Buru Energy (BRU)

Worth Another Look?

Summary Key Points

  • BRU has swapped permits with Mitsubishi to focus on oil production: BRU recently announced a deal where it has swapped permits with its long-term Canning Basin partner; Mitsubishi. BRU now own and operate 100% of the Ungani oil permits and Mitsubishi own 100% of the Valhalla/Asgard gas permits. This allows BRU to rapidly develop its oil assets without any constraint from Mitsubishi.
  • BRU are working on the restart of Ungani production to generate cash flow: BRU are in the process of restarting production from the Ungani oil field which was shut in due to low oil prices. BRU announced at the AGM that it expects to initially produce ~1,250 barrels per day using natural lift. By the end of the year BRU is planning to install downhole ESP’s to lift production to circa 3,000 barrels per day. It is expecting to make $25 to $30 per barrel including the cost of transport to Wyndham. As BRU now own 100% of the Ungani field it will receive 100% of the field cashflow and as part of the permit swap, Mitsubishi will also contribute $1.5m to the restart of production.
  • BRU will ship to its existing export point at the Port of Wyndham where it is in the process of a vendor-financed tank capacity upgrade allowing for bigger tankers thereby improving the field economics. The tank upgrade is also being vendor financed. The longer-term plan is to export via Broome port which is only circa 100km from the field. Currently, there are no suitable facilities and tanks and infrastructure will have to be developed from scratch. This will take a substantial cash injection to develop and BRU needs ongoing production to secure financing. Hence the more expensive Wyndham export route is an interim step until a suitable financing package can be worked out.
  • Drilling upside: BRU has no large-scale drilling plans for this financial year but is looking at drilling a side-track on Ungani-3. Ungani-3 was the step out appraisal well that unexpectedly intersected a tight portion of the Ungani dolomite reservoir. Post further analysis BRU believe a fault may be to blame and side-tracking the well could intersect the productive portion of the reservoir. If this fails, BRU is planning to use the well as a water injector as the need for efficient formation water handling increases. BRU is planning a comprehensive drilling program from next year and is exploring funding options for a number of targets.
  • Unconventional gas appraisal on hold while enquiry is ongoing: The new labour government is about to embark on another fracking review which will make it the 15th enquiry in Australia.
  • Ongoing cost reduction: BRU has aggressively moved to reduce expenditure in line with its level of activity. BRU currently has ~$19.8m cash on hand but it still owes Alcoa $12.5m which is due in June next year.

Our View

BRU has refocussed its business to take advantage of low cost opportunities to earn cash flow from its oil resources. Over time we can expect an increase in oil drilling activity as BRU ramps up exploration and ties in other discoveries. The Ungani trend is very promising and BRU’s strategy of producing from proven wells while looking for more oil upside across the trend makes economic sense.

Disclosure and Disclaimer

RCCAN 1405

This Research Report, accurately expresses the personal view of the Author(s).

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In accordance with Section 949A of the Corporations Act 2001 DJ Carmichael Pty Limited advises this document contains general financial advice only. In preparing this document, DJ Carmichael Pty Limited did not take into account the investment objectives, financial situation and particular needs (‘particular circumstances’) of any particular person. Accordingly, before acting on any advice contained in this document, you should assess whether the advice is appropriate in light of your own particular circumstances or contact your DJ Carmichael Pty Limited adviser. DJ Carmichael Pty Limited, its Directors employees and advisers may earn brokerage or commission from any transactions undertaken on your behalf as a result of acting upon this information. DJ Carmichael Pty Limited, its directors and employees advise that they may hold securities, may have an interest in and/or earn brokerage and other benefits or advantages, either directly or indirectly, from client transactions. DJ Carmichael Pty Limited believes that the advice herein is accurate, however no warranty of accuracy or reliability is given in relation to any advice or information contained in this publication and no responsibility for any loss or damage whatsoever arising in any way for any representation, act or omission, whether express or implied (including responsibility to any persons by reason of negligence), is accepted by DJ Carmichael Pty Limited or any officer, agent or employee of DJ Carmichael Pty Limited. This message is intended only for the use of the individual or entity to which it is addressed and may contain information that is privileged, confidential and exempt from disclosure under applicable law. If you are not the intended recipient or employee or agent responsible for delivering the message to the intended recipient, you are hereby notified that any dissemination, distribution or copying of this communication and its attachments is strictly prohibited.

The Author(s) of this report made contact with Buru Energy Ltd for assistance with verification of facts, admittance to business sites, access to industry/company information. No inducements have been offered or accepted by the company.

Recommendation Definitions

SPECULATIVE BUY – Potential 10% out-performance, but high risk
BUY – Potential 10% or more out-performance
ACCUMULATE – Potential 10% or more out-performance, buy on share price weakness
HOLD – Potential 10% underperformance to 10% over performance
SELL – Potential 10% or more underperformance

Period: During the forthcoming 12 months, at any time during that period and not necessarily just at the end of those 12 months. Stocks included in this report have their expected performance measured relative to the ASX All Ordinaries Index. DJ Carmichael Pty Limited’s recommendation is made on the basis of absolute performance. Recommendations are adjusted accordingly as and when the index changes.

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Michael Eidne

Director - Research

Michael has over 14 years experience working in financial markets in South Africa, UK and Australia. Prior to joining DJ Carmichael, Michael held research analyst positions at Bell Potter Securities and Blackswan Equities. He also spent several years working as a consultant for various Perth-based resource companies before moving back to the equity markets. Michael is originally from South Africa where he was a portfolio manager at Edge Capital, which is a large South African alternative investment manager. He also worked for a number of years at Investec Asset Management as an investment analyst.

Michael has a MSc in Mineral and Energy Economics from Curtin University and a MBA in Finance from the University of Cape Town.