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Experts
Peter Strachan is a capital markets veteran, resources analyst and lover of the oil and gas game. The brains behind the popular weekly StockAnalysis investment letter, which launched in 2003, Peter has worked in capital markets for over 35 years, and is a qualified metallurgist and geologist.
While exports of coal, liquified natural gas (LNG) and uranium oxide sees Australia as a major net energy exporter, the nation has a 600,000 barrel per day shortfall of oil production verses its consumption.
Worryingly, Australia’s petroleum refining capacity has largely shuttered, leaving its economy dangerously exposed to supply disruptions from oil refineries in Asia and the Middle East.
By some measures, the economy would run out of diesel, gasoline, and jet fuel in a matter of weeks if supply routes were blocked! What could go wrong as kinetic warfare rages on several fronts in the Northern Hemisphere and China lays claim to large areas in international waters?
As the Brent oil price hovers around US$90/bbl, domestic gas sells for over A$11/GJ and LNG is shipped into Asian markets for over US$18/GJ, one could be forgiven for blinking wildly at some of the operating cash flow and Resource value apparent in ASX listed oil and gas producers and developers.
Petroleum exploration, development and production is however, a high risk and capital-intensive activity. Working offshore is not cheap. Developing a 100 MMbbls of oil at shallow water depths is likely to cost a lazy $1.9 billion or more in deeper water.
Exploration is risky too. In the September quarter ‘23, Woodside (ASX:WDS) burnt ~$195 million after drilling two dusters in which it had a 44% and 65% interest respectively.
So, while EBITDA margins of >US$50/boe might be available to careful producers, royalty payments and government imposts of all descriptions can quickly drain out 50% to 80% of that cash flow, depending on the operating jurisdiction.
Additionally, Australian regulators are not making things easier. Projects face such uncertain compliance hurdles that inevitably overseas capital and capabilities will find calmer waters in which to invest.
Horizon Oil (ASX:HZN) is a $259m market cap company with low-cost oil production and development assets in China’s Beibu Gulf (3,500 net BOPD) and New Zealand’s offshore Taranaki Basin (~1,000 net BOPD), where it does not have to deal with onerous and uncertain Australian regulations.
Over the past 12 months the company has rewarded shareholders with dividends totalling 5.15 cents per share from an EBITDAX of US$103.5 million in FY’23, translating into an after-tax profit of US$43.9 million.
The company had 2P plus 2C oil Reserves and Resources totalling 11.8 MMbbls as of 30 June ’23 and retained net cash of US$35.7 million, providing firepower for ongoing field development and nearby exploration as well as the potential to invest in new business activities.
Strike Energy (ASX:STX) is a $1.07bn petroleum production and exploration company with recently discovered substantial gas assets in Western Australia’s Perth Basin, totalling 981 PJe of 2P and 2C Resources. Total Resources will expand once a merger with Talon Energy (ASX:TPD) is consummated in early 2024.
Strike recently commenced gas sales from its Walyering gas and condensate project, holding 56 PJe of 2P Reserves. The project is ramping up towards a targeted 33 TJ of gas plus 250 bbls of condensate per day, which will be 100% to STX’s account once Talon is merged. This project has hit a market where spot gas sales are being made at over $10/GJ and Strike could seek to duplicate production if planned appraisal drilling supports expansion.
The company had liquidity of $175 million as of June 30, including $47 million of debt facilities which, along with cash generation from Walyering gas sales will support exploration at South Erregulla and development activities at the 50% held West Erregulla and 100% held South Erregulla projects further north in the Basin.
Strike is working with a strategy for adding value to gas through fertiliser manufacturing and a renewable energy project on company-owned land at South Erregulla.
Recent corporate activity in the Perth Basin places a market value of A$2/GJ on undeveloped 2P + 2C gas Resources, so any additional appraisal success from drilling in 2024 is likely to make the company more attractive as it moves to expand gas production facilities.
Buru Energy (ASX:BRU) is a prospect rich, $66 million market cap company with extensive permits and several high-impact exploration targets within the Canning Basin in Western Australia’s Kimberley region.
Buru’s Ungani oilfield was discovered and developed in 2012 and oil production has since declined from over 1,200 BOPD to around 450 BOPD. Production is due to restart once repair of flood damage to road and bridge facilities has been finalised, linking its remaining ~4 MMbbls of oil to offtake facilities at the Port of Wyndham.
The Rafael conventional gas and condensate discovery was made in 2021. Planning is now underway to drill appraisal wells in 2024, guided by data from a new seismic survey. Based on its estimate that Rafael has potential to yield nearly 1 trillion cubic feet of gas and 40 million barrels of condensate, plans are underway to develop a small-scale LNG production hub to supply local energy and export markets as well as production of methanol or ammonia.
Buru had $10 million of working capital as of 30 June 2023 and the company has begun a formal process to seek a partner to assist with development of Rafael gas and also to test some of its many highly prospective oil and gas prospects in the Basin.
Experts
Energy
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