAR, Carnarvon and Karoon are yet to certify
Reserves. For the purposes of this ranking, StockAnalysis also combines 2C Contingent
Resources with 2P Reserves, which it believes presents a more informative picture of how
big a company could become.
There are many factors to consider when we seek to invest in a petroleum company. We’d
like to think that management is competent, honest and pays itself fairly. We’d also like to
understand if the company has a solid reserve base and if its petroleum assets can be
profitably exploited in the current market, as well understand what exploration projects
are in the wings.
Although onshore Perth Basin oil reserves and oil found in deep water, offshore West
Africa have different values that are defined by their capital and operating costs of
production, StockAnalysis treats each barrel the same. Gas reserves have a similar
challenge to bring to market, depending on location and CAPEX for development, but
unlike the oil price which is a global commodity, gas prices vary considerably, depending
on location.
StockAnalysis tries to standardise the barrels of oil equivalent for gas, based not only on
their energy content, but also on the likely market into which the gas will be sold. For
instance, at a domestic gas price of US$2.60/mmBtu, US domestic gas has an energy
value of US$15.6/boe while in Indonesia gas sold for A$9/Gj has an energy equivalent
price of about US$40/BOE. The value of gas Resources is very important for companies
such as Woodside, Oil Search, Santos, Senex, Buru, Cooper and Horizon, where petroleum
reserves are dominated by gas.
Companies trading with an
EV of less than A$15/BOVE in
Reserves would appear to be
cheap!
StockAnalysis believes that the price paid for a company on the basis of dollars per barrel
of oil equivalent in Reserves, is best reflected in its enterprise value rather than the
market capitalisation.
Unfortunately for Tap Oil, it has heavily hedged its Manora oil production at a price of
about US$42/bbl, so in effect the company will be working for its bankers with very
limited earnings upside for shareholders as the price of oil recovers.
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Peter Strachan © 2015/16 Pex Publications Pty Ltd
ACN: 59 077 704 146
Blue Energy is not yet a producer and w ill need to attract the capital required to
move forward or dilute its position in the project. Whatever way the company is viewed it
looks cheap on these metrics.
Buru also looks very cheap, especially w hen looking at Contingent Resources and
also Prospective Resources. However the company faces massive hurdles to find a market
for its gas, obtain a social license to operate and jump the funding hurdle, which should
be relatively easy once the first two obstacles are met.
A gas market is less of a concern for Carnarvon Petroleum’s Contingent Resources in the
offshore Pilbara, which are still very uncertain from a technical commerciality perspective.
Senex is w ell placed w ith an operating cash flow , but w ill need to jump the
CAPEX hurdle and obtain social license to operate.
Central Petroleum needs a path to market for its gas, but the proposed N EG
pipeline to take gas into the east coast market, still looks to have too many challenges
with not enough gas Reserves to support commercial development.
Horizon looks cheap on an EV or market capitalisation basis, but the company
has too much debt and its PNG gas assets add risk to a development profile. Ultimately,
Horizon is likely to be taken over as the LNG glut subsides towards 2020/21.
Buying AWE with an EV of A$10/BOVE of Reserves or A$3.80 per BOVE of 2P + 2C looks
incredibly good value. The company is funded for growth. StockAnalysis calculates that
any objective understanding of the value of its Resources should come up with a
value that it two to three times its current market rating, especially w hen
adjusting for exploration appeal in the Otway, Gippsland and Perth basins.
Source: Cue
Page 5
Peter Strachan © 2015/16 Pex Publications Pty Ltd
ACN: 59 077 704 146
Jupiter Energy is stuck in a fiscal setting that guarantees a low oil price and
where corruption and incompetence overwhelm any concept of value for oil held in
Resources.
Sundance looks expensive because it is reliant on debt to fund development of
high cost production from US shales. However, the company’s shares have strong
leverage to any movement in the price of oil and gas in the USA, so commodity price
recovery should see the shares outperform!
ELK Petroleum is also a high cost oil developer, employing enhanced oil recovery
techniques in Wyoming, which it hopes to
be able to transfer into opportunities in the
Cooper Basin.
FAR just needs to find a
buyer willing to pay $6/bbl for
Resources and shareholders
could be walking away with
15 – 20 cps.
Offshore Senegal, FAR has a tiger by the
tail at its giant, 15% owned SNE discovery.
Contingent oil of 561 mmbbls plus cap gas
that will fuel any development can be
‘bought’ for less than A$3 per barrel when
its true value is going to be over A$14 per
barrel. Resources at the SNE field will be
expanded by results from recent appraisal
drilling. The company also has a discovery
at its FAN oilfield (which StockAnalysis
estimates has 298 mmbbls of recoverable
Resources) and it is studying prospects
along the coast line, which StockAnalysis
believes will eventually lift total Resources
to over 1 billion barrels of oil. At that point,
FAR would be swamped by development
costs, which StockAnalysis sees as being
over US$800 million for its 15% WI.
Like most of the companies listed, Beach Energy holds Resources that are substantially
greater than 2P Reserves. The particular issue for Beach is its technical capability of delivering
gas from tight reservoirs in Central Australia. In this respect, Beach is similar to Real Energy,
Senex, Central Petroleum and also Buru, with
its massive Canning Basin potential.
While Santos, Woodside, Oil Search and
Empire all rank at the expensive end of
the scale, they benefit from having a lot of
developed Reserves in production and
delivering cash flow. Because of the
dominance of the large companies, the
weighted average EV/(2P+2C) is A$10/
BOVE or US$7.40 while the arithmetic
average is A$3.5/BOVE or US$2.6/BOVE.
At this stage of the oil and gas commodity
price cycle, companies that sit on plentiful
cash are in the box seat to pick up bargains
from distressed sellers.
Following the sale of its interest in the
Poseidon gas field, in the Browse Basin,
Karoon Gas has marshalled its cash,
but still trades with a market capitalisation
that sees a $137 million discount to its cash
stash! The company is moving cautiously
towards
feasibility
work
on
oilfield
development for discoveries in the Santos
Basin, offshore Brazil.
Carnarvon has applied some cash towards
acquiring seismic surveys and will stump up
about $7 million of additional funds to drill the Outtrim-East well that is currently
underway.
Drilling of ROC-2 later this quarter will be partially covered by its partner Quadrant
Page 6
Peter Strachan © 2015/16 Pex Publications Pty Ltd
ACN: 59 077 704 146
Energy, which will be hoping for a good result ahead of listing the Apache Energy spin-off
later this year or in early 2017.
Best bets amongst this cohort include:
Producer/Developers

