Ann: Fifth Eagle Ford Well , page-9

Texon Petroleum (TXN)
Market Cap: A$150m
Recommendation: Buy
Share price: A$0.62
Price target: A$1.04

Subject: TXN announces fifth well on its Eagle Ford acreage as well as the interpretation of its 3D seismic survey over the Mosman Rockingham leases




Key points:

* TXN announced it will drill a fifth well in its Eagle Ford acreage which is scheduled to commence drilling by the end of April.

* The Eagle Ford well that will be drilled is one of the Proven Undeveloped locations that has been identified by the company and is being drilled due to a lease obligation

* TXN has identified an area of 1560 acres on its Mosman Rockingham area leases that had a similar response on the 3D seismic survey to the Olmos character at its former Leighton area leases, suggesting a potential for 30 wells in the Olmos horizon on 40 acre spacing. TXN indicated that revenue would likely be 90% oil price linked, based on nearby well results from the same Olmos horizon.

* TXN plans to begin drilling its first Mosman Rockingham Olmos well in two to four weeks, with the expectation that operations will be completed within 45 days of spud and could potentially be on production by July 2012

* Investment view - At the Unconventional Oil and Gas day, John Armstrong (Chairman), indicated that a well was being drilled just across the border of one of their leases. As a result, they are obligated to drill a well on their lease due to the terms of the lease contract. Any sale of the Eagle Ford will be adjusted for the cost of the well, and the value of the well will already be included in the sale price as it is a Proven Undeveloped location. So overall, there will be no effect on the sale process.

The result of the 3D survey is positive for TXN, as it is the first indication of the production potential for the company following the sale of its Eagle Ford assets.

Though we would still consider any Olmos horizon drilling as exploration, as it is based on seismic results. Offset wells in the same horizon help to reduce the risking on the Olmos exploration. We include a risked value of $9.3m in our valuation for the Olmos potential in the M-R lease area, which we are still comfortable with following this announcement.

* Action - We maintain our Buy recommendation and $1.04 price target