research report august 2013
TRANSCRIPT
5 August 2013
Sun Resources NL (SUR)
About to start getting the recipe right
Recommendation
Buy Price
$0.032 Target (12 months)
$0.095
Risk
Speculative
Analyst, Retail Services
Peter Arden 613 9235 1833 Authorisation
Damien Williamson 613 9235 1958
Expected Return
Capital growth 197%
Dividend yield 0%
Total expected return 197%
Company Data & Ratios
Enterprise value $64m
Market cap $68m
Issued capital 1,984.9m
Free float 81%
Avg. daily val. (52wk) $0.16m
12 month price range $0.024 - $0.083
GICS sector
Energy Disclosure: Bell Potter Securities acted as a broker to the $20m two-stage placement in August and September 2012 and received fees for that service.
Price Performance
BELL POTTER SECURITIES LIMITED ACN 25 006 390 7721 AFSL 243480
DISCLAIMER AND DISCLOSURES THIS REPORT MUST BE READ WITH THE DISCLAIMER AND DISCLOSURES ON PAGE 22 THAT FORM PART OF IT.
Page 1
1mth 3mths 12mths
Price ($A) 0.031 0.035 0.062
Absolute (%) 3.2 -8.6 -48.4
Rel. Market (%) 7.2 1.2 -57.8
Tight hydrocarbon production gives USA a big helping hand
The USA has had an unprecedented turnaround in its energy supply mix over the past
decade with strongly growing production of unconventional hydrocarbons (most
recently tight shale oil and gas). This has enabled the world’s largest economy to
become a net energy exporter in 2012 for the first time since the end of World War II.
The growth in USA gas production has dramatically improved the country’s productive
competitiveness. More recently the rise in oil production from massive shale oil
deposits has started to dramatically reduce the country’s reliance on increasingly
expensive imported oil at a time when the USA economy is struggling to rebound from
very low growth rates and the burden of crippling government debt and deficits.
Use of experienced fraccing contractors is a positive step
The Woodbine tight oil play (Woodbine) in East Texas is now recognised as another
huge hydrocarbon field capable of sustaining a large oil output by horizontal drilling
and fraccing, which is why it is receiving attention from oil majors. Sun Resources NL
(Sun) was an early mover on oil in the Woodbine and has substantial interests over
strategic areas covering it and other stratigraphically adjacent hydrocarbon bearing
and productive horizons. As with other new unconventional hydrocarbon fields, it takes
time to establish the most suitable production techniques. While Sun has had setbacks
in its efforts to develop Woodbine oil production, we see encouraging signs that these
are now being addressed with more experienced fraccing capability recently engaged.
Sun well placed to start unlocking major Woodbine oil value
Increasing oil production by others from horizontal wells in the Woodbine shows it has
more favourable hydrocarbon characteristics than the highly prolific and better known
geologically adjacent Eagle Ford Shale. Recent Woodbine wells by others have had
initial production (IP) rates of circa 800 barrels of oil per day (bopd) and indicative
Estimated Ultimate Recovery (EUR) levels per well of up to 0.5 million barrels of oil
equivalent (Mboe). Sun is well placed to start unlocking potentially substantial value
from its strategic Woodbine areas by progressively establishing economically
significant oil production using the fraccing recipe that works for others. Our per share
equity diluted valuations are $0.13 for base case and $0.37 for upside case.
Accordingly we initiate coverage with a Buy recommendation with Speculative Risk.
Absolute Price Earnings Forecast
Year end June 2012a 2013e 2014e 2015e
Sales (A$m) 0.0 1.5 13.4 77.9
EBITDA (A$m) (4.5) (11.6) (8.3) 27.4
NPAT (reported) (A$m) (4.4) (11.5) (13.4) 2.8
NPAT (adjusted) (A$m) (4.4) (11.5) (13.4) 2.8
EPS (adjusted) (¢ps) (0.5) (0.6) (0.6) 0.1
EPS growth (%) na na na na
PER (x) (6.4) (5.0) (5.4) 32.7
FCF Yield (%) na na na na
EV/EBITDA (x) (14.6) (4.2) (11.9) 9.8
Dividend (¢ps) - - - -
Yield (%) 0% 0% 0% 0%
Franking (%) 0% 0% 0% 0%
ROE (%) na na na 8%
SOURCE: IRESS SOURCE: BELL POTTER SECURITIES ESTIMATES
2
4
6
8
10
Aug-12 Nov-12 Feb-13 May-13 Aug-13
Sun Resources Share Price
ASX 200 Energy Index (rebased)
Page 2
Sun Resources NL (SUR) 5 August 2013
Contents
Background and Strategy ............................................................. 3
Projects ........................................................................................... 6 Funding ......................................................................................... 10 Valuation ....................................................................................... 12 Capital Structure .......................................................................... 15 Board of Directors and Management ......................................... 16
Recommendation ......................................................................... 17 Risks and Share Price Drivers .................................................... 18 Appendix A: Technical aspects of the Woodbine Sandstone .. 19
Page 3
Sun Resources NL (SUR) 5 August 2013
Background and Strategy
Rising Texas oil output set to make the USA the No 1 producer
The dramatic rise in oil production in Texas that has seen output more than double in the
past two and a half years (Figure 1) is set to propel the USA to the largest oil producer in
the world, overhauling Saudi Arabia by about 2020 according to forecasts from the Energy
Information Agency (EIA). The rise in Texas oil production, which is on track to reach 3
million barrels of oil per day (Mbopd) by the end of 2013, is largely driven by output from
the fraccing of the Eagle Ford Shale with significant and rising production from the fraccing
of the Woodbine.
This massive lift in Texas oil production has had major economic benefits for Texas and
the USA – it has spurred a huge lift in employment, not only in the oil and gas sector
(38,000 people were estimated to be employed on the Eagle Ford Shale alone in 2011) but
325,000 new positions were created in Texas overall in the year to May 2013. It has also
contributed strongly to state and federal taxes and begun to dramatically reduce the USA’s
reliance on increasingly expensive imported oil at a time when the USA economy is
struggling to rebound from very low growth rates and the burden of crippling government
debt and deficits.
Figure 1 - Chart of daily oil production in Texas, USA from January 1985 to April 2013
SOURCE: EIA; INVESTOR.COM
Sun has built an impressive land position on the Woodbine
Sun was listed on the ASX in August 1993 and since then it has been involved in oil and
gas exploration in many parts of the world. The company established modest gas and
condensate production in the USA about five years ago but it is only in the past two years
that the company has really refocused on building up a significant position in East Texas
totalling 20,020 net acres along the extension of the north-easterly trend of the very prolific
Eagle Ford Shale (Figure 2 over page). Sun’s areas are targeting the closely underlying
and almost geologically equivalent stratigraphic unit, the Woodbine, which is comprised of
sandstone, siltstones and shales and whose emerging significance as a highly productive
tight oil play is continuing to grow rapidly.
