sector: energy - oil & gas explorers price target: $0.115 ...€¦ · basin - sgc’s 1 million...

Initiating Coverage | 1

30th August 2016

QA Capital Pty Ltd 2016 All stated recommendations and opinions expressed in this investment research report are views that represent the authors personal, opinions views and beliefs. For important information, please see the Disclosure Disclaimer at the end of this report.

COMPANY STATISTICS Share Price $0.030 12 Month Range $0.021-$0.051 Market Cap – pre-raising $3.3m Enterprise Value $3.5m Issued Shares 111.562m Options 11.5m Cash Balance Mar16 $0.01m (Est post issue) ~$2.9m Debt $0.16m

Valuation Risked – NPV A$/share

$0.118

12-month Price Target Risked – NPV A$/share

$0.115

Major Shareholders1 HSBC Custody Nominees (Australia) Limited Board & Management Top 20

7.8%

~12%

47%

Directors Andrew Childs Gary Jeffery Keith Martens David McArthur

Chairman

Managing. Director Technical Director

Co. Secretary 1 – Source: SCG SHARE PRICE PERFORMANCE

Source: ASX

CONTACT Tony Bonello (Director) +61 (2) 9231 5673 [email protected] Errol Penrose (Director) +61 (2) 9221 1468 [email protected] Lawrence Grech (Equity Analyst) Contact via [email protected]

Please refer to the last page for important disclosures of corporate involvement and other disclaimers

Leveraged to gas exploration success and to a rebound in US gas prices

A rare multi-TCF conventional gas play – near market

INVESTMENT OVERVIEW

Sacgasco Ltd (ASX: SGC) is an ASX listed gas explorer focussed on developing its onshore northern Californian portfolio of under-explored deep gas prospects. Local under-utilised infrastructure and a huge gas market paying premium prices mean that drilling success at its conventional gas plays can be quickly turned into cash flow. We think timing for discovering and developing US gas is opportune with low cost drilling and a declining overhang of gas supply nation-wide as US drilling activity has collapsed and the US’s new LNG export industry builds. An importer of 90% of gas needs, California already pays a premium and these prices are likely to trend up. Our indicative valuation of drilling success at the 55% owned Dempsey deep gas prospect is A$36m for SGC or $0.14/share at AUDUSD of $0.75 and a long-term real-2020 gas price of US$3/MMBtu – though with project risking our base valuation is $0.095/share. However, at US$4/MMBtu our real and un-risked value ratchets-up to $0.23/share with risked value of $0.15. Our analysis assumes a resource case of a 148BCF development of Dempsey. Resource upside is to 1,100BCF that could see these valuations rise many-fold. SGC is exploring funding combinations that include Farm-out and/or capital raising to drill the Dempsey project over the next 6 months. The well is designed to a depth of 3,200 metres over 40 days and targets seven separate “conventional” reservoir units that vary from 80 to 3,900 acres. Prolific gas fields have been found in the Upper & Mid-Cretaceous reservoirs in the Sacramento Basin and these alone could provide our base case “risked” discovery of ~150BCF. However, the largest upside of ~800BCF, is the Lower Cretaceous Boxer Formation, where SCG have identified at least four separate targets. These older formations have not been extensively targeted and are poorly understood; however regional geology and hi-quality seismic support drilling. Other Petroleum Assets The 40% owned Alvares deep gas discovery made in 1982 is ~30km Northwest of Dempsey and has a 2,400BCF of gas field potential. It requires appraisal to determine its multiple gas shows

Sacgasco Limited (ASX: SGC) Initiating research report Sector: Energy - Oil & Gas Explorers Price Target: $0.115 Cents Per Share


30th August 2016

QA Capital Pty Ltd 2016 All stated recommendations and opinions expressed in this investment research report are views that represent the authors personal, opinions views and beliefs. For important information, please see the Disclosure Disclaimer at the end of this report.

significance. Success at Dempsey and release of more data from NYSE listed California Resources Corp, a key competitor’s significant gas find to the south of Alvares could be catalyst for a big re-rating for SGC even prior to its drilling. SGC holds ~ 8,000 acres in a highly prospective under-drilled sub-basin of the Sacramento Basin. Some leases are held by minor production at Rancho-Capay and Los Medanos gas fields. SGC is well placed to benefit from a resurgence of gas drilling for deeper, conventional high productivity fields as California’s “green-focussed” fuels demand rises; also as US gas prices need to rise to restart gas rig utilisation that has fallen by 94% since 2009’s highs. Key risks for SGC includes material failure in exploration and evaluation programs to drill or located sufficient high productivity resource. Also lower commodity prices, higher costs or inability to obtain sufficient project equity/debt finance to drill and develop the field are the key risks to our valuation and share price targets.

Assets Location California’s Northern Sacramento Basin - SGC’s 1 million acre opportunity

Source: SGC presentations

SGC’s 55% working interest (WI) in the Dempsey Prospect and modest gas production at Rancho-Capay and Los Medanos areas provide some gas handling infrastructure including metering up to 20mmcfg/d with ready connection to PG&E’s pipeline network. Acreage is generally held by payments, rentals and/or royalties with private landholders. An August 2016 farm-out to Bombora Natural Energy Pty Ltd of up to 20% of 9 prospects in the northern Sacramento Basin values this area at A$2.0m (SGC’s WI share is 56% or $1.12m). The farm-out funds added acreage on trend with SGC’s large gas prospects, increasing upside on exploration success.

