Buru Energy (BRU)

Switch from Central Petroleum (CTP)

Switch CTP to BRU:

We believe there is an opportunity for clients to switch from CTP to BRU. The companies have similar market caps but very different asset bases. BRU is a WA oil based producer while CTP is a NT gas producer with the potential to take advantage of the gas supply issues on the east coast.

Reasons to sell CTP:

  • The takeover offer from Macquarie is unlikely to be improved in our opinion as Macquarie hold all the CTP debt. Even though dissident shareholders may believe the offer does not reflect fair value, CTP will need substantial capital to achieve its full potential. It is our view that Macquarie understand that the equity markets are unlikely to support a large dilutive raising and the balance sheet is stretched which limits the opportunity to raise new debt to fund development.
  • In our opinion without a deep pocketed funding partner, CTP will be capital constrained. It is also unrealistic to assume that profits from gas sales will generate excess cash to fund future development. It is expected that that the transport charges from the new pipeline that will link the NT to the east coast market will be north of $4GJ and these transport costs will result in CTP achieving a relatively low realised well head price. This low well head price will limit the amount of free cash CTP will be able to reinvest in exploration and development.
  • If the dissident shareholders are successful in scuppering the current Macquarie offer on the table, the share price is likely to fall sharply. Richard Cottee has also indicated he will step away if the bid fails.

Reasons to buy BRU:

  • 100% ownership of permits: BRU has recently swapped its 50% owned gas permits for 100% ownership of its oil permits with its partner Mitsubishi. This has allowed BRU to exit its commitments to explore for unconventional gas and focus on its oil business. While there is no doubt there is a lot of gas in the Canning Basin, it will be difficult to commercialise due to the lack of infrastructure in the Basin.
  • Production restart: BRU has restarted production from the Ungani oil field and is currently producing 1,250 barrels per day. BRU are planning to install downhole ESP’s at the end of the year to lift production to ~3,000 barrels per day. The oil is being exported via road haulage to Wyndham Port and then onto refiners in Singapore. The Ungani field has a 1C contingent resources of 2.08m barrels and 2C contingent resources of 6.6m barrels. We believe that at the 1C level the field could produce for circa 5 years and have a NPV of $26m to BRU. If we use the 2C contingent reserves number, the field could produce oil for north of 10 years and could have an NPV of circa $50m. We believe on 2C basis BRU is well valued at an EV of circa $50m and undervalued on the 3C contingent resources of circa 18m barrels.
  • Drilling upside: BRU have several infield drilling targets that could increase the recoverable oil in the Ungani field as well as several large regional targets along the Ungani trend. The regional targets have been identified by 3D seismic and are drill ready. BRU are planning to side track the Ungani 3 well as it believes the original drill missed the productive portion of the reservoir. If the thesis proves to be correct a successful outcome will materially upgrade the recoverable hydrocarbons in the field.

Disclosure & Disclaimer

RCCAN1413

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

At the date of this report, DJ Carmichael Pty Limited, members of the Research Team; including authors of this report, its directors and employees advise that they may have an interest in and/or earn brokerage and other benefits or advantages, either directly or indirectly from client transactions in stocks mentioned in this report.

DJ Carmichael Pty Limited is a wholly owned subsidiary of DJ Carmichael Group Pty Limited ACN 114 921 247.

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.

© 2017 No part of this report may be reproduced or distributed in any manner without permission of DJ Carmichael Pty Limited.

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.