Foster's - Today’s Top Picks. Austex Oil Limited (AOK.ASX, Mkt...

Foster's - Today’s Top Picks.

Austex Oil Limited (AOK.ASX, Mkt Cap: $56m) – Producing from the sweet spot in the Mississippian – TRADING BUY PT $0.20/sh

•Yesterday our analysts attended the excellence in oil and gas investment conference held in Sydney. The event provided us an opportunity to listen to some keynote speakers talk about various topics shaping the energy industry and meet with management from numerous ASX listed energy companies.

•The stand out from the companies attending the conference was Austex Oil limited (AOK.ASX), who are Mississippi Lime focused oil and gas producer. What we like about AOK is that they have been consistently increasing production, which now stands at ~550 boe/d, via a low risk development program targeting 2 vertical wells a months. The company is also well funded with $12m in the bank, have acreage in arguably the sweet spot of the play and have a large drill inventory of 125 wells , based on 40 acre spacing, which should keep them busy drilling for the next 4 years, based on their current development pace.

•AOK have amassed a total acreage in the Mississippian of 23,000 net acres, however development and production is primarily from the Snake River Project, which is ~5,000 net acres and located in arguably the sweet spot of the play, east along the Nemaha Ridge in Kay County, Oklahoma. Acreage along the Nemaha Ridge is shaping up to be a sweet spot given it provides a favourable structural position and enhanced recovery from the high porosity chat formation. This has been reflected in the results of AOK to date and reinforced from data released by US based Range Resources (RRC.NYSE), which have a sizeable acreage position proximal to AOK.

•To date, 18 wells have been drilled of which 10 wells are in production and 8 under completion. Total production has consistently increased month on month reaching ~600 boe/d, and with 8 wells under completion and 2 vertical wells expected to be completed each month we expect to see production this trend continue. The economics of the wells appear to be outstanding with vertical wells costing $600k drilled and completed, 30 Day IP’s ~80boe/d, oil cut >70% and EUR 85,000boe. RRC are reporting IRR of 90% for vertical wells and ~96% for horizontal wells based on the ~ 30 wells they have drilled in the nearby acreage.

•In addition to the vertical well program AOK have entered into an agreement with RRC to drill horizontal wells on the project. 2 horizontal wells have been drilled, the Balder !1-30N (AOK 13.76%) well, which was a standout producing at a 30 day IP of 899 boe/d and the not so stellar Hod #1-19H(AOK 8.33%), which produced at a 30 day IP of 151 boe/d. A further 4 non operated horizontal wells are planned to be drilled with RRC.

•AOK also holds interests in Kansas, in the 15,500 acre Colby Project in Thomas County (70% WI), and the 11,600 acre Cooper Project in Sheridan County (53% WI). While we don’t view this area core to AOK’s development plans it could provide upside potential should exploration results from Apache Corporation (APA:NYSE), which hold a large 580,000 position, prove to be economic.

•At 31 December 2012, the company held cash of $11.9 million, $7.5 convertible note, with budgeted expenditure for the current quarter estimated to be $2.9 million. The company’s reserves position stands at 1P-3.8mmboe, 2P 5.9mmboe and 13.4mmboe. However, we expect a material increase in the 1P and 2P numbers during this quarter given the number of wells, which have been drilled since the last report. Importantly, we believe this should also pave the way to establish a reserve based lending facility for the company which could provide an additional ~$10-15m in funding, effectively removing the risk of any further dilution as the company executes on its development program.

•Our valuation for AOK is $0.21/sh and is based on applying the average EV/1P multiple from our universe of ASX listed US based unconventional companies of $24/boe to AOK 1P reserves of 3.8mmboe.

•TRADING BUY PT $0.20/sh

http://www.fostock.com.au/announcements/austex-oil-limited-aok-asx