California – gas pipeline network

SGC’s fields are well located to access California’s intra-state gas pipelines that are considerably under-utilised due to field depletion.

Hydrocarbon rich Sacramento Basin has produced 11 TCF of gas From small to very large fields up to 3.5 trillion cubic feet (TCF)

Source: California Resources Corp June 2016 presentation

CRC’s recent Tulainyo gas find, west of the green Kione-Forbes Formation plays (see above map) has potential to create industry interest in SGC’s plays at Alvares and Dempsey.

Sacgasco'Limited'''I''''Investor'Presenta3on''3'

Asset&overview

Producing)Assets)#9)Sacramento)Basin)Producer)in)2015)

Rancho'E'Capay'Gas'Field'

'(SGC'55%'WI'in'4'wells)'

20,000'mcf'gross'Dec'quarter'2015'

Los'Medanos'Gas'Field'

(SGC'55%'WI'in'3'wells)'

13,000'mcf'gross'Dec'quarter'2015''

Explora,on)&)Development)<)Gas)

Dempsey'Conven3onal'Gas'Project'(Mul3Ezone:'Appraisal'and'Explora3on'stage)'

1+'Tcf'(>166'BOE)''55%'WI'

Alvares'Conven3onal'Gas'Project'(Appraisal'stage)'

2.4+'Tcf'(>400'BOE)'''40%'WI'

Dempsey Conventional Gas Project: SGC 55% Alvares Conventional Gas Project: SGC 40%

Rancho-Capay Gas Field: SGC 55%

Los Medanos Gas Field: SGC 55%

JPM Energy Equity 0616

Sacramento Basin

• Exploration started in 1918 and focused on seeps

and topographic highs. In the 1970s the use of

multifold 2D seismic led to largest discoveries

• Cretaceous Starkey, Winters, Forbes, Kione, and

the Eocene Domengine sands

• Most current production is less than 10,000 feet

• 3D seismic surveys in mid 1990s helped define

trapping mechanisms and reservoir geometries

• CRC has 53 active fields (consolidated into 35

operating areas where we have facilities)

• 2015 average net production of 7 MBoe/d

(100% dry gas)

• Produce 85% of basin gas with synergies of scale

• Price and volume opportunity

Overview

Key Assets

Basin Map

42


Section A Introduction & Background A single basin-focused explorer using “Discovery Thinking” Concentrated onshore California exposure SGC applying new ideas to mature but formerly prolific producing areas Its approach is starting to attract industry attention Conventional natural gas assets with huge unlocked value

Sacgasco Ltd (SGC) is a Perth based and Australian Stock Exchange (ASX) listed oil and gas exploration, appraisal and development company. Listed in 2005 and formerly known as Australian Oil Company – it changed its name in 2015 to reflect the company’s sole focus on conventional oil and gas field exploration and production in the United States’ onshore California Sacramento Basin. SGC aims to apply its “Discovery Thinking” – an in-depth investigative approach to formerly prolific producing areas to identify new play-types that historically often yielded major finds in spite of older plays depletion. The Board and management have focussed to maximise its geological, geophysical and other exploration experience and efforts in a single basin area of extensive, though mature oil/gas production in onshore California. Its approach is attracting industry interest as evidenced by the recent farm-out of part of its acreage to Bombora Natural Energy. SGC’s aim is to uncover either over-looked or new conventional rather than shale hydrocarbon plays. These drilling opportunities often come with ready access to under-utilised infrastructure that can speed up the discovery to development timeframes and at lower cost than in frontier hydrocarbon provinces.

California’s gas reserves (lhs) & new discoveries (rhs) fall – opportunity for new plays

Despite a huge market that generally pays premium gas prices, Californian gas reserves have been falling over a long period

New reserve additions failing to offset production as “old play types” are exhausted

… and comes despite technical innovation

Source: US EIA July 2016 - Annual natural gas data update – for California to 2014

Strategic focus: Strategy – underappreciated plays + on-trend acreage = leveraged returns Seek proven petroleum producing basins, close to infrastructure and markets

Early entry into big target exploration provides potentially leveraged value accretion

Gas is gaining market share in the US boosting chances of a price recovery

SCG’s 8,000-acre position in the proven 11 TCF Sacramento Basin, Calif.

