A positive view on DLS...., page-8

Lingo-less Drillsearch excites EdisonMonday, 3 August 2015


Anthony Barich


NEAR-TERM oil cash flow generation, a multitude of wet gas opportunities and unconventional upside has Edison excited about Drillsearch, despite overall industry activity slowing and persistently low sentiment.





Thanks in part to hedging, Drillsearch generates a strong margin on production, realising a price of $97.20/barrel for the year and, as of June 30, had $131.1 million in cash and $40 million of undrawn working capital facilities to play with.




A lot of it can be attributed to former managing director Brad Lingo, who left the company last month and took up his post at troubled US enhanced oil recovery hopeful Elk Petroleum.




Drillsearch has continued to hedge production, with 280MMbbl hedged across FY16/17 in the form of $US60-85 collars.




It is targeting $A10-15 million a year in corporate and operational savings, plus a reduced 2016-17 capex expenditure of about $80-110 million while targeting similar production to this year of 2.8-3.2MMboe.




As of the start of last month, Drillsearch had produced 3MMboe and had a 74% success rate with the drill bit with 12 new discoveries, prompting New Zealand-based Edison analyst Tim Heeley to call the company’s diverse but focused asset portfolio set an “encouraging” sign for future shareholder value.




“Even with the downturn in commodity prices, Drillsearch generates a strong margin on production, enhanced with hedging,” Heeley said in a research note published last week.




Most of Drillsearch’s cash flow is generated from its Western Flank oil project where over 12,000bpd gross has recently been achieved.




“The project has production capacity in excess of the export capacity and while new connections will increase output potential, there is no rush to expedite these in the low oil price environment,” Heeley added.




“With currently just under 8MMbbl of 2P reserves, we expect these to be revised upwards given recent drilling success and a healthy inventory.”




On the gas front, joint ventures with fellow South Australian players Beach Energy and Santos are focused on establishing early-stage production.




“Of note, the work with Santos has involved drilling eight wells [which generated seven discoveries], with first connection expected H1 2016,” Heeley said.




In this light, Drillsearch wants to become a material supplier to the east coast and is actively exploring short payback commercialisation strategies, he added.




Then there are the longer-term prospects – the assets focused on the Patchawarra and Nappamerri troughs.




In the northern area, a JV with Santos should drill deep coals in early FY16; while a JV in the western area will test gassy coals in the Baird-1 well.




In the Nappamerri trough, four wells have already been completed and two wells have been shut in post-fracture for pressure build up.




Next year will be a busy one for Drillsearch, with Western Flank oil driving cash flow with investment and gas flow in the Western wet gas area to come online progressively during FY16.




With Drillsearch planning to drill up to 22 wells across its portfolio, Heeley said there was “plenty of scope for upside”.



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