Written under AFSL: 259730

All Ordinaries Brent Crude Oil $AU/barrel AU$/US$ S&P ASX 200 Energy Index

By Peter Strachan

Gold Live AU$

Indices and Prices

All Ordinaries 5,353.30

Energy Index 8,261.20

Brent AU$/bbl 68.288

AUS$/US$ 0.7456

Live Gold/AU$ 1,701.88

As at close 21 June 2016

Issue 20, Volume 13

22 June 2016

In This Issue

Market Moves ADX hit by insto selling provides opportunity

Midland Basin activity provides support for Antares

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

Market Moves Welcome to the winter solstice edition of StockAnalysis.

It’s all downhill for the southern hemisphere from here and uphill for the market!

@ @ @

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.

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.

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!

Hot Topics

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

Drilling result of the week

Signs of life in the mines from Doray and Beadell.

Page 7

Oil & Gas reserves

StockAnalysis takes a look at ranking petroleum companies and contemplates . . .

Page 3

1400

1450

1500

1550

1600

1650

1700

1750

1800

Jan-16

Feb-16

Mar-16

Apr-16

May-16

Jun-16

0.680

0.700

0.720

0.740

0.760

0.780

0.800

Jan-16

Feb-16

Mar-16

Apr-16

May-16

Jun-16

40

45

50

55

60

65

70

75

Jan-16

Feb-16

Mar-16

Apr-16

May-16

Jun-16

6,500

6,750

7,000

7,250

7,500

7,750

8,000

8,250

8,500

8,750

Jan-16

Feb-16

Mar-16

Apr-16

May-16

Jun-164,800

4,900

5,000

5,100

5,200

5,300

5,400

5,500

Jan-16

Feb-16

Mar-16

Apr-16

May-16

Jun-16

Peter Strachan © 2015/16 Pex Publications Pty Ltd ACN: 59 077 704 146

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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.

Peter Strachan © 2015/16 Pex Publications Pty Ltd ACN: 59 077 704 146

Page 3

Otto Energy (OEL: ASX) has farmed out 25% of its 50% interest in dri l l ing 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 has consol idated i ts second ranking, based as much on the 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 and Senex, w hich jo ins i ts 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 and Cue Energy.

Kito is a high risk target, but

StockAnalysis estimates a

value for success of over 46

cps for Otto’s retained 25%

interest.

Peter Strachan © 2015/16 Pex Publications Pty Ltd ACN: 59 077 704 146

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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.

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.

Companies trading with an

EV of less than A$15/BOVE in

Reserves would appear to be

cheap!

Peter Strachan © 2015/16 Pex Publications Pty Ltd ACN: 59 077 704 146

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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 when 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 well 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 NEG 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 when adjusting for exploration appeal in the Otway, Gippsland and Perth basins.

Source: Cue

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. 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

FAR just needs to find a

buyer willing to pay $6/bbl for

Resources and shareholders

could be walking away with

15 – 20 cps.

Peter Strachan © 2015/16 Pex Publications Pty Ltd ACN: 59 077 704 146

Page 7

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 week 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

7 metres grading 41.6 g/t Au

including 2 metres grading 137.1 g/t Au

41 metres grading 4.8 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

Peter Strachan © 2015/16 Pex Publications Pty Ltd ACN: 59 077 704 146

Contact Peter Strachan: Peter@stockanalysis.com.au www.stockanalysis.com.au

Pex Publications: oilinfo@pex.com.au www.pex.com.au

PO Box 813, Mt Lawley, WA 6929 Tel: 08 9272 6555 Fax: 08 9272 5556

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Disclaimer The information or advice (including any financial product advice) herein is believed to be reliable and accurate when issued however, Strachan Corporate Pty Ltd ABN 39 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 in the securities mentioned in this report and therefore may benefit from any increase in the price of those securities. Opinions and estimates constitute Strachan’s judgment. The author certifies that the views expressed in this document accurately reflect the analyst's personal views about the subject company and are subject to change without notice. Strachan, its officers, agents and employees exclude all liability whatsoever, in negligence or otherwise, for any loss or damage relating to this document to the full extent permitted by law. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The investments and strategies discussed herein may not be suitable for all investors. In preparing such general advice no account was taken of the investment objectives, financial situation and particular needs of a particular person. Therefore, before acting on the advice, you should consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. There may be a product disclosure statement or other offer document for the securities and financial products we write about in StockAnalysis. You should obtain a copy of the product disclosure statement or offer document before making any decision about whether to acquire the security or product. If you have any doubts you should contact your investment advisor. The investments discussed may fluctuate in price and changes in commodity prices and exchange rates may have adverse effects on the value of investments.

Recent Strachan Corporate commissioned research or corporate advisory services have been supplied to the following companies, for which it has received a fee. Rawson Resources, Incremental Oil & Gas, Peel Mining, Mining Projects Gp, Horizon Oil, Kingston Resources, Aurora Minerals, Real Energy Jacka, Carnarvon Petroleum, Lion Energy, FAR Ltd, Galaxy Resources. In addition, over that period Strachan Corporate has delivered lectures at several Universities, provided expert witness statements and confidential financial services and advice to listed companies, several private investment companies and institutions as well as private investors. Disclosure of interests in these confidential actions by Strachan Corporate is only appropriate should Strachan Corporate determine a potential for conflict of interest.

The author has small holdings in shares of WIN, SUN, SGC, RFX modest holdings in IGO, AZZG, TDO, IDR, SRI, ADX, ANZ, NAB, PTM, FAR & WPL and larger holdings in AWE, FZR, RIC, HAV.

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