SGC has secured 3.4+ TCF prospective targets in 2 targets and currently has some production

SGC’s vision is to achieve superior shareholder returns through targeting large hydrocarbon exploration plays after considerable investigative work on underappreciated and low cost acquisition oil & gas opportunities and obtain added leverage to those plays by securing additional on-trend acreage. Entering into joint ventures and engaging in farm-outs assists managing financial risks. SGC is targeting substantial gas production to initially supply the 2.5 TCF per year demand of the Californian gas market. Government policies also promote gas to complement its environmentally friendly focussed power generation sector. The growth of gas in the US power mix and the rise of US exports of LNG provides a platform for a sustainable recovery in US wholesale gas prices over time, currently at the lower quartile of a multi-decade trading range. The Company has an extensive portfolio of appraisal and exploration stage gas prospects, including at least two multi-TCF opportunities in the proven Sacramento Basin. It has the opportunity to access over 1 million acres of prospective sediments and is seeking to significantly add to its lease position. These plays are interpreted to be hosted within “conventional” producing reservoirs with potentially high gas flows, avoiding the need for costly horizontal wells or fracture stimulation. The Sacramento Basin has significant development upside because operating companies have overlooked adjacent and underlying gas potential; they instead produce from more widely recognised younger or shallow petroleum reservoirs.


30th August 2016

Board & Executive Team – mix of technical & international experience

Chairman

Andrew Childs Mr Childs graduated from the University of Otago, New Zealand in 1980 with a Bachelor of Science in Geology and Zoology. His professional career began as an Exploration Geologist in the Eastern Goldfields of Western Australia. He then moved to petroleum geology and geophysics with Perth- based Ranger Oil Australia (later renamed Petroz NL). This provided him technical experience as a Geoscientist and later commercial experience as the Commercial Assistant to the Managing Director. Mr Childs is also Principal of Resource Recruitment and Managing Director of International Recruitment Services Pty Ltd.

Managing Director

Gary Jeffery Mr Jeffery has over forty years of project development, operations and exploration experience in the oil & gas, mining and energy utilities industries. This includes in both large and small organisations in over thirty countries worldwide. He has extensive big-gas experience and has been intimately involved in multi-TCF gas discoveries in the North Sea and the Northwest Shelf of Australia. He is an experienced director of public companies in Australia, Uganda and Canada, and has broad international experience in resources. He provides consulting services on energy and resource related matters. Mr Jeffery graduated with a BSc in Geology and Geophysics from the University of New England. He is a member of the Australian Institute of Energy, Fellow of Australian Institute of Company Directors.

Non-Executive Director Keith Martens Mr Martens is an exploration specialist with 35 years’ experience in Australia, North America, New Zealand, Philippines and Kazakhstan. He is the former Exploration Manager of Tap Oil Limited, Bow Energy Limited and Senex Energy Limited. He is the current lead explorationist for Jupiter Energy and Sacgasco and is Principal of Martens Petroleum Consulting Pty Ltd.

Company Secretary

David McArthur Mr McArthur is a Chartered Accountant, having spent four years with a major international accounting firm and has over 30 years' experience in the accounting profession. He has been actively involved in the financial and corporate management of a number of public listed companies over the past 28 years, and has substantial experience in capital raisings, company re-organisations and restructuring, mergers and takeovers, and asset acquisitions. He is Company Secretary and Director of a number of public listed Companies with exposure to the ASX, TSX and AIM markets and has a Bachelor of Commerce Degree from the University of Western Australia.

Glossary MMboe MMBtu

Mcf MMcf/d

BCF TCF

WI Confidence level

Risked value

Million barrels of oil (energy) equivalent; Million British Thermal Units; equivalent to 1.055 GJ; approx. 0.98 cubic feet of gas Million cubic feet Million cubic feet, per day Billion cubic feet Trillion cubic feet Working interest (% cost contribution/participation share of a lease) % assigned to a valuation equal to one minus % risk assigned Remaining value after deducting assigned % of risk to original valuation. Used in an attempt to account for uncertainties in assumed project parameters prior to a definitive feasibility study’s completion


30th August 2016

Section B Sacramento Basin projects – Dempsey – drill ready prospect

Dempsey – drill ready prospect – with 1+ TCF upside Dempsey gas prospect identified by integrating well data, seismic, basin structural review and outcrop analysis of potential seals and reservoirs

An aggregate target of >1 TCF Proposed Dempsey exploration well is designed to intersect seven reservoir targets: Low risk top section ~3 BCF (Forbes Formation: Top & Toe) Mid-risk mid-section ~200 BCF (Guinda Formation: G1) Higher risk deep ~800 BCF in 4 separate units (Boxer X1 to X4) Conventional sandstone reservoirs are hoped to flow at high production rates

SGC has undertaken a detailed review of the working petroleum systems in an under-explored 1 million acre sub-basin of the Sacramento Basin, with emphasis upon less explored sections that are outside the focus of the vast bulk of present industry producers.

SGC has high graded the Dempsey area by integrating existing well control, close-by rock outcrop, 2D and 3D seismic, gas shows/tests and core data, combined with basin production, basin modelling and industry assessments. Piecing these together it has supporting evidence on its expectations regarding reservoirs, seals, structuring, gas source and maturation timing. The identified conventional sandstone reservoirs are expected to flow strongly.

Dempsey Prospect’s un-risked recoverable prospective resource best estimate of its conventional sandstone multi-reservoirs amounts to 1+ Trillion cubic feet of gas – in interpreted combined structure/stratigraphic traps above 3,200 metres depth.

• The well-known upper level Late Cretaceous Forbes Formation has good chance of finding a modest discovery of around 3BCF of gas.

• The mid-Cretaceous Guinda Formation is gas saturated when in traps elsewhere in the Basin and could provide a target of 50 to 200BCF.

