Australia | Sep 10 2012
– Deutsche initiates on Drillsearch with a Buy rating
– Conventional fields to underpin near-term growth
– Upside risk to production growth expectations
– Shale assets offer medium to longer-term growth potential
By Chris Shaw
Drillsearch Energy ((DLS)) is an emerging energy producer fully exposed to the Cooper Basin through both conventional oil and gas fields and unconventional shale assets. The latter is via a joint venture with BG Group.
Deutsche Bank has initiated coverage on Drillsearch with a Buy rating, the broker setting its price target on the stock at $2.10. This is based on a discounted cash flow valuation for the stock of $2.07, which assumes recoverable Western Flank oil reserves for Drillsearch of 7.6 million barrels and 11.7 million barrels of oil equivalent of wet gas recoverable reserves.
For Deutsche, the attraction is that while Drillsearch's conventional fields will underpin near-term growth and cash flows, the shale assets are a potential game-changer over the medium to longer-term. Production growth for FY13 is expected to be more than 200% thanks to a ramp-up in oil output from the Western Flank and the elimination of some transport capacity constraints, with risk to the upside in Deutsche's view given recent exploration successes.
This production is high margin, as finding costs are estimated to be around $6 per barrel of oil equivalent and Deutsche notes production can be brought to market without a substantial infrastructure build-out being required.
Exploration also offers upside, as Drillsearch has more than 23 wells scheduled in FY13 and 3D seismic analysis has significantly improved potential success rates. Any substantial increase in reserves should act as a positive catalyst in Deutsche's view, as de-risking FY13 exploration drill lifting would increase the broker's price target 10% to $2.30.
With respect to shale assets, Drillsearch has 40% of ATP 940P, which covers 2,000 square kilometres in the Nappamerri Trough of the Copper Basin. Deutsche sees good prospects for success in the block given the combination of over-pressurised shales and initial indications of associated liquids.
Relative to other shale plays in the Cooper Basin, Deutsche sees ATP 940P as offering potential to achieve a more optimal balance between reservoir pressure and liquids yields. This would be a positive with respect to project economics.
The ATP 940P assets are valued at $0.46 per share at present, Deutsche pointing out a de-risking of technical reserves would see this valuation increase to $4.60. As this requires significant additional drilling Deutsche has adopted a conservative valuation for ATP 940P at present.
The other advantage with respect to economics for Drillsearch's shale assets is the BG Group joint venture, as this will provide financial support and a route to monetising the assets in Deutsche's view. As an example, BG Group needs to spend $130 million on ATP 940P to earn a 60% stake in the assets.
Deutsche's initiation of coverage on Drillsearch doubles the number of brokers in the FNArena database covering the company, as UBS also rates Drillsearch as a Buy. UBS has a more conservative price target of $1.37 but like Deutsche sees upside potential from new projects such as Drillsearch's shale assets.
Shares in Drillsearch today are higher in a stronger overall market and as at 10.45am the stock was up 7c or more than 4% at $1.62. Over the past year the stock has traded in a range of $0.425 to $1.64, the current share price implying significant upside relative to Deutsche's price target.
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