AWE 02 Feb 12

More Indonesia, less BassGas

A sale and a purchase has re-oriented AWE’s asset base towards Asia in the last two months. The sale of a stake in part of the Bass Basin portfolio has been offset by the acquisition of what the company calls ‘growth assets’ in Indonesia. We think it is time to partly step back from AWE following this move.

After printing a low of 90 cents in September 2011, a rotation north has eventuated. The bullish moving average cross formed is indicative of broader term momentum to favour the upside. The recent break of structural resistance will likely result in a strong boost of upward momentum to follow.

AWE has paid US$139 million for a 100% interest and operatorship of two Production Sharing Contracts (PSCs) offshore Indonesia, including an undeveloped oil field with an estimated 76mboe (million barrels of oil equivalent) of recoverable oil.

The price included US$100 million of loans and recoverables in the two companies which are parties to the PSCs.

The extra US$39 million has paid for the interest in the PSCs which are expected to contain an estimated 76mboe in an undeveloped oil field within the PSCs.

AWE explained the acquisition as a ‘key initiative’ in the company’s strategy to grow the business in Asia through selective exploration and acquisition.

Funding for the acquisition will come from existing cash reserves which were recently bolstered by the sale of AWE’s interest in the BassGas Project which is expected to be completed in late February. AWE also has an undrawn A$150 million loan facility that can be used for short term funding requirements although it may not be required in this case.

AWE will receive A$80.125 million cash for selling its 11.25% interest in the Bass Basin. Exiting this asset avoids the need to front up with money required for the BassGas Mid-Life Extension project which will save the company approximately A$40 million.

The BassGas sale also resulted in the company’s decision to pay shareholders a fully franked special dividend of 5 cents per share.

AWE still has a 46.25% interest in the BassGas project which is worth approximately A$324 million, according to the sale price of the stake just sold.

The two PSCs are the North West Natuna PSC (NWN PSC) and the Anambas PSC which border with Malaysia’s offshore interests.

It is the NWN PSC that includes the undeveloped Ande Ande (AAL) oil field which is estimated to contain 76mboe of recoverable heavy oil.

A development plan already exists for AAL that envisaged first production at the end of 2014. Initial production levels of 25,000bopd (barrels of oil per day) would be delivered via a leased floating production, storage and offloading (FPSO) vessel.

The field would also have 43 development wells drilled between 2013 and 2015 at an estimated cost of US$600 million. In this regard, AWE sees its existing funding arrangements together with future cash flows as providing the necessary funding for the on-going development of AAL with 2013 being the earliest date for any significant money being required.

AWE has not dismissed the possibility of a farm-out for part of the project as an avenue for greater financial flexibility.

The company believes the NWN PSC has other potential targets, some of which are adjacent to the AAL field.

The Anambas PSC contains the Anambas gas field and other significant exploration prospects. There is substantial offshore pipeline infrastructure already in the vicinity of the Anambas PSC providing some options for delivery of any discoveries.

AWE will conduct its own final investment decision on the AAL oil field with a decision by the end of 2012. Approval would result in AWE’s 2P reserves lifting by 43 million barrels in addition to its existing 56 million barrels, net of the sale of its BassGas interest. AWE’s 2P reserves would be approximately 60% liquids.

AWE already has investments in Asia through its Lengo gas discovery and the Atlas exploration prospect due to be drilled this year.

The company is on course to reach its production target of 5.0-5.5mboe in FY12 and revenue of approximately A$270-300 million.

With reference to the weekly chart, a series of higher lows is evident, suggesting a change in trend to the upside. We would expect prices to continue to coil higher over the medium term targeting a move towards the 2010 highs of $1.90.

The change in mix of AWE’s assets has reduced its exposure to the capital-hungry BassGas project and introduced some exploratory risk via the Asian assets. The latter are of course also in need of capital for further development, but have been bought at a reasonably cheap clip.

There is some risk in the direction of AWE’s new assets in Indonesia, but on balance it appears to be quite positive. The company will need to deliver on exploration results from Indonesia as well as convince the market that its funding arrangements are adequate. These questions are unlikely to be answered before the company makes its final decision on the AAL field development towards the end of 2012, leaving a few question marks hanging about in the meantime.

We are not being critical of the strategy but simply noting the risk associated with long decision times.

On this basis, we are recommending Members take some money off the table by selling half their holding in AWE at $1.55 per share.

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