• The underlying early Cretaceous Boxer & Ladoga Formation is interpreted to have four units named X1 to X4 with intervening shale seals. In aggregate this forms over 800 BCF of targets – but these targets are less well known due to limited number of well intersections.

Risks increases with age for at least two reasons: • Less is known of the older sections – partly mitigated by SGC’s studies

mentioned above; and • Mechanical drilling and well completion risks increase with depth – the joint

venture will employ an experienced local driller with a good record of meeting or beating drilling costs estimates and reaching well objectives.

Dempsey prospect – structural closure Dempsey Prospect – aiming to intersect 7 reservoir targets

• Structural closure of up to 3,700 acres with prognosed well down to 3,200 metres.

• We expect dry well cost US$3.1m and • Completed wells cost $3.6m.

Dempsey schematics: SCG Presentations

Equity Ownership • SGC – 55.0% working interest (WI). • PEOCO – 35.0% WI, Unlisted partner are currently obtaining funding to

undertake drilling. • Xstate Resources – 10.0% WI ASX code: XST; raised $3m in June 2016.

– Are fully funded for drilling and may want additional exposure.


Explora,on&and&Appraisal:&1+&Tcf&Dempsey&Prospect

Mul,<target)conven,onal)appraisal)and)explora,on)project)under)SGC)gas)produc,on)

•  Total'(100%)'unErisked'recoverable'prospec3ve'

'''''''resource*'best'es3mate:)1+)Tcf)()>166))million)BOE))'

•  Independent'Targets'ranging'from'1+'Bcf'to'350+'

Bcf'(0.35'Tcf)'

'

•  Dempsey'Structure'interpreted'to'have'a'very'high'

probability'of'flowing'commercial'quan33es'of'gas'

'

•  Individual'reservoirs'from'80'acres'to'3,900'acres'E'

based'on'3D'and'2D'seismic'

•  55%'Working'Interest'&'High'Net'revenue'interest'

•  Located'within'a'gas'unit'from'which'SGC'is'

producing'and'selling'gas'–'almost'immediate'3eEin'

'*'Refer'SGC'ASX'release'4'Sept'2014'

Dempsey)Prospect)Structure)Map'

1+Tcf*'

Sacgasco'Limited'''I''''Investor'Presenta3on'' 8'

Explora,on&and&Appraisal:&1+&Tcf&Dempsey&Prospect

Schema'c(Cross(Sec'on(illustra'ng(7(Conven'onal(Reservoir(Targets!

Prospect)Aiributes)

•  Working'petroleum'systems'in'underEexplored'part'(1'million'acres)'of'Sacramento'Basin.'

'•  Suppor3ng'evidence'

includes'reservoirs,'seals,'structuring,'gas'source'and'3ming.'''

'•  Based'on'integrated'well'

control,''closeEby'rock'outcrop,'2D'and'3D'seismic,'gas'shows'and''tests'and'core'data,'combined'with'basin'produc3on,'basin'modelling'and'industry'assessments.'

1+Tcf*'


30th August 2016

Alvares-1 gas discovery – a 2.4 TCF appraisal prospect 1982 well targeting oil found high gas shows from ~2,500metre depth for a further ~1,500 metres Core sample sees moderate porosity/permeability and drilling shows and cutting indicate the presence of both reservoirs and seals SGC estimate the prospect could contain 2.4 TCF of recoverable gas potential Drilling this feature will have to wait for Dempsey drilling and appropriate levels of funding

Alvares Equity Ownership

• SGC – 40.0% working interest (WI)

• PEOCO – 35.0% WI Unlisted petroleum group

• Xstate Resources – 25.0% WI ASX code: XST; raised $3m in June 2016.

The Alvares gas appraisal prospect has high potential that leverages off an existing 4,300-metre-deep well that had extensive gas shows in 1982. The discovery was abandoned as it failed to yield oil and gas was then unattractive to commercialise. The Alvares Prospect is located to the North-West of Dempsey, close to the Western margin of the Sacramento Basin. It is interpreted to be a large anticlinal feature and the well intersected reservoir sands in the mid-Cretaceous Boxer and Ladoga beds interpreted to be the primary target of Dempsey drilling and gas saturated sandstones in shale sealed Stoney Creek Formation reservoirs which were not deposited at Dempsey. Aim to follow-up the gas extensive shows Following a test of the Dempsey Prospect, SGC are keen to follow-up with an appraisal well once it can obtain sufficient financial backing. This is because the original Alvares-1 well encountered over 1,500 metres of gas column that was interpreted from gas shows below a depth of 2,500 metres while drilling. These shows occurred in the lower Stoney Creek Formation that encouragingly occurs below a thick sealing unit that SGC have named the Dero Shale. However, the operator in 1982 was unable to log the top 500 metre section of best gas shows to assess their fuller significance. A gas sample was recovered on a pre-test to an open-hole DST that failed mechanically, and the gas quality appears to be consistent with gas produced in the northern Sacramento Basin. Based upon supporting evidence of integrated well control, close-by rock outcrop, 2D seismic, seismic attributes, gas shows and core data – SGC and its partners have concluded there is likely to be a gas charged reservoir of moderate porosity/permeability. The Alvares structure is assessed to contain an un-risked recoverable prospective resource on a best estimate deterministic basis of 2.4 TCF according to SGC.