Sun was an early mover into the Woodbine, being the first ASX-listed company to
recognise its potential and make it a specific target. The company’s strategy now is to
totally focus on its Woodbine areas, where it has progressively built up an impressive land
position while reducing all its other interests to an absolute minimum by sales or farm-outs.
Sun’s non-Woodbine interests is a 45% interest in an offshore block in Thailand, which has
been 100% farmed out (Sun is not responsible for any ongoing commitments) for a
production royalty. The company completed the sale of its 9.25% interest in WA-47-R in
the offshore Carnarvon Basin of WA in late 2012 for an undisclosed sum.
Page 4
Sun Resources NL (SUR) 5 August 2013
Figure 2 - Map of the Eagle Ford Shale and Woodbine trends in East Texas, USA
SOURCE: SUN RESOURCES N L
The Woodbine was an old, marginal conventional oil play that is now a very important unconventional (tight) oil producer
The Woodbine Formation is of Late Cretaceous age and was named in 1905 and was first
exploited by conventional vertical wells in the 1930s. It is a 350 – 800 feet (107 – 243m)
thick sedimentary unit of interbedded sandstones, siltstones and shales. It had long been
recognised as hydrocarbon-bearing but until recently it has only been sporadically
productive from conventional vertical wells because the reservoirs are tight. The first
horizontal well (Stroman #1H) was drilled by PetroMax Operating Company (PetroMax)
affiliate, BWOC, in January 2005. The Kirten Field was the first to deploy horizontal drilling
and multi-stage fraccing in 2008 as operators moved East along the Eagle Ford Shale
trend. Since then, drilling, fraccing and completion techniques have evolved and improved
and over 100 horizontal wells have been drilled into the Woodbine across seven Counties.
Whereas conventional vertically completed wells into the Woodbine in the 1970s and
1980s used to be brought on with rates of 50 to 75 barrels of oil per day (bopd) and yielded
a total of 37k barrels of oil per well on average, the early horizontal wells that had been
fracture stimulated (fracced) came on at about four times the rate of the offsetting vertical
wells and started to produce over 35k barrels of oil per year. Since then, there has been
further refinement to the drilling and completion techniques. Horizontally fracced wells now
often achieve IPs of up to 800 to 1,000 barrels of oil equivalent per day (boepd) and have
Expected Ultimate Recovery (EUR) rates of 0.4 to 0.5 million barrels of oil equivalent
(Mboe) with slower decline rates than the Eagle Ford Shale.
Large partner, Amerril, has supported Sun’s Woodbine thrust
Sun’s partner in approximately 40% of its Woodbine leases is Amerril Energy LLC
(Amerril), which is also Sun’s largest shareholder (owning 292M shares currently equal to
14.7% of Sun’s issued shares). Amerril is a subsidiary of China Qingdao Kingking Group,
which is the second largest candle maker in the world. Amerril has an experienced
multinational oil and gas operating team based in Houston, Texas.
Amerril is a privately owned company that was formed in 2009 and is an approved operator
of oil and gas leases in the USA. Amerril now has over 100,000 acres of petroleum
tenements in Texas, Oklahoma and Louisiana of which over 40,000 acres is targeting the
Woodbine in Texas, where Amerril has recently begun to be the operator of some of its
areas and has begun to establish modest oil and gas production.
Page 5
Sun Resources NL (SUR) 5 August 2013
Amerril has already had early success in the Woodbine where it sold a 25% working
interest in the PMO Field to Halcon Resources Corporation (Halcon, NYSE – HK, not
rated), at a substantial profit in 2012, after production increases resulted from improved
fraccing and well designs
More recent joint venture agreement with Petro-Hunt adds acres and significant additional Woodbine production expertise
Sun recently reached agreement with Petro-Hunt LLC (Petro-Hunt) to jointly explore and
develop an Area of Mutual Interest (AMI) in the Lower Woodbine comprising 7,832 acres in
Leon County, Texas. Petro-Hunt is privately-owned independent oil and gas company
based in Dallas, Texas and is one of the largest privately owned companies in the world. It
is active in the onshore and offshore sectors of the global energy industry, including
offshore Western Australia.
Petro-Hunt is also the largest shareholder (with a 27.9% interest) in Halcon, which is one of
the largest and most successful operators in the Woodbine. Halcon drilled 22 wells into
the Woodbine in 2012 and expects to drill 60 to 65 Woodbine wells in 2013. Under the
Petro-Hunt arrangement, Sun and Petro-Hunt are each contributing oil and gas leases that
they own within the area of the AMI and under the operatorship of Petro-Hunt, they plan to
drill and explore the AMI with the first horizontal well planned for the last quarter of 2013.
Sun is contributing 810 net acres from its 100% owned Delta Oil Project and Petro-Hunt is
contributing 2,430 net acres that it owns and which also lie within the AMI. Petro-Hunt will
hold a 75% interest and Sun will hold a 25% interest in the AMI.
Woodbine growth in production could replicate what happened with the Eagle Ford Shale as it was de-risked and opened up
There has been almost exponential growth in hydrocarbon production from Eagle Ford
Shale over the past five years and while it has a significant gas content, oil has made up a
growing proportion of the hydrocarbon output (Table 1). Recent estimates put the total
daily Eagle Ford Shale production at about 1Mboe, which is estimated to be more than the
daily production from the highly prolific Bakken Field in North Dakota.
Table 1 - Recent leasing and hydrocarbon production history for Eagle Ford Shale
SOURCE: TEXAS RAILROAD COMMISSION; HART’S NGI’S SHALE DAILY; AURORA OIL & GAS LTD
While it is widely recognised that the upper sections of the Woodbine are not a
homogeneous formation, it is becoming very apparent from the impressive results of the
various companies now producing from it – such as Halcon, EOG, Crimson Energy
Partners III LLC, PetroMax, Encana, Gastar, Chesapeake and Amerril – that the Lower
Woodbine contains a very significant amount of oil with generally minor amounts of gas
and that very substantial oil production can be established there by using horizontally
drilled wells and appropriate fraccing.
The production from the Woodbine has clearly established that it has significantly better
porosity and permeability than the Eagle Ford Shale and wells producing from the Lower
Woodbine also show significantly slower decline rates than for the Eagle Ford Shale.
These enhanced Woodbine well characteristics have led to significant and strongly growing
oil production being rapidly developed. Other operators are now reporting that wells in the
Lower Woodbine in East Texas have EURs of 0.3 to over 0.5 Mboe based on traditional
well spacings of about 160 – 320 acres. Several groups producing from the Lower
Woodbine are reporting good success from closer well spacings still yielding similar EURs.
