Small Caps | Aug 03 2012
– Neon Energy operating in US and Vietnam
– Further drilling at Paloma project a potential catalyst
– Vietnam acreage appears prospective
– DJ Carmichael rates the stock a “High Conviction' Spec Buy
By Chris Shaw
Junior oil and gas explorer Neon Energy ((NEN)) has operations in both the US and Vietnam and a site visit to the US operations by DJ Carmichael has reinforced the broker's Speculative Buy rating on the stock.
Neon Energy has an 85% working interest in The Paloma Deep project in California, where two additional appraisal wells were recently completed. Results were encouraging in the view of the broker, as Paloma Deep-2 confirmed the lateral extent of pay zones encountered in the Paloma Deep-1 exploration well.
As well, DJ Carmichael notes the Paloma Deep-2 results support the current resource estimate of 26 million barrels of oil and 22 billion cubic feet of gas. There is scope for this to be increased, as a deeper sandstone reservoir was also encountered.
Production testing of Paloma Deep-2 is set to begin this month and the broker suggests this could be a key near-term catalyst for Neon Energy, as unrisked upside is estimated at $0.26 per share. The Paloma field is in a highly prospective area, as US-listed Occidental Petroleum is conducting an extensive shale program in fields close to Neon Energy's operations.
In offshore Vietnam, Neon Energy recently announced global energy major Eni would be the farm-in partner for blocks 105 and 120. Eni will take a 25% working interest in both blocks and will carry Neon through one exploration well in each block.
The location of each well to be drilled will be determined after seismic data is obtained, DJ Carmichael noting exploration drilling is unlikely to commence before the first half of next year. Two prospects under consideration for drilling in block 120 are estimated to potentially hold unrisked resources of between 460 million and 611 million recoverable barrels as a best estimate and 1.3 billion to 1.7 billion recoverable barrels as a high case estimate.
Adding to the value of the acreage, ExxonMobil recently announced a second discovery in a block close to Neon Energy's block 120. The ExxonMobil discovery is thought to be on the same geological trend.
For block 105, the Cua Lo prospect has been assessed to hold between four trillion and 14 trillion cubic feet of recoverable gas. While market reaction to Eni farming-in was relatively neutral DJ Carmichael viewed the news more positively given Eni's credentials in terms of successful exploration.
The potential for positive news flow from Neon Energy in coming months remains high in the view of DJ Carmichael, enough for the broker to rate the stock as one of its top 'High Conviction' calls for 2012. The Spec Buy rating is accompanied by a price target of $0.81, which is more than double the current share price.
Neon Energy has a market capitalisation at present of around $170 million, meaning the company receives little coverage by brokers. As evidence of this, none of the brokers in the FNArena database provide research on the company.
Shares in Neon Energy today are slightly higher in a weaker overall market and as at 11.15am the stock was up 0.5c at $0.38. This compares to a range over the past year of $0.245 to $0.59.
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