Woodside & AWE
Developer/Explorer

FAR & Cue
Blood and guts, high risk

Buru & Karoon
Drilling result of the week
Doray Minerals (DRM : ASX) takes the prize this w eek w ith ongoing exploration
success at Gnaweeda, where gold resources can be fed into its adjacent Andy Well gold
project.
The company hit zones of gold mineralisation at Turnberry, with several high-grade
results including:


10 metres grading 18.9 g/t Au


41 metres grading 4.8 g/t Au
7 metres grading 41.6 g/t Au

including 2 metres grading 137.1 g/t Au
9 metres grading 10.4 g/t Au
When drillers find mineralisation with an insitu value of A$2,300 per tonne, extending
over 7 metres, they have every right to believe that they have completed a good day’s
work!
Second price goes to Beadell Resources (BDR: ASX), which has extended high grade gold
mineralisation along the Tap AB1 lode at depth below its Tucano mine in Brazil.
Soapbox
Nate Hagen on Resilience in the face of peak everything
https://youtu.be/-EMlDuNH59c
Page 7
Peter Strachan © 2015/16 Pex Publications Pty Ltd
ACN: 59 077 704 146
Contact
Peter Strachan:
[email protected]
www.stockanalysis.com.au
Pex Publications:
[email protected]
www.pex.com.au
PO Box 813, Mt Lawley, WA 6929
Tel: 08 9272 6555
Fax: 08 9272 5556
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079812945; AFSL 259730 (“Strachan”), does not warrant its completeness, reliability or accuracy. Strachan, its Directors and their Associates from time to time may hold shares
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Page 7
Peter Strachan © 2015/16 Pex Publications Pty Ltd
ACN: 59 077 704 146