Year
Drilling
Permits
Issued
Producing Oil
Leases
Producing
Gas Wells
Crude Oil
Production
(kbpd)
Proportion of Total
Hydrocarbon
Production
Natural Gas
Production
(Mcfpd)
Proportion of Total
Hydrocarbon
Production
Condensate
Production
(kbpd)
Proportion of Total
Hydrocarbon
Production
Total Oil & Gas
Production
(kboepd)
2008 26 N/A N/A 0.4 21% 8 79% 0 0% 2
2009 94 40 67 0.8 8% 47 78% 1 14% 10
2010 1,010 72 158 12 16% 298 65% 14 19% 74
2011 1,826 368 550 128 36% 967 45% 72 20% 361
2012 4,343 1,262 875 352 61% 950 27% 72 12% 582
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Sun Resources NL (SUR) 5 August 2013
Projects
Sun’s main focus is the Lower Woodbine in East Texas
The hydrocarbon-bearing Woodbine occurs in the East Texas Basin, being on the eastern
edge of, and on the same North-Easterly trend as, the Eagle Ford Shale (Figure 2). The
Woodbine stretches over an area of over 60 square miles (155 km2) with current activity
taking place in the Counties of Brazos, Grimes, Leon, Madison, Robertson, Houston and
Walker.
The Woodbine sands have long been a target of conventional oil producers. In the region
of Madison and surrounding Counties of Brazos, Grimes, Leon, Robertson, Houston and
Walker in East Texas there is a mini-basin, the Brazos Basin, which dips below the
southern edge of the Angelina-Caldwell Flexure, bordered by the Edwards-Sligo Rim to the
south, the San Marcos Arch to the west and the Sabine Uplift going east. The underlying
Buda Formation defines the bowl-like shape. This area has been the focus of most of the
horizontal well activity in the Woodbine. The upper, generally sandy part of the Woodbine
was the focus of early attention with horizontal wells but more recently the more extensive
and predictable Lower Woodbine, which is generally shalier, has attracted growing
attention of operators (Figure 3).
Figure 3 - Map showing the Woodbine acreage by operator
SOURCE: OIL & GAS INVESTOR
Sun has a significant net acreage position in the Woodbine
The company holds a total net interest in 20,020 acres covering the major hydrocarbon-
rich Woodbine trend, principally in the Leon County area of East Texas. This is a
substantial land holding, which is made up of five project areas. With the exception of the
largest net holding (in the Delta Oil Project), the areas are held in joint venture
arrangements with other exploration and production groups (Table 2 and Figure 4).
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Sun Resources NL (SUR) 5 August 2013
Table 2 - Sun's tenement holdings over the Woodbine in East Texas
SOURCE: COMPANY DATA AND BELL POTTER SECURITIES ESTIMATES NOTES: 1. FORMERLY RICHLANDS OIL PROJECT
2. HAS 16.7% INTEREST IN THE C W BROWN #1H WELL
3. AMI COVERS 7,832 ACRES
Sun produces very modest amounts of oil from its 13.54% to 16.67% interest in the Beeler
Oil Project (previously known as the Richland Oil Project) (Table 2 and Figure 4) as the
operator continues with clean-up and flow back operations at the three horizontal
Woodbine wells. The most productive well, the Ellis #1H, produced an average 90-day IP
rate of only 150 bopd, well below most other recent Lower Woodbine wells.
Figure 4 - Map of Sun's Woodbine areas in East Texas, USA
SOURCE: SUN RESOURCES N L
The Beeler Oil Project is located immediately adjacent to the Gresham A #1H well, one of
the best performing horizontal Lower Woodbine oil wells in Leon County, Texas. The
Gresham A #1H well was drilled by a group that was acquired by Halcon which produced
over 105,000 barrels of oil in its first 166 days of production, having averaged 793 bopd
over its first 30 days of production and was producing at about 600 bopd in late 2012.
Originally Sun and the other two farminees were to have earned larger interests in the
Richland Project by funding more of the costs of the first well, Beeler #1H, but the Farmors
exercised their option to participate in the well, thereby reducing the interest that Sun and
its farminee partners acquired. Steadfast Resources LLC, a company associated with the
farminors, subsequently earned a 40.625% working interest in the Richlands Oil Project by
funding its share of the cost of the C W Brown (previously called Beeler) #1H well.
Oil Project Name
Sun
Working
Interest
Other PartnersGross Leased
Area (acres)
Sun Net or
Equity Leased
Area (acres)
Wells
Drilled
Wells
FraccedProduction Status Comments
Beeler1
13.54%2
Richland Resources (13.5%);
Amerril Energy LLC (13.5%);
Steadfast Resources (40.6%);
Farmors (18.8%)
1,360 227 4 3 M inor production
from 3 wells
Principally target ing
Upper Woodbine,
also stacked targets
Delta 100% 11,010 11,010
Recently transferred
810 acres to Halcon
AM I
Amerril 50% Amerril Energy LLC (50%) 12,293 6,147 3 2
M inor production
from Seale # 1H well;
T Keeling # 1H well
being fracced now
Principally target ing
Lower Woodbine,
also stacked targets
Normangee 50% Amerril Energy LLC (50%) 3,652 1,826
Original Woodbine
discovery f ield
nearby
Petro-Hunt AM I 25% Petro-Hunt (75%) 3,4203 810
Petro-Hunt is
Halcon's major
shareholder. Halcon
has very impressive
Woodbine record
Totals 28,315 20,020 7 5
Page 8
Sun Resources NL (SUR) 5 August 2013
Four wells have been drilled in the Beeler Oil Project but so far only a very modest rate of
oil production has been achieved. Three wells have been drilled, fracced and completed
as horizontals to access oil in the Upper Woodbine – the Ellis #1H, the John Beeler #1H
and the C W Brown (previously called the Beeler) #1H. These wells were achieving
average flow rates of 172, 75, and 50 bopd respectively as flow back from the fraccing
declined, but this has now reduced to average flow rates recently of 140, 31 and 24 bopd
respectively. These rates are well below the rates achieved for many contemporary Lower
Woodbine wells, which have achieved initial production (IP) rates of 800 – 1,000 bopd with
relatively slow decline rates so that they have regularly yielded 40k to 50k barrels of oil in
the first 90 days of production. The total Beeler Oil Project produced only 14k barrels of oil
in the June 2013 quarter (91 days).
Carefully controlled staged fraccing of T Keeling well starts
The operator and owner (Amerril) of a 50% working interest of the Amerril Oil Project, in
which Sun also holds a 50% working interest (Figure 2 and Table 3), has completed about
four weeks of flow back operations at the Seale #1H well following the successful 23-stage
frac operation. Unfortunately the flow back operations only incorporated seven stages of
the multi-stage frac near the heel of the well after a mishap in which the shaft of the drill bit
used to drill out the frac plugs sheared off and the bit remained in the hole.