Alvares-1 well data collected – provide strong clues for presence of gas and reservoir quality & seal

In time SGC hope to test this gas discovery for its commercial significance

Source: SGC Presentations


Appraisal:&Alvares&Gas&Project&–&Alvares&#1

'Sands))

outside)of)closure)in)A<1)

Well)(equivalent)to))Dempsey)Prospect))))

Reservoirs)))

Thick)Seal)

Interpreted)Gas)Column)

with)core)and)gas)sample)

1500+)metres)gas)show

s)

Alvares)Prospect)Valida,on)

•  Working'petroleum'systems'in'underEexplored'parts'of'the'Sacramento'Basin.'

'•  Suppor3ng'evidence'

includes'reservoirs,'seals,'structuring,'gas'source'and'3ming.'''

'•  Based'on'integrated'well'

control,''closeEby'rock'outcrop,'2D'seismic,'seismic'aBributes,'gas'shows'and''tests'and'core'data,'combined'with'basin'produc3on,'basin'modelling'and'industry'assessments.'

'

500'm'of'High'Gas'ShowsE'no'evalua3on'logs'

Mud'weight'cloaked'shows'

2.4+'Tcf*'


30th August 2016

California’s E&P giant - CRC’s Tulainyo gas find – On-trend and can potentially upgrade the Alvares Project

Northern Sacramento Basin Older sediment plays may hold the key to production revival, a view actively investigated by California’s largest producer CRC (spun-out of Occidental Petroleum)

Source: SGC presentations

California Resources Corporation (NYSE: CRC) exclusively operates in and is California’s largest oil and natural gas producer on a gross-operated basis with net output of 148,000 bbl. oil equivalent per day with gas/liquids making up 34%. It was spun-out of Occidental Petroleum in late 2014. CRC has a large portfolio of lower-risk conventional opportunities in each of California’s four major oil and gas basins: San Joaquin, Los Angeles, Ventura and Sacramento.

Low oil and gas prices and a big debt position has seen CRC reduce capital budgets and in the MarQ’16 had no drilling being undertaken despite overall production volumes falling 11% over the year earlier levels and gas falling 19% quarter on corresponding quarter last year.

Tulainyo gas find Encouragement but its confidential status limits data release

Prior to and after its drilling, CRC’s partner Cirque Resources L.P described the Tulainyo Project is a structurally controlled gas prospect on a well-defined, large anticline with a large potential in-place resource in stacked gas reservoir targets that range over 1,000 feet or more of vertical relief. These targets include the Ladoga Formation and other older formations to form a multi-TCF target.

CRC states in its 2015 shareholder annual report that in the Sacramento Basin, it drilled one well to test a 50 square mile four-way closure that was mapped on CRC’s proprietary 2D seismic data. This conventional exploration well encountered multiple stacked gas bearing conventional reservoirs. The well is understood to have been abandoned due to operational problems before fully evaluating the prospect by testing the gas-saturated sands.

Assuming the discovery is of commercial significance – we think it unlikely that CRC will release details of the Tulainyo project until they have secured adjoining acreage, more fully tested the project’s potential and settled on a development plan. If this occurs, we believe it will materially upgrade SGC’s Alvares project, and may also create added farm-in interest.

Section C Base Case – Dempsey project assumptions and valuation Key assumptions Base case uses near spot pricing of US$3.00mmbtu and AUD/US$0.75 Gas sales 139 BCF over 16-year project life Capital cost over project life is US$0.60/Mcf Operating cost and royalty are ~US$0.17 and $0.65/Mcf

In addition to incorporating the abovementioned project features we have incorporated the following assumptions into our “Base Case” analysis:

• Our Base Case use spot AUD/USD $0.75 and spot Henry Hub gas price of US$3/MMBtu flat to 2020, then rising at 2/3rd the inflation rate of 2%pa.

• Californian producers generally receive around the Henry Hub gas price. Premium prices for local city gate wholesale price tend to approximate the ~US$0.30/MMBtu for entering a system such as PG&E’s.

• We assume a discovery of 148Bcf of raw gas that translates to 139BCF of sales and minor credit for gas liquids over a 16-year project life.

• Initial flow rate of 6 MMcfg/d per well with decline rate of 4%/quarter and a gradual drilling of 13 wells with peak production in 2022. Strong flows are expected from interpreted thick stacked conventional reservoirs. NB See sensitivity table for the value impact of lower initial flow rates.

• Total capital and abandonment cost over the life-of-field of US$88m, with dry well costs of US$3.1m and completed wells each at US$3.6m. This is equivalent to US$3.60/boe or US$0.60/Mcf.

• Cash operating cost are expected to be modest at US$0.17/mcf given little processing of high methane content gas is expected to be required.

• Royalties to landholders are the highest cost anticipated to be around 21% of well-head prices or ~US$0.65/Mcf.

• Corporate tax of 42.8% is used. • A discount rate of 11%pa is used in this ungeared valuation.

