Australia | Feb 18 2013
-Deutsche Bank initiates on Buru
-Ungani field offers large potential
-WA supply opportunity for Laurel gas
By Eva Brocklehurst
Deutsche Bank has joined the broking community covering Buru Energy ((BRU)), seeing the company's stake in the Ungani oil trend as a high potential onshore play. Buru offers a pure exposure to the Canning Basin in north-west Western Australia, east of Broome. There are 17 million net acres of potential and Mitsubishi is its high profile joint venture partner. Recent drilling success has demonstrated the scale of the development and this has intrigued brokers. Macquarie initiated coverage of the stock in January.
The Ungani field is set to commence commercial production in 2014, while the neighbouring Laurel tight gas formation in Valhalla and Yulleroo will begin flow testing this year. These oil and gas fields have served as a catalyst for Deutsche Bank to initiate with a Buy rating and a price target of $3.20. This is similar to Macquarie's stance, where the broker opened with a $3.00 target and Buy rating.
JP Morgan, the third broker covering the stock on the FNArena databas,e has a Buy rating and $4.13 target. JP Morgan is expecting a small first half loss for Buru and is most interested in its 2013 exploration plans, the timing of the Ungani full field development and the Yulleroo/Valhalla frac testing. Appraisal drilling has identified the Valhalla tight gas play as a basin-centred gas accumulation, with a strike length in excess of 65km. Yulleroo represents a second sizeable gas play in the Laurel formation, with Buru currently drilling the Yulleroo-4 well outside the mapped structure to test if Yulleroo is also part of a broader accumulation.
The major risk for Buru is the remote location of Ungani, ensuring pricier operating and development costs and higher transportation costs relative to competing supply sources. Nevertheless, the project is set to ramp up to 2,500 barrels of oil equivalent per day (bopd) in 2014. Deutsche Bank expects more than two exploration wells in 2013 as key near-term catalysts to further de-risk the scale and productivity of the play. The broker's target ascribes around 82c of risked exploration upside to the Ungani trend. Buru has applied for a production licence for Ungani to enable the project to proceed to full development. As part of the process, native title negotiations with traditional owners are underway. Deutsche Bank assumes capex of $40m for the full-field development phase in 2013-14, based on $14m per horizontal well.
Buru is seeking to construct an oil export facility at a north-west port to reduce trucking distances from the field and Deutsche Bank believes Dampier is a likely port due to its relative proximity to the field. Buru expects production will increase from current levels (400-600 bopd) to a constrained rate of 1,000 bopd (gross) once the production licence has been received, given constraints in oil trucking capacity. Production will continue ramping up from in 2014 once an oil export facility has been commissioned. Deutsche Bank factors in 5,000 bopd (gross) from September quarter 2014, representing 2,500 bopd on a net basis.
Deutsche Bank believes the WA domestic gas market provides an attractive monetising opportunity for Buru, once the North West Shelf's domestic obligations roll off from 2015. The broker does not expect the North West Shelf partners to extend or re-sign domestic gas supply contracts when existing contracts expire as they could earn materially higher margins by monetising all uncommitted gas reserves as LNG. To this end, the broker sees Buru appraising the Valhalla and Yulleroo tight gas play to prove up the commercial potential for a gas resource with significant associated liquids. The broker is cognisant of the fact that Buru could face competition from alternative sources and will need to demonstrate competitive break even to secure market access.
Buru also holds an extensive position (6m acres) across the Goldwyer shale, in the southern Canning Basin. The project is in the early stages of exploration and Deutsche Bank considers it is a longer-dated growth option.
See also Buru Energy Packs Potential In Canning Basin on January 24
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