Euroz Hartleys Energy Snapshot Review

Euroz Hartleys hosted a virtual Energy Conference late last week. We had eight companies present throughout the day with significant interest shown by institutional clients throughout.

The O&G macro remains topical and certainly the supply demand dynamics of some agencies paint an optimistic picture for O&G producers over the next 25+ years. We note the oil price is well off its all time highs, circa 43% below its 2008 highs. Energy Information Agency (EIA) has compiled an illustration on their forecast supply demand out to 2050. The cumulative supply gap in all demand scenarios presented by EIA should reflect higher oil prices, whilst concurrently seeing exploration dollars going into the ground to fill the supply hole.

Euroz Hartleys Energy Snapshot Review 1

Below, we consider the performance of the eight participating names vs Brent over the last 12 months. Clearly, the challenging oil price environment has made for difficult operating conditions for the O&G sector over CY21. Notwithstanding this, there is a clear disconnect between oil price and share price performance with just NWE, ATS & KAR outperforming Brent over the time period. We anticipate equities will start to reflect stronger oil price through CY22.

Euroz Hartleys Energy Snapshot Review 3

In our view, the spud of CVN’s Buffalo well later this month is of real interest. We want to highlight well spudding as a clear catalyst and one that we anticipate should materially move the needle. The risk at CVN’s Buffalo target is reservoir size, not presence of oil or quality – production was shut in at 4,000 bopd. With that in mind, we see CVN as a trading buy into spud later this month. History paints a clear path way for stocks to run in the lead up to spud. We look at BRU.ASX and 88E.ASX who spud Rafael 1 and Merlin-1 respectively this year and clearly demonstrated the appetite for exposure to potentially new discoveries.

Euroz Hartleys Energy Snapshot Review 5

We have some summarised notes from the presentations over the course of the day. Please reach out for more detail on any of the names.

FAR Limited
Market Cap: $84M
Share Price: $0.84
Sector: Oil & Gas

  • FAR has a market cap of $84M and roughly $84M cash, prior to this upcoming drilling program.
  • It is scheduled to spud the Bambo-1 well on 13th November. FAR has a 50% interest with Petronas, Operator, also a 50% interest.
  • The well is targeting 3 key prospects, Soloo, Bambo, and Soloo Deep. In aggregate, the target is 1.118 billion bbls @ 7-37% COS. Intended to be a 30-day well.
  • Net costs remaining to FAR as part of this program are US$21M, hence I think EV post drilling more like $28M.
  • Management notes that the Soloo Prospect, in particular, is a step-out extension from the Sangamor Field, where there has been an excellent success rate in historical drilling.
  • Euroz Hartleys Research does not cover FAR.

Cooper Energy (COE)
Market Cap: $465M
Share Price: $0.285
Sector: Oil & Gas

  • Focus is the Orbost Gas Plant in the Gippsland Basin
    • Currently producing at 40-45TJ/D, with APA contractual obligations at 68TJ/D
    • APA continue to undertake remedies to fix foaming and sulphur build up which is preventing steady state at 68TJ/D, however, current fixes unlikely to deliver production much higher than 45-50TJ/D
    • February / March timeframe for more extensive plant rectifications
    • There is growth beyond Sole field, with Manta and Gummy Deeps and the potential for Longtom gas to be processed (3rd party ownership), including plant upgrades as the surrounding land is not restrictive
  • Athena Gas Plant (50% ownership) in Otway Basin
    • Looking to ramp up to 31TJ/D, currently at 27TJ/D
    • Phase 3 Development FID targeting 2022
  • Staged process of growth at Athena
    • Get Athena plant up and running
    • Get production up through Annie and Henry
    • Grow reserves through exploration 
  • Approximately 90% of Otway acreage shot through 3D

Beach Energy Limited (BPT)
Market Cap: A$2,977m
Share Price:  $1.30
Sector: Oil & Gas

  • Resignation of Matt Kay came out of the blue, but Management keen to confirm strategy remains the same. CFO, Morne Engelbrecht, has been instilled as acting CEO.
  • Strategy remains to fill 8 gas plants by end 2023 – currently have 6. These plants will feed four markets for >15 years from FY24. Importantly, BPT is fully funded for FY24 growth.
  • Elevated CAPEX to fund growth from CY22 is met by operating cashflow. The business is being set-up for growth to production to c28mmbboe in FY’24 (from 21-23mmbboe FY’22) and expect this will result in strong Operating FCF.
  • Perth Basin is transformational for BPT – By mid-23 will have 3 gas plants in Perth Basin with 290Tj/day. Currently at 40Tj with Waitsia Stage 1A (Xyris Plant) @ 20TJ and Beharra Spirings @ 20TJ.
  • Waitsia Stage 2 – first gas project in WA in over a decade. Will deliver 250TJ/day.
  • BPT/Mitsui JV controls the majority of the remaining perspectivity in the Perth Basin Kingia Play. Management feel they understand the basin, already have plants in basin and are in a great position to build on this.
  • Aspiration to be net zero by 2050 with focus on delivering 25 by 25 and Moomba CCS.