Even so, the maximum flow rates achieved from the severely blocked well were
understood to have briefly reached 91 bopd. Attempts to retrieve the drill bit have so far
been unsuccessful and have been suspended while the T Keeling #1H well is fracced. It is
not clear if more attempts will be made to retrieve the broken off drill bit so the other 16 frac
plugs in Seale #1H well can be drilled out and the entire length of the fracced lateral can be
flowed back.
Flow rates from the Seale #1H well recently increased initially after installation of a jet
pump but they have subsequently decreased, apparently in response to the continuing
presence of the broken drill bit.
Very recently, the operator began the staged fraccing of the suspended T Keeling #1H
well. This well was targeting the lower part of the Middle Woodbine. It was drilled in
January 2013 but was then cased and suspended awaiting the fraccing and clean-up of the
Seale #1H well, which took a lot longer to occur because of the well mishap. The fraccing
operation on the T Keeling #1H well is being very carefully controlled and has consisted of
an initial first five stages across about 1,500 feet at the “toe” of the lateral section of the
well. Each of these first five stages of the T Keeling horizontal well had between three and
five clusters of perforations per frac stage and a frac fluid and proppant pumping program
that is similar to those used successfully in Lower Woodbine wells of others nearby and is
currently considered to represent best practice. Sun has reported that all five stages were
fracced successfully as designed and that a period of flow back to recover fraccing fluids is
now underway.
As described earlier (see page 4), Sun has reached an agreement with Petro-Hunt to form
a Joint venture for an AMI over about 7,832 acres that includes an area of 810 net acres
Sun will contribute from its Delta Oil Project and Petro-Hunt will contribute 2,430 net acres
from its nearby areas within the AMI (Table 2 and Figure 4). Petro-Hunt will be the
operator of the Joint Venture and the partners are intending to drill the first horizontal well
into the Lower Woodbine in the last quarter of 2013.
The operator and owner of a 50% working interest (Amerril) of the Normangee Oil Project
(Table 2 and Figure 4), in which Sun also holds a 50% working interest, is continuing with
planning for the first Woodbine horizontal well in this project area. The Normangee project
is located to the south west of the Amerril Oil Project, and so is closer to existing
successful Lower Woodbine wells.
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Sun Resources NL (SUR) 5 August 2013
Other potentially attractive oil target horizons besides those in the Woodbine
There are at least four other potentially significant and attractive oil-bearing hydrocarbon
target horizons stratigraphically (and physically) near to the Woodbine that other groups in
the district are starting to investigate and even produce from. These other horizons include
the following, which could be accessed by horizontal and/or potentially vertical wells that
are fracced vertically to give comingled production as is already occurring in a limited way:
Austin Chalk – located just above the Eagle Ford Group; already supports production
Sub-Clarkesville – located immediately below the Eagle Ford Group and immediately
above the Woodbine; already supports production in places in the district
Georgetown Limestone – located below the Woodbine; already supports production in
the area but may not yield high returns from fraccing because of more brittle nature of
the rocks
Bossier Sands – located well below the Woodbine; already supports production in the
district (by Navidad Resources LLC, which now has over 50 vertically fracced
commingled wells producing almost 6,000 boepd)
While Sun is currently totally focused on the Woodbine (and the Lower Woodbine in
particular), the company recognises that there are other oil-rich hydrocarbon horizons
elsewhere in the stratigraphic column in their lease areas. We believe that Sun is likely to
progress to exploring and potentially producing from some of these other areas in the next
few years after these other plays are better developed and the company is able to afford to
explore and develop them using cash flow from Woodbine production.
Non-Woodbine USA Petroleum Interests
Sun has 20% to 37.5% working interests in the Margarita and Redback Projects, onshore
South Texas, which includes the modest gas and oil production from the Flour Bluff Gas
Field near Houston . The company has a 37.5% interest in a 400 acre lease covering the
TBF 1.46 oil exploration project that has the potential to contain 0.5M barrels of
prospective oil resources in the Lower Frio Formation. The exploration well for this
prospect is the subject of farm-out arrangements that the company is continuing to
progress as it is Sun’s intention to divest its interests in all these other projects.
Other Petroleum Interests
Sun announced that 100% of the L20/50 Concession in offshore Thailand had been farmed
out to Siam Moeco Limited (SML) in October 2012 and that as a result neither Sun, which
held a 45% interest or its partner holding the balance, Carnarvon Petroleum Ltd ( ASX –
CVN, not rated), had any further exploration or development commitments in relation to the
Concession. Terms of the farm out were that SML would pay CVN and Sun $US8.5M
upon the commencement of commercial production and would also pay CVN and Sun a
2% royalty capped at $US10M (Sun’s share of each being 45%).
The company has sold its 9.25% interest in the WA-47-R block in the offshore Carnarvon
Basin to Hydra Energy (WA) Pty Ltd subject to regulatory approvals. Sun has a 20%
interest in ESA Area 4 Block and ESA Area 5 in offshore Malta. The standing of these
permits has become uncertain because of a decision by the government of Malta. The
operator of these permits is considering its options in relation to an arbitration hearing
and/or further negotiations with the government of Malta.
The company has previously executed a non-binding term sheet with an undisclosed party
whereby Sun was to participate in the drilling of a high impact well designed to test a 720
billion cubic feet (Bcf) conventional gas target in onshore North-West Europe. The
Operator of the venture has been in negotiations with local government authorities on the
approvals process for the well since the end of December, 2012.
Page 10
Sun Resources NL (SUR) 5 August 2013
Funding
Unsatisfactory recent results have used up cash reserves
Sun is estimated to have spent about $40M over the past two years on the acquisition and
exploration of its Woodbine projects. This has been funded out of net capital raisings
totalling $29M and the issuance of about $15M in securities over that time.
The company still had cash of $3.6M at 30 June 2013 after having had additional
exploration expenses in the June 2013 quarter related to completion and testing of several
wells and the remedial work arising from several well difficulties. More recently the
company has been involved with funding its share of the fraccing of its suspended T
Keeling #1H well, which we estimate should be a relatively modest additional amount of
the total well cost, and for which its share of expenditure is 50%.
Having only established minimal oil production from its efforts to date, the unsatisfactory
drilling results have meant that the company has failed to generate any significant oil sales
revenue to supplement its depleted cash reserves.
