Oilex Ltd 16 Dec 09

The first well in JPDA 06-103 was a dud.

Speculators piled into the stock mid-November, ahead of the first of two wells spudding in the Timor Sea. The first well, Lorẻ-1, in JPDA 06-103 targeted 195mmbl of oil of which the company had a 10% interest. Lorẻ-1 spudded on 20 November 2009 and failed to deliver.

The company’s share price was spiked to $A0.38 on 17 November 2009.

Lorẻ-1 intersected the objective Elang and Plover formations but the cupboard was bare. Minor oil shows were observed in the Elang section and there were zones with limited oil saturation in the Elang formation.

This was hugely disappointing for investors but part of the game with regards to risk and reward. The success rate in a global sense for wildcat wells is only about one in nine. In a 2-hole program, the odds of failure are stacked against the explorer.

In response to bad news the punters trashed the share price which has fallen to $A0.18.

The drill rig Songa Mercur will drill the Lolotoe prospect next. Lolotoe is described as a “robust 3 way dip faulted anticline having about 300 metres of vertical relief. The prospect is targeting a mean prospective oil resource of 90 million barrels (100% basis) in the primary objective Elang/Plover formations.”

Oilex is the operator and only has a 10% interest. Even if the well is a success, a 10% interest is not a company maker. With one failure already, investors are unenthused.

JPDA 06-103 looked like an exciting oil play. There are multiple targets and the acreage seemed to have potential for significant oil reserves. JPDA is located near producing oil fields, and near Eni’s recent Kitan oil discovery (45 mmstbo) which is being developed. Other fields to the south-west are Corallina, Laminaria and Bayu-Undan.

Technical Comment

Fat Prophets initially recommended buying OEX at $1.64 in January 2007 (Fat Mining 62). Our last review of this stock was in September (Fat Mining 190).



 

Our last coverage saw Oilex trade at $0.245, prices went on to reach $0.38 in early November. Prices have since retraced sharply to touch a low of $0.17. There is an increasing risk to the downside both in the short and longer term trend. Should the $0.17 level fail to support prices, the next level is at $0.14, July low.





In mid-October the company completed a placement of 44m shares at $0.23 per share to raise $A10m.

The cash flow statement in the September quarterly report highlights the challenge faced by the company. Oilex generates a handy small cash flow form its interests in India that are cash positive at the operating level. For 3Q09 the company reported sales and receipts from debtors of $A0.5m. Production costs were reported at $A0.2m, but net administration costs of $A0.5m exceeded revenues.

Oilex is carried in JPDA 06-103 by Japan Energy up to an agreed ceiling. As an operator of projects the company receives payments for exploration and evaluation. Income from this source was $A2.0m and after development expenditures of $A0.3m the company reported a net operating cash flow of $A1.5m.

Oilex has no debt and finished the September quarter with $A11.4m and has since raised $A10m. The company desperately needs a successful well.

Key Points from the September Quarterly Report 2009

JPDA 06-103 (Timor Sea – Oilex 10% and Operator)

1.    Japan Energy farms-in reducing Oilex’s interest to 10%.
2.    The company is carried for two wells subject to a ceiling.
3.    There is an option to drill a third well.
4.    Drilling is expected to start late November.
5.    Oilex’s share of prospective resources is 28.5mmbl of oil.
6.    Indonesia has extended the term of the PSC to 15 January 2011.
7.    This gives time to complete the drilling program and evaluate the results.
8.    Two additional wells are to be drilled on the block during 2010.

WA-388P (NW Shelf, Australia – Oilex 14% and Operator)

1.    Processing of new 3D seismic completed.
2.    The seismic shows potential hydrocarbons in place.
3.    Prospects will be prioritised, and a decision to drill made in 2010.

West Kampar (Indonesia – Oilex 45%)

1.    Work is suspended because of a dispute between JV partners.
2.    Oilex is ready to restart the work program.
3.    The company is trying to recover US$4.1m owed to it by the operator SPE.
4.    SPE’s 22.5% need to be transferred to Oilex or other third party.
5.    Oilex is entitled to the 22.5%.

India (Cambay, Bhandut and Sabarmati Fields – Oilex 45% and Operator)

1.    Net oil production for 3Q09 of 8,408 barrels.
2.    India is cash flow positive.
3.    Production is declining from the Cambay-74 and Cambay-64 wells.
4.    The Cambay-19Z well is in production from a deeper zone.
5.    Production from Cambay wells 72, 63, 20 and 8 is intermittent.

Oman (Block 56 – Oilex 25% and Operator)

1.    On behalf of the JV the company is reviewing options.
2.    Options are potential sale and farm-out.


The company has acted firmly to lower the costs of running its business in order to preserve cash. The company has focussed on maintaining oil production from India but this is hardly a company maker.

If the Lolotoe well is also unsuccessful, it will bitterly disappoint both management and shareholders, although this is probably already in the price.

The company has no catalysts for a re-rating in the short-term.

3D seismic has been completed for WA 388P and any drilling prospects will be determined by early 2010. The company has big hopes for its 14% interest in WA 388P. The licence includes part of the fairway that hosts the Gorgon, Pluto and Wheatstone gas fields.

WA 388P is well positioned so that a major gas discovery (> 1TCF) could supply additional feedstock for existing LNG projects, Pluto, Wheatstone and North West Shelf.

After a failure in JPDA 06-103, the company will focus on testing targets in WA 388P. Oilex has indicated that a decision to drill could be made in early 2010, but this of course is subject 3D seismic defining suitable targets.

Oilex has had bad luck and an investment thesis based on success in JPDA 06-103 has not worked out. It is time to cut losses and switch into a company with more immediate upside potential.

We are removing Oilex from the Fat Prophets Australian Mining and Resources Portfolio. A good switch is from Oilex into Aurora Minerals. Aurora has an exciting manganese project in Western Australia.

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