from my close friend at a melbourne branch of RBS morganrbs...

from my close friend at a melbourne branch of RBS morgan

rbs research note.. $1.04 target price

Texon Petroleum

HY result - no change

Increased 1H12 oil production and higher oil prices partly offset the sale of the Leighton Olmos and Yegua properties, and a decrease in the 1H12 gas price. TXN has continued its
appraisal of existing prospects, continues to bring on new wells and has increased its proven, probable and possible reserves (after adjusting for asset sales). However, the focus remains on the Eagle Ford monetisation process, which is taking longer than expected, but the company notes that it "is continuing to progress a potential transaction".
Event: Increased oil production and prices partly offset asset sale effect on earnings

Whilst production decreased 20% due to the sale of the Leighton Olmos and Yegua properties and gas prices fell significantly, increased oil production and marginally higher oil prices received partly offset the reductions. By volume (boe), oil increased its share of production during the period to 75% (from 60%), while gas decreased to 25% of production from 40%. Consequently, TXN recorded a 1H12 net loss after tax (NLAT) of A$9.1m on revenue of A$7.6m. The result includes a gain on sale of the Leighton Olmos and Yegua properties of A$2.5m and a non-cash share-based payment expense of A$1.5m. At year end, TXN’s cash position was A$25.8m.


Forecasts: Ongoing appraisal activity overshadowed by Eagle Ford monetisation process


The Eagle Ford monetisation process is taking longer than expected. The intention of the process is to fully or partly monetise the assets via lease sale, corporate trade, farm-out or joint venture.

TXN had been targeting a “mid 2012” completion but notes that it “is continuing to progress a potential transaction”. Nevertheless, in 1H12 TXN entered a JV to add 200 net acres (working interest) bringing TXN’s working interest acreage to about 7,400; drilled the first Olmos well, Wheeler #1 (May 2012) and in June flowed oil and gas at the rate of 220boepd. TXN plans to refrac the Hoskins #1 well in 4Q12 and follow up with new Olmos wells in 2013.

The company is progressing early leasing approval on significant open acreage in East Texas considered prospective for shallow oil with a “proof of concept” well planned for 2Q13.

Valuation: We maintain our target price and Buy recommendation

Inevitably the focus remains on the sale process for Eagle Ford holdings. However, in parallel, TXN has continued its appraisal of existing prospects, continues to bring on new wells and has increased its proven, probable and possible reserves by 11% in FY12 to 12.58mmboe (adjusting for the sale of Leighton Olmos and Yegua reserves). As per our last published report, our
valuation range for the Eagle Ford asset is A$200m-279m before tax (A$0.82-1.14ps), based on the level of interest, the quality of the acreage and the strategic value to potential bidders. Our target price of A$1.04ps is set to incorporate the lower end of our Eagle Ford potential sale valuation, with value for exploration and new prospects included. Risks to our target price relate to
variations in production rates and drilling success, the generation of commercial prospects out of the Wandoo agreement, and variations in oil/gas prices and AUD/USD rates.