Future funding needs depend on whether the company elects to continue to contribute its share of costs or to farm them out
The future funding needs of Sun depend on whether the company chooses to maintain its
current various working interests in its five projects or decides to farm out them out. With
working interests of 100% of the large Delta oil Project and 50% of the large Amerril oil
Project, the company is facing significant exploration costs until a significant rate of oil
production is established. Once the company has been able to establish a significant and
growing oil production rate, it should be much easier for it to obtain debt funding at a
reasonable cost. We estimate that equity oil production at a rate of about 2,000 boepd with
a good prospect of increasing that equity oil production to a rate of about 5,000 boepd
within a year would be sufficient to underpin significant ($50M to $100M) debt funding on
reasonable terms (interest rates of circa 7.5% pa).
We estimate Sun should drill at least 8 equity wells in FY14
With total well costs conservatively estimated at around $US6M to $US8M (including
completion and fraccing), we estimate Sun requires about $50M to $65M to fund a
reasonable rate of drilling and oil production development (of at least three to five wells in
each of its major projects so that it has about 8 equity wells) in FY14 if it wants to maintain
its current working interests across all its projects covering the Woodbine. If the company
decides to farm out some of its interests in its larger projects, its funding requirements
would be commensurately lower.
Delaying exploration and development reduces the need for funding but potentially jeopardises retention of the areas and defers the potentially significant returns from success
If Sun were to decide to largely retain its current working interests but to have a slower rate
of exploration drilling and development wells in FY14 than we forecast, it would also
reduce the amount of funding it needs but it could jeopardise its retention of its working
interests. There is generally a three year leasing period (that may come with an option of
a two-year extension) for the areas to be worked by drilling. While delaying or deferring
exploration and development drilling may not mean the company is at risk of the imminent
loss of title to its areas, it does mean that it is defers the potentially significant returns from
establishing the sort of successful oil and related hydrocarbon production that Sun’s
adjoining explorers have begun to routinely establish.
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Sun Resources NL (SUR) 5 August 2013
Healthy margins of around $US70 per boe are being achieved from the Lower Woodbine in
wells operated by others adjacent to Sun’s areas, so there is a strong incentive for the
company to access the necessary funding to accelerate activity.
Farming out drilling costs severely reduces a company’s value
One way for Sun to significantly reduce its future funding requirements is to farm out its
interests in its larger areas. With many smaller resource companies finding it very difficult
to raise additional equity capital, let alone access debt markets in any meaningful way,
those resource companies with significant equity in good projects are increasingly opting to
farm out some of that equity to meet their funding needs.
We note that this practice of farming out has included ASX-listed oil and gas companies
such as Austin Exploration Limited (ASX – AKK, not rated) which has interests in East
Texas near to Sun. AKK recently reached a farm-out arrangement with an unnamed major
US oil and gas company whereby it is farming out a 70% interest in its Birch Prospect,
where it is targeting the Eagle Ford Shale. The terms of this farm-out are for the farminee
is to drill three horizontal wells (each at an estimated cost of about $US 8M each) plus pay
AKK $1.95M for past drilling and as an option over the block where the drilling is to take
place. The farm-out covers an area of about 4,295 acres.
Our analysis of the potential impact of this sort of arrangement shows that it potentially
causes a severe reduction in the value of the retained interest in the event that the area
concerned subsequently has significant hydrocarbon reserves and production. We
estimate the unrisked NPV of Sun’s 100% owned Delta Oil Project, which currently covers
an area of 11,010 acres, at over $500M. If the company were to farm out a 50% interest in
return for the drilling of three or four wells within a similar sized area, we estimate the value
of Sun’s interest in the Project could decrease by about 30%.
Farm-outs less likely unless T Keeling fraccing disappoints
On the basis that Sun’s Woodbine areas are still regarded as potentially very prospective
for substantial oil reserves and production, we are not assuming they are going to farm out
any areas in the near term. We believe that Sun would prefer to raise additional capital to
fund development of its Woodbine areas after it has successfully fracced and flow tested a
well, preferably the T Keeling #1H well, and has therefore established that the new fraccing
recipe is the appropriate one. In the event that the T Keeling #1H well is not successfully
fracced as expected, we believe it will be more difficult for the company to raise equity
capital and it may be forced to accept one or more farm-outs to fund further exploration
and development until such time as its can achieve alternative funding.
Capital raising more likely after successful T Keeling fraccing
On the assumption that the fraccing of the T Keeling #1H well is successful, we believe
Sun will then seek to raise additional capital during FY14 to enable it to fund its share of
the development of additional wells using the successful fraccing and completion recipe.
We have assumed that the company will raise up to a net $20M of additional equity capital
in FY14. For the purposes of our forecasts and valuations, we have conservatively
assumed this would be done on the following basis:
Shares to be issued: approximately 684M
Issue price: $0.031 (around the current price)
Net amount to be raised: $20M
We have assumed this potential capital raising would be done at around the current market
price because we believe that price is already at a significant discount to fair valuation
because of the poor outcomes from recent fraccing. A successful outcome from the current
fraccing of the T Keeling #1H well should lead to a higher rating and share price.
Page 12
Sun Resources NL (SUR) 5 August 2013
Valuation
Sun’s value is well above the share price on two key metrics
Several methodologies can be used to derive valuations for areas which contain economic
deposits of hydrocarbons in major geological formations such as the Woodbine. Whilst we
still regard net present value (NPV) based estimates derived from areas with significant oil
and associated hydrocarbon production that is underpinned by certified proven reserves as
the most reliable, there are two more subjective valuation methods of NPV-based forecasts
and of land area values derived from recent commercial transactions.
Since Sun’s Woodbine interests are yet to achieve significant hydrocarbon production or
have proven reserves on any of its leases, we have adopted a valuation methodology
based on consideration of the two more subjective methods of NPV-based forecasts and of
land area values derived from recent commercial transactions.
Our estimates of the value of the company’s Woodbine areas by each method gives a
value for Sun’s shares that is well above the current share price.
NPV-related forecasts give the best guide to valuation
We regard valuation estimates based on NPV-related forecasts are the best guide to the
valuation of Sun. We have used the following assumptions for our forecasts of potential
hydrocarbon production from the company’s Woodbine areas (Table 3).
Table 3 - Assumptions for forecasts of production from Sun's Woodbine areas
Variable Assumptions
Well costs $US 8M
Well spacing 80 acres
EUR 350,000 boe
IP 500 boepd
Time to drill and complete a well 24 days
Time from spudding well to production 55 days
Average hydrocarbon makeup Oil 70%; condensate 5%; NGL 5%; gas 20%
SOURCE: BELL POTTER SECURITIES ESTIMATES
Applying the forecasts in Table 3 we have derived a valuation for Sun’s Woodbine assets.
We have applied a heavily risk adjusted factor (of 70%) to the valuation of the company’s
Woodbine assets to determine an overall base case valuation for the whole company
(Table 4). The base case valuation only considers the Woodbine – it does not consider any
of the other nearby oil-bearing stratigraphic horizons. The upside case valuation considers
a much lower risk adjustment factor (of 25%) for the NPV-related valuation of the
Woodbine assets and also contains a modest valuation component for other horizons.
