Small Caps | May 03 2012
– Neon Energy a junior oil and gas play
– Exploration and a potential farm-in agreement offer upside
– DJ Carmichael rates Neon a Speculative Buy
By Chris Shaw
Junior oil and gas play Neon Energy ((NEN)) operates onshore in California and offshore in Vietnam, assets in the former providing steady cash flow from production and some exploration potential while the latter offers exploration upside in both oil and gas.
DJ Carmichael notes while the North San Ardo field delivered lower production in the March quarter, this can largely be explained by delays in drilling new development wells. Current production of 300 barrels of oil per day ensures Neon's corporate and overhead costs are funded.
On the development side, DJ Carmichael notes the Vietnam farm-out agreement is nearing completion, with the farm-in partner for the two permits expected to be a major oil and gas company. This will add credibility to the acreage in the broker's view and should also be value accretive.
In the quarter Neon also delivered further positive appraisal results from the Paloma Deep discovery in California, including an unstimulated 445 barrels of oil from the Lower Antelope interval. This is encouraging according to DJ Carmichael as the result is similar to early results from a number of nearby fields producing in the same formation.
Using historical data from the nearby fields the resource potential of Paloma Deep could be from 7.9-23.6 million barrels of recoverable oil, Neon's share being 5.9-17.7 million barrels. A 10 million barrel oil discovery would add around 13c per share to DJ Carmichael's valuation on an unrisked basis.
If a commercial reserve within this range can be confirmed there is significant potential upside for Neon in the view of DJ Carmichael, though further appraisal work is needed. As part of this, Neon is planning to spud a second appraisal well shortly.
The upside potential from a successful discovery at Paloma Deep and the upcoming farm-out agreement makes Neon one of DJ Carmichael's High Conviction plays for this year. This is reflected in the significant share price upside of a current share price of close to $0.40 relative to the broker's price target of $0.70. DJ Carmichael rates Neon as a Speculative Buy.
Despite a market capitalisation of more than $180 million there is little coverage of Neon Energy by Australian brokers, and none of the brokers in the FNArena database currently provide coverage of the company.
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