Australian Oil Company Limited I Investor Presentation 12

Appraisal: Alvares Gas Project - 2.4+ Tcf gas

Appraisal of a conventional sandstone reservoir, gas discovery

• 40% Working Interest in onshore Alvares Gas discovery drilled in 1982 when oil was the only target

• >1,500 metres of gas shows from 2,500 metres depth with pipeline quality gas flowing to surface

• Located close to large natural gas pipelines along Interstate 5 providing access to premium Californian gas market

• On trend with geologically similar, multi-Tcf Tulainyo Project mapped by Cirque Resources and involving California Resources Corporation (NYSE: CRC)

• Large Anticlinal structure covering > 10,000 acres

• Total (100%) un-risked recoverable prospective resource* on a best estimate deterministic basis: 2.4+ Tcf (~400 million boe)

• Alvares is interpreted to have a high probability of flowing commercial quantities of gas.

* Refer AOC ASX release 4 Sept 2014

11 Tcf Produced

from Basin

Rio Vista Field

3.5 Tcf


30th August 2016

Chart 1: Base Case profile of gas sales (rhs) & Revenues and Free Cash Flow in A$’000 (lhs)

Base case project profile – at US$3.00/MMBtu generates >55% IRR

Dempsey project estimated output & earnings

Source: SGC releases and QA Capital’s estimates ----------------------------

Base Case analysis results (un-risked)

• Moderate capex upfront to first production can reduce need for excessive extra equity

• Slow build up of production to peak at 2022, could be accelerated to boost NPV of project by quicker drilling

• Peak EBITDA is US$25m share to SGC • Ungeared NPV for SGC’s share is

US$36m or ~US$0.47/Mcf and IRR 55% • Worth A$0.144/share to SGC un-risked

Source: SCG releases and QA Capital’s estimates

Scenario Analysis Robust development – economic down to below US$2.50/MMBtu We have reviewed a number of Dempsey Project scenarios by varying key input parameters:

Chart 2: NPV per SGC share scenarios – at various gas price & capex per Mcf

Source: SGC announcements, QA Capital estimates

Our findings for an un-geared project in terms of NPV per SGC share are summarised in the Chart 2: Base case 139BCF dry gas sales reserves; US$3/MMBtu gas price and 6mmcfg/d initial flow rate per well generates A$0.14/share.

• Project is robust if reserves halved to 71BCF; generates $0.07/share value. Rises to $0.27/share on double Base Case reserves.

• Flow rate is critical to valuation – doubling initial flow to 12mmcfg/d per well boosts value to $0.20/share, while at 0.75 and half initial base flows sees valuation fall to A$0.09 and $0.02/share respectively.

• A rise in gas price from US$3 to $4/MMBtu raises NPV per share from A$0.14 to $0.23/share

• Project still robust at US$2.50/MMBtu gas; generates $0.10/share of value.

• Project is US dollar exposed – a 7% fall in AUD/USD from 0.75 to 0.70 raises valuation by 8% to $0.16/share value.


30th August 2016

Chart 3: Sensitivity of NPV per Mcf – at various flow rates & reserves scenarios

Source: SGC announcements, QA Capital estimates

In reviewing a number of Dempsey Project scenarios unit valuation per Mcf of gas is significantly impacted by the following key input parameters:

Base case initial flow rate of 6 MMcfg/d and 147 BCF resource produces an NPV US$0.35/Mcf and scenario sensitivity: • Doubling initial well flow rates

boosts NPV/Mcf to $0.48/Mcf as it accelerates production.

• Halving initial flows to 3 MMcfg/d sees NPV/Mcf fall to $0.09/Mcf as it takes longer to produce reserves and wells can shut-in earlier as they reach low economic flows.

• Doubling reserves massively increases total NPV but changes unit NPV/Mcf little. This is due to need for extra wells and plant required above that currently installed.

• Gas price from US$3/MMBtu to $4 and $2.50/MMBtu sees Base valuation move from $0.35/Mcf to $0.56 and $0.23/Mcf respectively.

Section D SACGASCO Ltd – Corporate Valuation & Investment Thesis

SGC – Risked Valuation totals $0.118/share

We apply risk factors to NPV valuations to account for parameter uncertainty

Our base case assumption leads to an un-risked NPV valuation of A$36m or $0.14/share. Prior to refinement of project parameters, we apply a 34% risk or 66% confidence factor to this value to calculate “Risked” project values at A$24m or $0.10/share post estimated placement shares. As project parameters become settled, our confidence rating and valuation rises.

Source: SGC releases, QA Capital estimates

• Dempsey project’s “risked” valuation is A$0.10/share • We include an assessment of Alvares and Dempsey upside which together add A$0.036/share. • Other acreage is priced at the Bombora Natural Energy Pty Limited farm-out equivalent that

prices an Area of Mutual Interest of ~250,000 acres at A$2m with SGC’s ultimate share worth $1.1m which is risked to $0.6m for a staged farm-in.

• We assume $3.1m capital is raised adding 138m shares to total 249m to calculate per share amounts

• Deducting ongoing corporate costs and net cash – our un-risked NPV-based value is $0.33/share and $0.118/share after notional project rising.