Australis Oil & Gas (ATS)
Market Cap: A$70m
Share Price:  $0.058
Sector: Oil & Gas

  • ATS story remains consistent. Patiently awaiting the macro environment to unfold and for TMS to become more digestible/mainstream. This is slowly steadily happening.  
  • 85% of US production comes from 3 plays, Permian, Eagle Ford and Bakken. Eagle Ford & Bakken are now mature, plateauing in early CY20 and not recovered from COvid, down ~25%.
  • In 2019, Permian was 41% of shale production – by years end CY21, will be ~60%.
  • The TMS remains one of the last quality oil plays appraised but not developed.
  • Nearby 3rd Party due to drill well proximal to ATS. Anticipate drilling this CY. Will be couple months to drill.  
  • 3rd Party success would validate ATS’ thesis, whilst failure does not necessarily invalidate it, there is trial and error with new tech/drilling methods. Play is largely derisked – it has been appraised andas a 6 year production history allowing for considerable technical data.
  • Management remain confident a deal will be done – not sure when, but will happen. The macro story is slowly moving in the right direction – the tipping point is getting closer. Nothing in discussions has made management believe anything to contrary;
  • We see a free option on 170mmbbls of proven resources noting NPV10 pre-tax of US$67.5m (unhedged forward WTI strip) for Proven Producing Reserves of c3.5mmbbls (current EV of $83m).

Carnarvon Petroleum (CVN)
Market Cap: A$493m
Share Price:  $0.31.5
Sector: Oil & Gas

  • CVN is aware of changing energy trends and is, looking at other carbon free energy production. The renewable diesel business is not green washing but is a viable business.
  • Oil outlook is undeniably bullish, with large volumes of oil supply +10 years away and the US shale unlikely to fill the gap from a growing level of demand in oil consumption resulting in a significant forward deficit

Buffalo Oil Field, Timor

  • Drilling to commence in late November, once the rig is released from its current drilling obligations
  • Buffalo sits in shallow 35m of water
  • Existing production was shut in at 4,000 bopd. Risk is reservoir size, not presence of oil or quality.

Dorado / Bedout Basin

  • Super high quality oil field and location (Western Australia)
  • 75-100t bopd initial production via a FPSO 
  • FID mid 2022
  • Material drill program commencing in January 22 with Pavo (30% ownership p50 68mboe) and Apus Prospect (20/30% ownership p50 197mmboe)
  • On success, the fields will potentially provide a tie back to the Dorado development, unless too large to warrant a stand alone development
  • Targeting <$25/bbl (initial opex and capex)

Strike Energy (STX)
Market Cap: $354M
Share Price: $0.17
Sector: Oil & Gas

  • Strike has a well-defined pipeline of drilling objectives (Waylering, SE-1 & WE-3) and prospects (Ocean Hill and Eneabba Deep) over the next 6 months. Near term catalysts.
  • Walyering-5 is within a historically producing gas field. If successful, could be a relatively short development timeline with key infrastructure (Parmelia gas pipeline) nearby.
  • South Erregulla well is an important well for STX. SE-1 to be drilled post Walyering. If South Erregulla is successful STX is well placed to maximise resource booking in order to advance Haber towards bankability as quickly as possible. 
  • Project Haber could be a demand sink for regional third party gas.
  • Strike remains catalyst rich with a base case valuation backed by WE offtake.
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Karoon Energy Ltd (KAR)
Market Cap: A$1B
Share Price: $1.815
Sector: Oil & Gas

  • Baúna is KAR’ 100% owned core asset in Brazil, having became the operator in November 2020.
  • Current production ~ 13,500 bopd of high quality 34º API light oil (135MMbbl produced to date, production peaked at 70,000 bopd).
  • KAR will be looking to maximise value from Baúna through a multidisciplinary focus on optimised reservoir management.
  • The company believes crude oil demand will be supported up to at least 2035 based on years of underinvestment leading to structural undersupply.
  • The company has sanctioned two near term projects which are expected to grow production as well as materially improve unit costs.
  • Q1 FY22 saw revenue of US$71m, cash at the end of September was US$175m (US$42m was added during the quarter).
  • Going forward the company will take advantage of a strong oil environment with emphasis on asset value optimisation and strategic inorganic growth.

Norwest Energy (NWE)
Market Cap: $133M
Share Price: $0.0.24
Sector: Oil & Gas

  • Awaiting final timing of well testing equipment and crew to arrive at the Lockyer Deeps discovery to undertake a flow test (likely early in the new CY).
  • Based on the data gathered from the initial discovery hole, porosity and permeability wireline estimates materially exceed the other Kingia penetrations in the Basin.
  • Combined with the height of the hydrocarbon column and the reservoir pressures, we expect a strong flow test rate.
  • Volumetric potential exists to materially exceed the current high case pre-drill est of c1.2Tcf gross recoverable.
  • Future appraisal will follow 3D seismic acquisition next CY and will likely involve a sidetrack to test the North Erregulla accumulation.