Tim Boreham | The Australian | May 29, 2014 12:27PM
A RISKY dilutive side-play executed at an over-the-odds price, or the prelude to much-anticipated Cooper Basin rationalisation?
The hydrocarbon jury today was still deciding on the merits or otherwise of Drillsearch’s (DLS, $1.56) friendly scrip offer for Ambassador Oil & Gas (AQO, 28c), valuing the target at $41m and struck at a 50 per cent premium to secure board support.
On the one hand, the merger widens Drillsearch’s exposure to “wet” (condensate bearing) gas in the northern Cooper, via Ambassador’s 47.5 per cent stake in PEL 570.
Notably, Ambassador’s exploration costs are fully funded by partner New Standard Energy (NSE, 14.5c) to the tune of $42.5m.
On the other hand, the foray broadens (distracts?) Drillsearch’s focus from its producing oil operations on the western flank of the basin.
The only pure-pay Cooper exposure Drillsearch and plans to double current out put of 3 to 3.3 million barrels of oil by 2019.
If PEL 570 proves as fecund as expected, Drillsearch becomes ideally placed to benefit from the expected domestic gas shortfall as the valued molecules are directed to LNG export projects.
If not, Drillsearch dilutes its share capital by 6 per cent.
Cooper Basin consolidation in the past two years includes Beach Energy’s farm-outs to Chevron, the takeover by Cooper Energy (COE, 51.5c) of Somerton Energy, Drillsearch’s Acer Energy purchase and Beach’s blitzkrieg takeover of Adelaide Energy.
Who’s next?
Foster Stockbroking highlights Real Energy Corp (RLE, 25c), which has two million acres in the northern Cooper, targeting both shale gas and oil and conventional oil.
Real is surrounded by blocks with various operators including Senex (SXY, 72c), Icon Energy (ICN, 14c), Santos and the unlisted Victoria Oil and Australian Gasfields.
Senex and Icon are routinely listed as targets. Cooper claims to be claims to be the fifth biggest onshore producer — not that that’s saying much — and has promised a record full year after generating a $13.6m net profit in the first half.
UBS estimates a one million barrel oil discovery (net to Drillsearch) would be worth 6c a share to Drillsearch.
But the firm expects the average prospect size to be 300,000 to 500,000 barrels.
Assuming Drillsearch’s average participation of 50 per cent, this would require a four to six barrel average-sized discoveries.
The hope is that Drillsearch can find another 10mb field akin to Bauer, its key producing Cooper field.
UBS suggests Cooper consolidation will be tricky from here on, with Drillsearch itself “more likely to become the hunted than the hunter.’’
As we posited yesterday, vaunted takeover scenarios rarely pan out as expected. With a $40m market cap, Real Energy is worth a punt while Cooper Energy is enjoying a production purple patch.
Drillsearch is a hold.
AQO Price at posting:
27.5¢ Sentiment: None Disclosure: Not Held