Both valuations are equity diluted and assume additional capital as per page 10.
Table 4 – Equity diluted NPV-based valuations of Sun
SOURCE: BELL POTTER SECURITIES ESTIMATES NOTES: 1. ON EQUITY DILUTED BASIS ASSMING EFFECTS OF SHARE ISSUE IN FY14; MAY NOT ADD BECAUSE OF DILUTION EFFECTS.
Exploration - USA Projects - Woodbine 369 0.13 1,103 0.38
- Other 1 0.00 3 0.00
- Thailand 3 0.00 8 0.00
- WA 1 0.00 4 0.00
- Malta 1 0.00 1 0.00
- Total 374 0.13 1,118 0.38
Net Corporate and Financials2 (27) (0.01) (27) (0.01)
Total 347 0.13 1,090 0.37
Base Case Upside Case
$ M $ per share 1 $ M $ per share 1
Page 13
Sun Resources NL (SUR) 5 August 2013 2. INCLUDES CORPORATE COSTS AND ADDITIONAL EQUITY.
Valuation based on recent transactions for Woodbine acreage
It is difficult to obtain detailed information on all recent oil and gas exploration asset
transactions but there have been several recent transactions in which there is enough
information to make a reasonably reliable estimate of the unit value being ascribed to land
over the Eagle Ford and Woodbine trend which is near to the areas held by Sun (Figure 3).
Much of the range of unit values per acre for recent transactions in or around the
Woodbine can be accounted for by whether the acreage contains established production
and reserves or not (Table 5).
Table 5 - Recent transactions of comparable Eagle Ford and Woodbine acreage
SOURCE: COMPANY DATA; BELL POTTER SECURITIES ESTIMATES
We believe that a value per acre of $US 15,000 is the appropriate value for Sun’s
Woodbine acreage. We have decided on that amount on the basis that while Sun has a
substantial net acreage position that is believed to be in a prospective part of the
Woodbine as Sun’s areas are located adjacent to areas that have achieved strong IPs and
large EURs, they do not yet have any significant production and do not have any reserves.
Despite its lack of significant production from its areas so far, several of the wells drilled by
Sun have recorded strong oil shows during drilling and we believe that with more suitable
fraccing and completion results, which is expected to for the T Keeling #1H well currently
being fracced, Sun should be able to achieve and sustain at least the sort of flow rates
generally seen in other parts of the Woodbine.
Applying our value of $US 15,000 per acre to Sun’s Woodbine assets gives a value
of $327M or $0.119 per share on an equity diluted basis (arising from the assumption
of additional equity as per the assumptions on page 10) and an alternative total
valuation for Sun of $290M or $0.105 per share on an equity diluted basis.
Comparison with AUT shows what is possible
Aurora Oil & Gas Limited (ASX – AUT, not rated) has grown rapidly from a market
capitalisation of $56M in December 2009 to $1,478M currently through the development of
significant oil and gas production (Table 6 over page) from a slightly smaller net acreage
position in an area to the west of Sun’s area but covering the Eagle Ford Shale. We see
strong similarities in the development of AUT and Sun in that AUT was an early mover in to
the Eagle Ford Shale region as Sun is an early mover into the Woodbine. AUT initially
brought in a larger partner to provide the technical capability and help it fund the
development of its areas and then more recently it took on significant debt and also did a
deal with one of the oil majors to accelerate the development of the rapidly growing
business. Sun has similarly done a similar thing in that it has brought in a bigger partner
(Amerril) and more recently done a deal with one of the largest independent oil and gas
exploration companies (Petro-Hunt) involving formation of an area of mutual interest that
will be managed by the large partner.
BuyerTransaction
Date
Net Area
(acres)Seller Acquisition Terms
Value
($US M)
$US/equity
acre$US/boe
Woodbine Acquisitions May 2011 na Petromax Operating Co.
Included w ells w ith IPs of ~900bopd and EURs of over 0.5Mpoe and
reserves of 19.8 Mboe 250 na 13
Halcon Resources Aug 2012 20,268 Petromax and other groups $US301.6M cash and 20.8M shares; producing ~2,000 bopd 489 24,117 na
EOG Resources March 2013 50,000 ZaZa Energy Corp. 3-stages - up to $US 50M cash & commitments to drill up to 9 w ells 123 2,465 na
Energy & Explor Partners April 2013 57,275 Chesapeake Energy Corp. Mostly gas production; includes 11 producing w ells 500 8,730 na
Not disclosed May 2013 3,007 Austin Exploration (ASX - AKK) Selling 70% interest in return for drilling 3 w ells plus $1.95M cash 26 8,631 na
Meidu Holdings July 2013 15,100 Woodbine Acquisition LLC Includes production of about 5,000 boepd and 28.3Mboe reserves 535 35,430 19
Page 14
Sun Resources NL (SUR) 5 August 2013
While it is now recognised that AUT is in a favourable part of the Eagle Ford Shale, we
note that the Woodbine is generally recognised as having superior hydrocarbon production
characteristics, is generally far more “oily” and generally gives rise to cheaper production
and completion with superior (slower) decline curves. These attributes also afford better
downside protection from any lower oil prices and also significantly, the Capex required to
drain oil per acre is likely to turn out to be almost half of what would be needed for the
Eagle Ford Shale.
We understand that even the best Eagle Ford Shale wells generally have significantly
lower net back values than wells in the Woodbine, because most Woodbine wells have a
much higher oil and liquids content.
Table 6 - Production and financials for AUT from 2009 to 2012
SOURCE: AURORA OIL & GAS LTD; BELL POTTER SECURITIES ESTIMATES
Year Ending December 2009 2010 2011 2012
Production
No of wells - Producing 6 66 216
- Stimulation underway 2 1 4 8
- Awaiting stimulation 2 8 12
- Drilling or rigging up 2 6 7
- Total 2 11 84 243
Gross 3P Reserves (Mboe) 43 112 139 165
EV/boe ($US) 1 7 10 12
Equity acres over Eagle Ford Shale 20,285 15,600 16,365 19,100
EV/Acre ($US) 2,481 51,814 83,120 104,035
Gross Equity Production - Mboe 0.2 1.0 3.9
- boepd 422 2,858 10,678
Financials
EBITDAX ($US M) (2.2) (0.6) 39.8 167.5
NPAT ($US M) (11.3) (6.6) 30.6 58.8
Operating Cash Flow ($US M) (2.2) (2.2) 39.8 139.9
Net Cash - $US M 5 46 40 (327)
- $A M 5 45 39 (355)
EV ($A M) 50 808 1,360 1,987
Share Price ($A) 0.27 2.24 3.39 3.63
Market Capitalisation ($A M) 56 853 1,399 1,632
Page 15
Sun Resources NL (SUR) 5 August 2013
Capital Structure
Capital expanded by issue of securities for Woodbine areas
Sun’s move into the East Texas area where it is targeting the Woodbine has seen the
company issue a significant amount of securities (shares and options) related to payment
for various land leasing arrangements. This has involved the issue of 350.8M ordinary
shares, 395M performance options to shares and 50M unlisted options. The acquisition of
the company’s 50% interest in the Amerril Oil Project involved the largest single share
issue component when Sun issued 292M shares at $0.05 (equivalent to $14.6M) to
complete the transaction after having paid $US 0.8M cash for the initial 2.5% interest.
