NZEC – what's going on?
February 9, 2012
Let's be honest up front and say, "I don't know what's going on." Neither does the Company, according to this afternoon's NR. This is a spitball exercise and nothing more. How's that for a disclaimer?
When I first wrote it up, New Zealand Energy Corp. was trading at $1.07. Early last August, the Company went public at $1.00. My intro article was written just two months ago.
It's now priced at $2.28. Since I published my piece on December 13, there has been no news of drilling results. As regards operations, the only news (January 18) was that they've spudded the Copper Moki-2 and Ranui-2 wells. No results yet, though expectations are for something shortly.
Are we witnessing the 'buy on the rumour, sell on the news' syndrome at work? Perhaps. Only time will tell.
Here's another possibility. I think it's as simple as the notion that more people are starting to run the numbers and they see what I see. The first producing well, Copper Moki-1, with a 20/64th inch choke, yields some 500 barrels of oil per day. TAG Oil's nearby Cheal B-5 well, is last reported as producing 1700 barrels per day, with a 40/64th inch choke. I have yet to hear back from TAG on my enquiry for a confirmation/amendment of that figure. Applying the formula for the area of a circle (the opening of the pipe), or pi times the square of the radius, the Cheal B-5 pipe is 4.0 times the opening of the Copper Moki-1 pipe. On a linear basis, that would place NZ's CM-1 well, on a same-base diameter of pipe, at just under 2000 barrels. Accepting some loss of pressure with the opening of the pipe, the more realistic figure would be somewhat below that level. Just for fun (remember, this is just spitballing), I'm imagining the apples-for-apples flow of CM-1 at 1700 barrels or higher. Not talking about production flow here, just trying to come up with a same base comparison with the next door neighbour's experience.
Why, then, would NZ be restricting flow on this well, as described by President Bruce McIntyre in his online video interview with Al Korelin? Of course, there's the assurance of stability in production by not pushing to the limit, but there's got to be more than that. The discrepancy in daily production rate is just too great.
The January 18th release referenced an installed facility at the surface to accommodate up to 1,000 barrels per day. Looking at both of slides 1 and 3 from their updated corporate presentation, I see four tanks. Well, four times 400 (each tank would hold 400 barrels) means they've upped capacity already since January 18. From slide 3, there appears to be lots of room for further expansion. This is starting to feel a bit like a round of Where's Waldo, isn't it? Still, I feel there's got to be something else at work here.
My guess is that it's tied to the natural gas side of things. At the current level of production, they're flaring off, by my guestimates, $7,000-10,000 worth of natural gas every day, including the highly valued liquids component. That's not pocket change, by anybody's description. There's currently no facility in place to capture the natural gas and condensate, worth at the low end another $210,000 to add to the current netbacks (at $90/barrel – yes, you read that correctly - $90 per barrel) of $1.35 million per month. I have to think that they're just hopping to capture the natural gas and liquids within 2-3 months. The oil is not going anywhere, so if I were in charge, I'd be treading softly on production until that facility is in place.
Next, consider that the 3D seismics for Copper Moki-2 are well matched with Copper Moki-1. If, and that's always the biggest word in the English language, if CM-2 matches the success of CM-1, and if the natural gas component is consistent and playing the role I suggest, then we're looking at huge upside potential from here, and this on just the first two wells.
Bruce McIntyre mentioned in his online interview with Al Korelin that they've already identified (via 3D seismics) an additional six 'lookalikes' to the Copper Moki target, with prospects for 2-3 wells per target. This is the focus of their Taranaki plan for 2012. Let's see now. Six plus one, all times two or three… nahhh… let's leave that for later, shall we?
Still just spitballing here, folks, but isn't that the fun of it?
Looking at CM-1, open the pipe some in a couple of months, say to 1,000 barrels of oil per day, double that to account for CM-2, and then add in the natural gas component (current flaring of $7,000 at the low end… times twice the production flow… times two wells). My calculator (smoking from the seams) places it altogether at about $75 million per year in net cash flow, including $10 million for the natural gas and condensate.
How much is that worth in market cap? Six times net cash flow? Ten times? At eight times, we're talking about $5.63 per share, fully diluted. On just two wells??? We're not even beginning to think about the other 152,000 acres in the Taranaki Basin, or the 1.8 million acres on the East Coast. As the kids would text, OMG!
Just spitballing, mind you…
Best regards,
Kevin Graham