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Oil Shock, Now For AWE

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AWE has a portfolio of high-quality assets that provide strong cash flow, and also boasts some valuable growth opportunities.

With any of the resources producers battered by falling commodity prices, there comes a point where investors need to make a call on whether the stock has been over-sold. They might not be able to make that call at the exact point - that is exceedingly difficult to do - but they can identify an improving trend.

From $1.97 in September 2014, oil and gas producer AWE Limited (AWE) followed the slumping oil price, plunging 44% to $1.11 in mid-December. But AWE has mounted a mini-recovery since then, appreciating to $1.32.

On the analysts’ consensus forecasts collated by FN Arena, AWE could have more to rise: the analysts see the stock at $1.60, implying 21% upside from the present level. The most bullish firms, Macquarie and Citi, have price targets for AWE at $2.00 and $1.88 respectively: it is only fair, though, to point out that Deutsche Bank’s target is $1.15, and Morgan Stanley’s is $1.24.

Certainly AWE has given the market some interesting news lately. In January, it announced a major milestone with the Indonesian government approving the plan of development for the Lengo gas field, offshore East Java. In which AWE holds a 42.5% participating interest.

Lengo has an estimated 200 billion cubic feet of recoverable sales gas, which would find a ready market in East Java. AWE and the field’s operator, Singapore oil and gas company KrisEnergy, are now working towards a final investment decision.

Then, earlier this month, AWE commenced the flow testing program at the Senecio-3 well, in the Waitsia field, located in the onshore Perth Basin, WA. When AWE announced the discovery of Waitsia in September, it was reported as potentially the biggest onshore gas discovery in Western Australia since Dongara in the 1960s, and galvanized the share price by 14% on the day of announcement.

Initial data analysis at Waitsia shows that there could be between an estimated 65 billion cubic feet (Bcf) to 1.17 trillion cubic feet of gas (the best estimate is 360 Bcf.), close to existing infrastructure. Currently AWE has reserve life of about 16 years, which Morningstar says is “impressive among AWE's mid-tier peer group” – this could increase to more than 20 years if Senecio/Waitsia is developed.

Currently AWE produces and sells oil, condensate, LPG and gas, with production assets in Bass Gas (South-east Australia), Cliff Head oil field (WA), Onshore Perth Basin (gas/oil/condensate), Casino gas (NSW), Tui oil fields (NZ, where AWE is operator and holds 57.5%) and the Sugarloaf Area of Mutual Interest (AMI) in Texas, of which it owns a 10% interest (the operator is Marathon Oil). Natural gas from its Australian fields is piped directly in to NSW, Victoria, and South Australia.

The company has exploration projects in South-east Australia, Western Australia, New Zealand, Indonesia, Yemen and Bohai Basin, China. Prime among these in the development stakes is the highly prospective Ande Ande Lumut oil project in offshore Indonesia, where AWE has 50%, in joint venture with Santos, which is the operator. AWE expects first oil from Ande Ande Lumut project to flow in late 2017: AWE’s share of the development cost is estimated at US$150 million.

Production in the December 2014 quarter came in at 1.17 million boe, spread across gas (52.1%), oil (20.5%), condensate (19.7%) and LPG (7.7%). Sugarloaf generated 29.6% of production, the Casino/Henry gas fields (NSW) supplied 22.7%, the Bass Gas project 17.6%, Tui 13.6%, the onshore Perth Basin 9.2% and Cliff Head 7.2%.

In terms of sales, oil accounted for 37.7% of the $77 million total for the December quarter, followed by condensate (32.5%), gas (23.4%) and LPG (6.5%).

For the half-year to December 2014, AWE produced 2.6 million boe, down 14%, but in line with full-year guidance of 4.6–5.1 million boe. Sales revenue fell 8%, to $161.3 million, while EBITDAX (earnings before interest, tax, depreciation, amortisation and exploration spending) was down 25% to $88.1 million, and the net loss came in at $61.7 million, including $50.1 million in impairment charges against the carrying value of the Tui and Cliff Head projects. AWE has a strong cash position, with net cash of $15 million at 31 December 2014.

AWE has a portfolio of high-quality assets that provide strong cash flow, and also boasts some valuable growth opportunities. The company plans to more than double its production, to 10 million barrels of oil equivalent, by 2018, based on development at Sugarloaf and Bass Gas, and fast-tracking Waitsia/Senecio, Ande Ande Lumut and Lengo. That could see it generating more than $500 million in EBITDAX. If it can do that, current price levels will prove to be an attractive entry point.

View More Articles By James Dunn

James was founding editor of Shares magazine, and oversaw one of the most successful magazine launches in Australia. He has also written for BRW, Personal Investor, The Age and Management Today, and was subsequently personal investment editor at The Australian and editor of financial website, investorweb.com.au



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