Amerril is the company’s largest shareholder with a 14.7% interest, which it acquired when
it sold 50% of its Amerril Oil Project to Sun in September 2012.
Sun has also issued 1,036.7M shares to raise a total of $30.8M in two major capital
raisings over the past two years - a two stage share placement and a rights issue that
raised $10.8M at a share price of $0.017 in September/October 2011 and a two stage
placement that raised $20M at a share price of $0.05 in August and September 2012.
A total of 140M shares were issued after the exercise of 140M Class D and Class G
performance options upon appropriate milestones having been achieved. A total of 115M
performance options have lapsed and 140M performance options are still current.
The current issued capital of the company is given in Table 7.
Table 7 - Issued capital of Sun
SOURCE: COMPANY DATA; IRESS
1,984.9
Expiring 6/01/14; exerciseable at 12¢: 1.3
Expiring 31/03/14; exerciseable at 2.5¢: 97.3
Expiring 8/08/14; exerciseable at 9.4¢: 1.0
Expiring 16/11/14; exerciseable at 3.6¢: 23.7
Expiring 12/09/15; exerciseable at 10.5¢: 5.0
Expiring 3/05/16; exerciseable at 5.7¢: 15.0
Expiring 3/05/16; exerciseable at 6.7¢: 15.0
Expiring 3/05/16; exerciseable at 7.6¢: 15.0
Total Unlisted Options 173.3
Unlisted Performance Options (M)
Class E expiring 30/04/17; exerciseable at 0.1¢: 65.0
Class F expiring 30/04/17; exerciseable at 0.1¢: 75.0
Total Unlisted Performance Options 140.0
Total Issued Securities (M) 2,298.2
Fully paid ordinary shares (M):
Unlisted Options (M):
Page 16
Sun Resources NL (SUR) 5 August 2013
Board of Directors and Management
Sun’s Executive Directors have direct oil and gas experience
The Non-Executive Chairman is Dr Wolf Martinick. He joined the board in February 1996
and was appointed Chairman in March 2011. He is an environmental scientist with
extensive resources industry experience spanning over 30 years. He is Executive
Chairman and Managing Director of Oro Verde Ltd (ASX – OVL, not rated) Non-Executive
Chairman of Weatherley International Plc. (AIM – WTI, not rated), Azure Minerals Ltd (ASX
– AZS, not rated) and chairman of MBS Environmental Pty Ltd.
Dr Govert Van Ek is the Managing Director. He was appointed to this position in March
2013. He has 17 years of experience in oil and gas exploration and development and
related finance and investment areas in Europe, Asia and Australia. He was previously
Chief Executive Officer at Spyker Energy and Business Development Executive at Genting
Oil and before that he worked for ANZ Investment Bank and was Head of Oil and Gas
Lending for BNP Paribas. Prior to that he was an operations engineer and was involved
with oil and gas field development with Shell.
Matthew Battrick is an Executive Director, Technical. He was appointed to the board in
January 2008 as Managing Director and was appointed to his current position in March
2013. He is a geologist and has had extensive oil and gas experience with LASMO,
Ampolex, ExxonMobil, and Eni. He was Exploration Manager and General Manager for
Pancontinental Oil and Gas NL (ASX – PCL, not rated) prior to joining Sun.
Damian Kestrel is a Non-Executive Director. He was appointed to the board in February
2012. He has over 15 years of research, sales and management experience in Asian
equity capital markets, most recently with CLSA, to whom he remains a consultant.
John Kenny is a Non-Executive Director. He was appointed to the board in March 2012.
He is a lawyer who practices in the areas of corporate and mining law and investment
banking. He is a Non-Executive Director of Gippsland Ltd (ASX – GIP, not rated).
Craig Basson is Company Secretary and Chief Financial Officer. He was appointed to
these positions in November 2009. He has over 20 years of experience in accounting,
auditing and financial management of resources and other companies.
Page 17
Sun Resources NL (SUR) 5 August 2013
Recommendation Lack of production success weighs on share price even though neighbouring groups do major re-rating transactions
Although Sun has not yet achieved any significant oil production success in the two years it
has been targeting the Woodbine, we believe its Woodbine areas in East Texas are still
very prospective for substantial amounts of oil and that by using more appropriate fraccing
and completion techniques, it really should be able to establish significant sustainable and
highly profitable production. The prospectivity of its Woodbine areas is not reflected in the
market rating of the company’s shares. We assess the base case valuation for Sun’s
interests in East Texas is significantly higher than the current enterprise value (EV) of the
whole company. We have seen that despite considerably firmer oil prices, expanding and
highly profitable production from neighbouring company leases and further transactions
involving nearby areas that have established sale metrics that impute a much higher rating
for Sun’s shares, the market remains concerned about the ability of the company
successfully monetise its Woodbine interests.
Current frac may indicate what Sun’s areas are capable of
Recently Sun and its partner began to frac their previously suspended T Keeling #1H
horizontal well using the specialist fraccing contractor which has been successfully fraccing
horizontal wells for the leading producers from the Lower Woodbine. The T Keeling #1H
well is being fracced in carefully controlled segmented stages, with an initial five stage frac
over 1,500 feet at the toe of the approximately 7,000 feet long lateral. Flow back has
commenced from that initial stage and it will be followed by a subsequent 18 stage fraccing
of the remaining 5,500 feet of that lateral, which should be done in coming weeks. It should
result in substantially better production rates than Sun has achieved in its other wells and
which are more in keeping with the results achieved by the many wells of others nearby.
There are other nearby oily horizons besides the Woodbine
While the Woodbine is not a homogeneous zone of oil-bearing strata, and it is usual for
early operations of unconventional oil production to encounter difficulties and setbacks, we
believe Sun has had more than its fair share of them but should now be able to put them
behind them. The company still has a large net acreage position, most of which has not
been subjected to any form of drilling or tight oil production techniques for the Woodbine or
any of the other adjacent oil-bearing horizons. While Sun’s attention (as for most of the
other Woodbine operators) is solely focussed on the Woodbine (and more specifically for
Sun on the Lower Woodbine), there are potentially another four to six adjacent
stratigraphic horizons that could be equally hydrocarbon-rich and very oil productive with
the appropriate fracture stimulation from horizontal wells.
