AWE  Limited
 
This is an Australian energy company focused on upstream oil and gas exploration and production. It concentrates on exploration and appraisal type assets in regions of proven potential prospects where there is a good chance of commercial success and includes fields which are currently marginal but may be improved by innovative approaches to appraisal and development. It currently has six main producing assets:
Tui oil fields - offshore Taranaki basin, New Zealand (AWE 57.5% Operator)
BassGas project - offshore Bass Strait, Tasmania (AWE 35%)
Cliff Head oil field - offshore Perth basin, Western Australia (AWE 57.5%)
Casino gas project - offshore Otway basin, Victoria (AWE 25%)
Onshore Perth Basin interests, Western Australia (AWE 33-100% - some Operated)
Onshore US shale gas, Texas (AWE ~10%, net ~7.5% after royalties)
In addition to its oil and gas producing assets it has a number of exploration, appraisal and development prospects both in Australia and overseas.
 
Quarterly report for the three months to 30 June 2015
 
The highlights for the quarter in production and development include full-year production of 5.1 mmboe which is at the top of the guidance range. Quarterly production of 1.42 mmboe was up 28% over the preceding quarter and early production at Patake-4h at Tui exceeds expectations at the time of pre-hook up and commissioning. At BassGas, the Yolta-6 development well has commenced production and Yolta-5 is expected to follow suit in early August. There is an increase of 13.8 mmboe in 2P reserves following the upgrade at Sugarloaf and the reduction at Yolta and the total is now approximately 100 mmboe. Exploration and appraisal highlights include the Irwin-1 discovery estimated at 149 bcf of gross contingent resources and the Watsia-1 appraisal well results confirm that the gas field has potential. The Watsia-2 appraisal well has reached TD and wireline logging is under way.


Quarterly Production (Source - Company Reports)
 
Financial and corporate highlights show that full-year sales revenues of $ 284 million were down 13% over the previous year. However, the average price realisation on oil and condensate was $ 72.07/bbl compared to $ 57.33 for the previous year. A new $ 400 million secured multicurrency syndicated loan facility has replaced and extended the maturity of the earlier $ 300 million facility. The net debt of $ 123 million as at 30 June 2015 consists of cash of $ 47 million and drawn debt of $ 170 million. 2 Lost Time injuries were reported but there were no reportable environmental incidents during the quarter.
 
The 28% increase in production during the quarter was because of improved performance at Tui following the tie-in of the Pataka 4H well and resumption of production at BassGas following a planned shutdown for development activity. Liquids comprised 58% of the quarterly production with gas accounting for 42%. Production for FY 2015 at 5.1 mmboe was 9% down over the previous year but still within the upper range of the guidance of 4.6 to 5.1 mmboe. Total sales revenues were up 97% over the preceding quarter at $ 81 million largely because of a second lifting at Tui of more than 600,000 barrels in June following the tie-in of the Pataka 4H well. The average realised price for oil and condensate for the full year was $ 78.77/bbl which was significantly less than the previous year when the average was $ 109.


Financial Highlights (source - Company Reports)
 
Field EBITDAX was $ 40 million up 172% from the preceding quarter and the figure for FY 2015 was $ 142 million a decrease of 32% compared to the previous year reflecting both the lower production and the decrease in oil prices. Development expenditure for the quarter was $ 68 million which was 11% lower than the preceding quarter with the major items of expenditure including development drilling at BassGas on Yolta 5 and 6 and further drilling at Sugarloaf. Exploration expenditure was $ 14 million an increase of 34% over the previous quarter because of increased drilling activity in the Perth Basin. Following the reassessment and subsequent reduction of the 2P reserves at the Yolta Field, the company expects to record a non-cash impairment of between $ 100 million and $ 110 million after tax as at 30 June 2015.
 
Update on strategy
 
The geographical spread reflects the market focus and the strategy is built around three core platforms. High value gas is focused on markets which have an upside on pricing and demand such as Australia and Indonesia. Oil is focused on markets where there is a long-term upside on pricing and favourable currency rates and include Indonesia, China, Australia and New Zealand. Unconventional focuses on rich liquids close to infrastructure where there is a pricing upside and markets include the USA, Indonesia and Australia. The company is in a good position to deal with low oil prices because of several factors. Operations continue to perform well and production is on track and development milestones are being achieved. The diversified asset portfolio provides several options such as the ability to set priorities for development and exploration, CPI linked gas contracts and significant reserves and resources which can be contacted again at higher prices. Finally, disciplined financial management is focused on cost reduction, portfolio management and maintaining a robust yet flexible balance sheet.


Performance Summary (Source - Company Reports)
 
The company is able to operate in a low oil price environment because of its production assets where production remains economic for all its assets at current commodity prices and there is a good balance of liquids and gas. The lower oil and condensate revenues will be replaced over a period of time by growth in high value gas markets. Fast track development of gas projects will emphasise the maximum possible return over the shortest possible time in projects such as Waitsia. Cost reduction will continue to be emphasised and matched by the reduced funding commitments over the next year in which a 27% reduction is forecast on development expenditure and 45% on exploration expenditure. Finally, portfolio management provides the ability to farm out or sell non-core assets in order to maximise the return on the portfolio.


Drilling operations Perth Basin (Source - Company Reports)
 
We are convinced that the company is poised for growth and performance even in relatively unfavourable price environments and should do really well with any rally in commodity prices. We are also encouraged by the increase in 2P reserves to around 100 million barrels of oil equivalent which means that the current market capitalisation is valuing these reserves at a fraction of the current market prices of oil making the stock relatively cheap even if all these reserves are not recoverable. We would recommend a Buy at the current price of $1.22 .

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