01/02/2012 - 10:50

Juniors target oil and gas success against the odds

01/02/2012 - 10:50

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Several WA-based juniors are working to ensure they are the ‘next big thing’ in oil and gas.

Juniors target oil and gas success against the odds
SPREAD: WA-based explorers are on the lookout for exploitable prospects in places including Vietnam, the Philppines and Somalia. Photo: iStockphoto

Several WA-based juniors are working to ensure they are the ‘next big thing’ in oil and gas.

AMERICAN oilman J Paul Getty famously had a simple recipe for success: ‘Rise early. Work hard. Find oil’.

Decades later, little has changed. Today, just as 100 years ago, a successful oil and gas discovery can create a fortune overnight.

It’s no surprise, therefore, given Western Australia’s entrepreneurial streak, that Perth is home to a large number of companies betting big on making the next substantial oil and gas discovery.

The majority of oil and gas exploration wells – around 80 per cent, as a rule of thumb – end in failure. Despite those odds, such are the huge rewards that come with success that there is always a solid queue of companies looking to drill the next great prospect, and an equally solid queue of investors willing to back them.

This year is shaping up as a particularly active one for a number of junior exploration companies that have spent the past few years identifying promising oil and gas prospects.

WA Business News has identified six junior companies that, if all goes to plan, should be drilling substantial prospects over the course of this year. 

If they succeed, they can expect to see their share price rocket upwards. Failure will generally equate to a similarly steep fall in the opposite direction.

The following companies have all studied structures within their acreage and, with the help of consultants, come up with estimates of how much oil and gas those structures could contain. The big question for all the companies, however, is whether the structures will end up containing any oil and gas at all – a question that can only be answered through expensive exploration drilling.

Investing in speculative oil and gas explorers is a very risky business and is not for the faint-hearted. Just maybe, however, one of the following stocks is on the cusp of striking it rich in the coming 12 months.

Neon Energy

Recent discoveries off the coast of Vietnam by the likes of ExxonMobil, Petronas and Premier Oil have been great news for Neon, which has been sitting on a 50 per cent interest in two promising exploration blocks. 

Respected industry consultants Netherland Sewell & Associates have identified 19 targets, with Neon’s Block 105 estimated to be capable of hosting around 165.5 million barrels of oil and 5.6 trillion cubic feet (Tcf) of gas, while the best estimate for block 120 suggested it could host 1.9 billion barrels of oil and 2.6 Tcf of gas. 

Under a recently struck agreement, an as-yet unnamed third party will fund seismic surveys and drill a well in Block 105 in exchange for a 25 per cent interest in the two blocks. The partner will also pay Neon up to $US5 million in cash.

Neon’s shares have already rallied to around 45 cents on the back of the building excitement in Vietnam, but analysts are tipping the stock to go even higher as drilling nears.

Bell Potter has a price target on Neon of $1.07, DJ Carmichael is tipping Neon to go to 74 cents, while both Patersons and RBC have 73 cents as their target prices.

Otto Energy

You can judge a junior oil and gas player by the company they keep, and Otto Energy has secured global giant BHP Billiton as its partner.

Otto and BHP plan to drill the promising Cinco prospect in the Philippines by no later than August this year. (Drilling would have started sooner had BHP not decided the drill rig that had been lined up for the prospect wasn’t up to its standards.)

Studies have suggested Cinco, part of Otto’s SC55 licence, could host around 2.1 Tcf of gas and 74 million barrels of condensate. 

Regardless of whether Cinco is a success, Otto also plans to drill the nearby Hawkeye prospect that sits on a completely different geological structure to Cinco. Hawkeye could contain around 680 million barrels of oil or 1.3 Tcf of gas.

Otto appointed Gregor McNab, who was working for BHP Billiton when the giant was negotiating to partner with Otto in SC55, as its managing director late last year.

Otto also has more tricks up its sleeve beyond SC55. The company owns a 33 per cent stake in the Galoc oil field elsewhere in the Philippines, which is currently producing around 2,200 barrels of oil a day net to Otto.

Range Resources

There’s frontier exploration, and then there’s Range Resources.

The idea of drilling in war-torn Somalia would be enough to deter many investors, but Range is already under way with the drilling of what it says will be the first exploration well in the country for more than 20 years.

Geographically, Somalia would appear to be in the right area for oil and gas. The problem, of course, has been the country’s instability over the past few decades.

Range – which owns a 20 per cent stake in the acreage – and its partners started drilling in mid-January and should know whether the well has been a success by mid-March.

The first target, Shabeel-1, is estimated to potentially contain around 300 million barrels of oil. The partners also plan to drill the potential 375 million barrel Shabeel-2 well afterwards.

The company also has some small but profitable assets in Trinidad, and is in the middle of a program to increase production there to 1400-1800 barrels of oil a day.

Rialto Energy

Compared to its peers, Rialto Energy is a different proposition.

Rather than cross its fingers and drill a large but unknown prospect, Rialto later this year will be re-drilling an existing discovery.

Rialto has leases off the coast of Cote d’Ivoire that were drilled in the 1970s and 1980s. Oil was discovered, but at the prevailing oil prices of the time the discoveries were not considered sufficiently worthwhile developing.

Oil prices are a lot healthier now, and Rialto is confident it will be able to get its 14 million barrel, 266 billion cubic feet Gazelle field into production by the end of 2013. Gazelle is slated to produce 8,000 barrels a day and 100 million square feet of gas a day, which will generate a very handy earnings stream.

While drilling into Gazelle in the coming months, Rialto will extend the well through the reservoir to test the deeper Condor prospect. That structure could host 750 billion cubic feet of gas.

Rialto was raising $60 million through an institutional placement at 30 cents per share at the time of writing, and also plans to raise a further $8 million through a share purchase plan and another $20 million from the World Bank’s International Corporation.

A three-well drilling program starts in early February.

Tangiers Petroleum

Another company that has been raising cash from investors in the lead-up to drilling is Tangiers Petroleum, a junior with exploration licences in Morocco and Australia.

Both prospects are huge – Morocco is supposed to be prospective for around a billion barrels of oil, while its Australian acreage could contain several Tcf of gas.

Morocco is historically underexplored, but recent discoveries in the area means that is starting to change. Global majors CNOOC, Repsol and Anadarko are all active in the country.

There is an oil shale mine just inland from Tangiers’ licence and oil and gas seeps have been seen in the waters. 

At this stage, Tangiers is hoping to have locked in partners and drilled two wells in both Morocco and Australia by the end of the year.

WHL Energy

A year ago, WHL was a puny, $4 million Sydney-based company with no full-time staff.

Since coming under new management, WHL has jettisoned its onshore oil and gas project in the US and a wind farm in the UK and thrown itself into assessing its newly won 21,426 square kilometres of exploration acreage in Seychelles, off East Africa.

That $4 million market cap has since risen to around $60 million as investors start to get excited about the potential of the Seychelles.

East Africa is an emerging oil and gas province but Seychelles has been little understood. 

WHL has commissioned detailed seismic surveys over its acreage and has spotted prospects that could host an estimated 3.5 billion barrels of oil equivalent.

That is a huge number, and perhaps unsurprisingly WHL says it has been receiving “unsolicited interest” in the acreage.

A data room set up over the prospects closed late last year, with the group now looking to finalise joint venture negotiations with interested parties.

That deal should spell out what sort of exploration campaign can take place over the acreage, as well as how it would be funded.

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