$0.35 $0.33$0.32$0.48$0.25$0.09$0.23$0.56$0.34

-‐1

1

3

5

7

9

11

13

-‐25

25

75

125

175

225

275

325

Iinitial Flow Rate mmcf/d & NPV

US$/m

cfe

Gas re

covered -‐B

CF

After-‐TaxNPVUS$/mcfe

GasrecoveredBCF

Initialflow/wellmmcf/d


30th August 2016

Dividend Discount Methodology

Chart 4: DDM Analysis

Other valuation measures – DDM indicates ~$0.106/share We have assessed SGC over the field life integrated into projections of possible profit & loss statement and balance sheet. This incorporates gearing and future equity funding and estimates of dividends from free cash flow. We recognise this valuation methodology is highly conditional – but it indicates a high margin project that can repay debt and generate a dividend flow over the 16-year project life.

Our Dividend Discount Model valuation comes to a preliminary estimate of $0.106/share, and is close to our $0.116/share risked NPV calculation.

Price target – sees 12 month target price: $0.11/share Our Target Price is set at $0.115/share – close to our risked NPV of $0.118/share and our preliminary DDM value of $0.106/share

We have taken our risked NPV based valuation of $0.118/share and taken cognizance of the need for a possible $2m of added equity funding once production has begun to drill additional wells. This has been captured in our DDM analysis that generated a value of $0.106/share Combining these two our 12-month price target is set at $0.115/share.

Investment thesis

SGC has solid 55% and 40% interests in two multi-TCF gas field prospects Drilling success by SGC or competitor CRC can materially re-rate the company Obtaining funding, while dilutive could increase market interest in SGC as it means that its “drill-ready” Dempsey well proceeds Dempsey success or commercialisation of CRC’s Tulainyo gas find are key re-rating factors US gas markets are being primed for price spikes as excess production capacity fades

Our investment thesis in SGC is that the company has two multi-TCF drill ready gas prospects ideally located to infrastructure and a market paying premium prices. In drilling Dempsey prospect it has the opportunity to realise considerable value upside. Its success would also upgrade the Alvares project. Similarly, if CRC moves to commercialise its Tulainyo gas find, SGC’s assets are likely to be re-rated by the market, or potentially be the subject of a takeover by local Californian producers who are facing declining output from mature fields.

Catalysts to move toward our share price target: • SepQ’16 – Raising of $2.5 to $3.2m; introduction of supportive shareholders.

A possible farm-out of part of the well reduces funding burden and places a value on the prospect.

• SepQ’16 – Engage with contracting companies to finalise drill plans for Dempsey. The prospect has a short path to any remaining approvals and its status is “drill ready” and there is ample equipment and personnel available to undertake cost-effective drilling.

• DecQ’16 – Mobilise drilling equipment to site and begin drilling 60-day project. • MarQ’17– Examine drilling result – if successful then engage with gas buyers

and look for equipment upgrades if required. Engage with debt providers to fund added equipment and development drilling on a more cost-effective reserves-backing basis.

• MarQ’17 US seasonal gas pricing peak – gas in storage is now falling from record levels. Lower drilling could see less surge capacity to cope with seasonal peaks resulting in gas price spikes that can draw attention to gas plays lie SGC.

Investment Risks – SGC is for risk tolerant investors SGC faces numerous risks and should appeal only to risk tolerant investors

Key risks include: • The Dempsey prospect drilling may uncover too small a gas accumulation or

flow gas at uneconomic rates to be commercially produced. • Under-estimate of technical issues may see cost of drilling rise or inability to

reach or properly evaluate the target zones. • A delay or failure to raise necessary equity funding may preclude

participation in the drilling of the Dempsey project; or require SCG to farm-out on cheap terms that may materially dilute upside for SGC shareholders.

• Negative moves in gas prices and in energy investors’ sentiment can materially impact the share price.


30th August 2016

Section E United States Natural Gas Industry Fundamentals & Pricing

US Gas Price fundamentals strengthen – but upside likely capped well below boom levels Fundamentals suggest a bottoming in gas prices through 2016-17 Gas price upside may be limited by lowered costs of US shale producers and low relative oil prices US Gas could move from ~US$1.50 to $3 range to the $3 to $4.50 per/MMBtu

We are becoming more confidant that a bottom has been reached in US gas and that prices can gradually return to a sustainable US$3 level and up to $4.00/MMBtu range. This is backed up a price rebound despite high storage levels, a higher NYMEX futures Contango and the EIA’s short term forecasts for 2016 to 2017.

US gas prices are cheap in absolute terms, with recent US$1.50 to 2.75/MMBtu prices in nominal terms at or below the depressed prices of the 1990’s “gas bubble” period.

However, in relative terms to oil prices, gas is not so cheap. Additionally, the shale-gas revolution’s technical breakthroughs that have lowered cost levels – the gas price is likely to trade well below past peaks exceeding US$10/MMBtu.

The identification of techniques to commercially exploit multiple shale-gas basins throughout the US and Canada mean that high prices can unleash ample supply within a one to three years. This probably means that the US gas market may become unable to “sustain” prices much above US$4.50-5.50/MMBtu range.

