Here is an email from my adviser which i thought might be of...

Here is an email from my adviser which i thought might be of interest to some of the punters on here. Looks like we're nearing go time on this one with NSE due to drill maiden well with Conoco within a month. Please take note of the necessary disclaimers - I own stock personally as does my adviser.

Background
On 24 October 2011, KEY Petroleum Ltd (KEY.ASX; MC A$10m) announced a company changing deal with Empire Oil and Gas (EGO.ASX) which would see KEY acquire EGO’s 100% owned subsidiary Gulliver Productions Pty Ltd, owner of EGO’s Canning Basin assets, in exchange for KEY issuing EGO 52m shares (15% of KEY’s SOI) as well as assigning EGO a 22.5% interest in KEY’s Perth Basin assets. Simply put, the deal turned KEY from a stale story floated on some uninspiring UK exploration blocks to the THIRD LARGEST ACREAGE HOLDER in the Canning Basin, whilst simultaneously narrowing EGO’s focus to the Perth Basin and helping the company realise some worth from a grossly undervalued asset.

Post the completion of the transaction on 8 December 2011, KEY has been chaired by Mr Craig Marshall, EGO MD since 1997. Prior to floating EGO on the back of their Perth and Canning Basin assets, Craig was integral in the development of coal seam gas prospects in the Bowen Basin in Queensland. These were later sold to Continental Oil Company (Conoco) who developed the coal seam gas assets which are now gas productive and owned by Australian major company Origin Energy.

The Assets
KEY boasts a strong relationship with Buru Energy (BRU.ASX; MC A$800m; A$152m farm-in agreement signed with Mitsubishi in June 2010) via three JVs in Exploration Permits and one Production License:

·EP104 (KEY 14.8%, BRU 38.95%)
o Contains the stranded Point Torment gas discovery which flowed 4.2mmcf/d from the Anderson formation on discovery in 1992.
o The well requires further testing which would be warranted if the operator BRU believes critical mass required to justify infrastructure exists in this part of the basin.

·Retention License 1 (adjacent to EP104 with corresponding equity interests)
o Along trend from BRU’s Valhalla gas discovery
o Stokes Bay #1
§ Also operated by BRU (previously Arc Energy - ARQ.ASX)
§ Drilled in late 2007 to test the extent and reservoir development up-dip from the Point Torment gas accumulation in the Laurel gas sands on the Lennard Shelf
§ Gas flowed under pressure on one test, however the well was shut-in to evaluate the options to undertake a definitive test
§ According to the announcement made to the ASX on 4 April 2012, “Key considers the potential recoverable gas in Stokes Bay-1 is circa 100 billion cubic feet of gas over the interval 2455m to 2470m and 2510m to 2535m. This interval had elevated oil and gas shows and also observed as hydrocarbon bearing intervals on the electric wireline logs run in the well.”

·Production License L15 (KEY 49%; BRU 19%)
o Contains West Kora oil field which “has potential for re-commencement of oil production following a workover to isolate water production”.
o Production License issued 1 April 2010 and valid for 21 years

· EP438 (KEY 20%, BRU 70%)
o In BRU defined WT Province
o BRU has farmed-in after completing 80km of 2D seismic over the block.
o BRU has committed to drilling the Cyrene-1 well late in 2012 and KEY is free-carried in this well up to a cap of $3m
o Potential recoverable oil estimated to be up to 5mmboe, so a relatively small target, but any discovery would be “proof of concept” for an extension to BRU’s prolific Ungani field

KEY also boasts a 70% interest in the massive EP-448 (red block furthest to the south in the below diagram):
o According to the Company, an aeromagnetic survey has been recorded and “seismic mapping has provided exciting potential for both conventional oil targets as well as unconventional large oil shale leads in the Goldwyer Formation”
o On my calculations, the block encompasses ~220,000 acres in the Wet Gas window and ~1.6m acres in the oil window.
o Fielding interest from several well known farm-in partners
o Adjacent as adjacent gets in the Canning Basin to NSE/COP EP456 where a 3200m well will be drilled into the Goldwyer formation in July to kick off the JVs Phase 1 exploration and data collection program
§ This NSE/COP well, “Nicolay-1”, is a major catalyst for NSE and all Canning Basin players, but particularly KEY given their close proximity to the well location

Investment Case
KEY represents an ideal investment for those who have a high appetite for risk and a medium to longer term investment outlook. KEY, whilst an early stage proposition, has acquired an acreage position which already justifies a meaningfully higher market capitalisation. By way of comparison, NSE currently trades on EV/Acre of ~A$25 (with 15m share investment in BRU recognised as cash for this purpose, and including their ENTIRE acreage position). If we were to apply this valuation PURELY TO KEY’s PRIME ACREAGE IN EP448 it gives us a valuation of A$0.15/sh for KEY. This is ground which NSE’s very own map would indicate has the potential to be the equal or superior of NSE’s Nicolay-1 ground, where a well will be drilled by the end of July 2012, given its presence in the theoretical wet gas and liquids rich window. As we’ve learnt from the situation in the US, this is crucial in underpinning sound project economics. Just to reiterate, that’s an underlying $0.15/sh valuation before factoring in EP438, where at least one well (but more likely 2 wells) will be operated by BRU late this drilling season, before factoring in the 15% interest in EP104 and RL-1 and before factoring in the 49% interest in the West Kora oil field. And I haven’t even spoken about the value to be realised in the immediate future from the spin off of the Company’s legacy assets (sale process underway) or any of the Perth Basin acreage.

Catalysts
Divestment of legacy assets. Impact: LOW
Key board appointment to be made. Impact: MODERATE
NSE/COP to drill Nicolay-1 in July 2012. Impact: HIGH
Likely NSE/COP testing Nicolay-1 ~late August 2012. Impact: VERY HIGH
At EP448, collation of all the existing geophysical data sets, mapping of conventional oil prospect and further technical work on the Goldwyer Formation and its shale oil potential to be completed. Impact: HIGH
Potential farm-out of EP448. Impact: VERY HIGH
At EP438, BRU to drill Cyrene-1 well early Q4CY12. Impact: VERY HIGH
NSE/COP to release results from core analysis from Phase 1 drill campaign by late 2012/early 2013. Impact: VERY HIGH
Restoration of oil production from discovery well West Kora-1. Impact: MODERATE
Testing of the Stokes Bay -1 well to prove gas reserves from a contingent gas resource status and also re-evaluating the Point Torment-1 gas discovery. Impact: HIGH

***Disclaimer: I own stock in KEY personally.


NB: Since this email the company has appointed Ian Paton to the board. Probably worth a few of you doing your research on Ian - his name speaks for itself in the WA onshore oil and gas industry. A massive coup for the company.