US gas - near multi-decade lows in nominal prices Gas approaching 40% of oil energy price equivalent

Henry Hub price US$/MMBtu (lhs) – blue line Gas Futures price to spot (rhs) – Contango normalising

Source: EIA monthly data

Gas price relative to oil (green line) have trended up since 2012 – now not cheap on post-GFC ratios

Source: Iress, Bloomberg, Qandl database

Demand for US gas - key bull factors include:

Source: EIA July 2016 annual data

Gas up 18.7% - green bar Coal down 14.2% - brown bar

Nuclear up 1% - yellow bar Total generation up 0.5% - blue bar

• Gas has been displacing coal in US power generation on pricing and increased effective costing of environmental factors or explicit credit costs. Though growing renewables have slowed gas’ recent rise we see both growing with gas’ role as a backstop for variable output renewables.

• Nuclear plants retirement timings are increasingly certain, while commissioning new nuclear units is likely to experience delays.

• New power demand - A gradual US economic recovery is raising overall energy demand – but currently only modestly; longer-term electric vehicles can provide a secular boost to overall power demand – at the expense of liquid fuels.

• Growth in US economy and cheap reliable gas feedstock is seeing commissioning of new (gas intensive) chemicals manufacturing plant. However, this element of growth could slow in coming quarters.

• LNG Exports - The first US-based LNG export terminals has begun exporting LNG. This can progressively bring on ~57 million tonnes pa of exports by 2020 with plants under construction, plus another 39 MMtpa capacity seeking final development licences and funding. Piped exports to Mexico are also rising strongly.


30th August 2016

Supply factors for US gas - key bull factors include: US rig utilisation down 94% from highs

Rig utilisation moves closely after big moves in gas prices – recent price rise appears insufficient to boost drilling

Source: Baker Hughes weekly data

Canada’s gas rig utilisation down 80% from highs Eventually low activity slows export growth to US

Source: Baker Hughes weekly data

US production gas growth flattening – while US net gas imports falling

Gas in storage – key item to watch – needs to fall for a sustained price rise

US Gas Consumed (green); US Gas Production (blue) Monthly BCF smoothed 12 month moving average

Source: IEA July 2016

US underground storage in BCF 2016 readings (in blue) still above upper range of last 5

years (grey shaded area)

Source: EIA Monthly Gas July 2016

NYMEX Futures and EIA forecasting higher US gas prices around US$3/MMBtu

Downside US$2.00 and upside >US$5/MMBtu

US gas prices – now entering a new phase • Gas prices below US$4/MMBtu have seen a collapse

in gas drilling. Production growth is now slowing and will turn down decisively in the absence higher prices

• US production is visibly consolidating and in 3 months to Mar’16 output fell 8.1% while US gas consumption fell 1.9% with storage drawn increased 441 BCF or equivalent to 5% of the peak-use MarQ16.

• JunQ16 sees first LNG exports and acceleration of gas-liquids exports following export ban removal; this can gradually tighten the gas market over the 2016 to 2019 period.

• A recovery in oil prices to beyond US$60/bbl could see US gas prices recover more quickly due to the increased LNG export market link, however, higher liquids prices can see high-liquids gas field production expand considerably thereby damping part of gas relative price upside.


30th August 2016

California’s premium city gate gas prices – a favourable State to be a gas producer

California “imports” around 90% of its needs California production (in blue) is in decline

California premium price over Henry Hub and EIA’s forecast for rising price

Source: EIA Short Term Energy Outlook, July 2016

DISCLOSURE DISCLAIMER

This document and the information and views contained within are intended for QA Capital’s Wholesale investors only. Non-wholesale investors should not rely upon this document and should seek independent advice regarding any security mentioned or implied in this report. Readers should be aware that QA Capital intends to earn fees for research and stock issue(s) and or placement(s) of SACGASCO Limited. The author of this report at its publication date does not hold securities in SACGASCO Ltd. The author of this report has not undertaken a visit to the SACGASCO Ltd.’s operations and is relying solely on the factual accuracy of information provided to QA Capital by the Company. The author of this publication, QA Capital Pty Limited (‘QA Capital’), ABN 67149077332, AFSL 448754, its Directors their Associates and Clients can or do hold shares in the securities mentioned in this Research document and therefore may benefit from any increase in the price of those securities. QA Capital and its Advisers may earn brokerage, fees, commissions, other benefits or advantages as a result of transactions arising from any advice mentioned in publications to clients. Any financial product advice contained in this document is unsolicited general information only. Do not act on this advice without first consulting your Adviser to determine whether the advice is appropriate for your investment objectives, financial situation and particular needs. QA Capital believes that any information or advice (including any financial product advice) contained in this document is accurate when issued. However, QA Capital does not warrant its accuracy or reliability. Any opinions, forecasts or recommendations reflects the judgment and assumptions of QA Capital as at the date of publication and may change without notice. QA Capital, its officers, agents and employees exclude all liability whatsoever, in negligence or otherwise, for any loss or damage relating to this document to the full extent permitted by law.

sector: energy - oil & gas explorers price target: $0.115 ...€¦ · basin - sgc’s 1 million...

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