Sun is still well placed to begin to unlock significant value
Despite its technical setbacks so far, the company still has a significant and largely
untouched exploration tenement position in what is still regarded as very prospective areas
of oil-rich East Texas. This sees Sun still well placed to begin to unlock the value in its
areas either by continuing to fund its share of exploration and development using the most
appropriate fraccing and completion techniques or by farming out some of its areas so the
financial and technical strength of others is brought in for the good of Sun shareholders.
We recommend Sun as a Buy with a speculative rating. In setting the price target,
we have applied a 25% discount to our risk weighted base case valuation to take
into account the fact that the company has had a series of setbacks and has not yet
achieved successful production from its horizontal wells. Our price target is $0.095.
Page 18
Sun Resources NL (SUR) 5 August 2013
Risks and Share Price Drivers
Besides the usual oil and gas industry risks, establishing a successful fraccing regime is a critical risk
We regard the following as the major risks to Sun achieving success:
Establishing a successful fraccing regime that enables the company to realise the full
potential of its extensive net land position in the Woodbine
Commodity prices and foreign exchange rate outcomes that are different to our
forecasts
Lack of exploration success and/or greater than expected geological complexities
Lack of funding to carry out adequate exploration and development
Adverse operational issues including from the effects of adverse weather
Adverse changes to business conditions from changed government policy
Adverse environmental and other regulatory issues
Cost overruns or other adverse impacts from development delays
Inappropriate acquisitions of other assets that divert management effort and yield
inadequate returns
We identify the following as the main share price drivers:
We have identified many upcoming events that could be significant share price drivers over
the next year or so:
Successful fraccing of the T Keeling #1H well that yields a strong IP with significant and
sustainable oil production and demonstrates that the appropriate fraccing recipe yields
strong results
Other successful production results from near term wells in the planning, including a
well with Petro-Hunt in the last quarter of 2013
Maiden Resource and Reserves estimates for the Amerril and Beeler Oil Projects from
significantly improved and sustained production
Successful roll-out of drilling, fraccing and completion of wells across the company’s
extensive land positions in the Woodbine that leads to the establishment of substantial
reserves for all areas and subsequent profitable and rapidly growing oil production with
strong cash generation from the wells in them
Further exploration drilling, fraccing and completion success in stratigraphically nearby
oil-bearing horizons other than the Woodbine that leads to the establishment of Maiden
Resource and Reserve estimates and subsequent substantial and profitable oil
production from all the oil-rich horizons in Sun’s East Texas areas
Successful application of the techniques of horizontal drilling and completion using
multi-staged fraccing of tight oil-bearing horizons in other appropriate oil-bearing
provinces elsewhere in the world
Page 19
Sun Resources NL (SUR) 5 August 2013
Appendix A: Technical aspects of the Woodbine Sandstone
The Woodbine Sandstone (Woodbine) is called by a number of different names but whatever it is called, it is a very important geological unit . In South Texas the Woodbine occurs as sandy sediments containing vast oil-rich hydrocarbon reservoirs that can yield impressive flow rates when fracced appropriately by horizontal wells, making it a highly profitable pay zone.
The Woodbine is an Upper Cretaceous age sandstone unit that occurs in the East Texas
Basin and interfingers with the Eagle Ford Shale. Named in 1905 and first exploited in the
1930s, the Woodbine (or Eaglebine as it is often referred to) is quite an extensive formation
that varies from 350 to 800 feet (107 to 243m) thick and comprises interbedded sandstone,
siltstone, limestone and shale. It is not a homogeneous unit with the basal part being
shalier and the upper part sandier. Some areas of it are notably more silty and it has been
subdivided into three slightly different sub-units – the Lower, Middle and Upper Woodbine
(also known as the Woodbine C, Woodbine B and Woodbine A respectively).
Sun believes that industry participants are using a number of different names to describe
the same target horizon that Sun is specifically targeting, such as the “Eagle Ford”,
“Eaglebine”, “Dexter”, “Maness Shale”, “Lower Woodbine” and the “Woodbine C”.
The Woodbine sits stratigraphically just below the Eagle Ford
The Woodbine is stratigraphically just below the Eagle Ford Group, which consists of three
units – the Sub Clarksville Sand, the Coker Sand and the Harris Sand (Figure 5).
Figure 5 - Stratigraphic column showing relationship of the Woodbine to other units
SOURCE: SUN RESOURCES NL
Page 20
Sun Resources NL (SUR) 5 August 2013
The Woodbine was formed during the Upper Cretaceous period from fluvial flow deposition
and marine sediments, the formation is widely spread across East Texas. The sands
thicken between the San Marcos arch to the west and Sabine uplift to the east. The play is
more shallow and oily to the northwest and becomes deeper and gassier to the southeast.
Within the Woodbine Sands, there are three broad divisions: The upper section has
numerous sandstone packages interbedded with organic-rich shales, the middle is more of
a sand and shale mixture and the lower Woodbine is more of a shale resource play. The
sandstone units are often large lenticular bodies that pinch-out up dip (to the north).
Individual sand units can be up to 30 feet thick and can consist of fine to medium-grained,
laminated sandstone with porosities ranging between 10 – 17% and permeabilities from
0.1 to 20 millidarcies.
The Woodbine sands have long been a target for conventional oil production. In the region
of Madison and surrounding Counties of Brazos, Grimes, Leon, Robertson, Houston and
Walker in East Texas there is a mini-basin, the Brazos Basin, which dips below the
southern edge of the Angelina-Caldwell Flexure, bordered by the Edwards-Sligo Rim to the
south, the San Marcos Arch to the west and the Sabine Uplift going east. The underlying
Buda Formation defines the bowl-like shape. This area has been the focus of most of the
horizontal well activity in the Woodbine. The upper, generally sandy part of the Woodbine
was the focus of early attention with horizontal wells but more recently the more extensive
and predictable Lower Woodbine, which is generally shalier, has attracted growing
attention of operators (Figure 6).
Figure 6 - Stratigraphic section across the East Texas Basin
SOURCE: OIL & GAS INVESTOR
The superior flow characteristics for wells in the Woodbine compared to wells in the Eagle
Ford Shale for production over the period to early in 2103 is shown in Figure 7. More
recent well performance in the Woodbine would accentuate this difference.
Figure 7 - Decline curves for Woodbine (LHS) and Eagle Ford Shale (RHS)
SOURCE: HALCON RESOURCES CORPORATION; OIL & GAS INVESTOR
Page 21
Sun Resources NL (SUR) 5 August 2013
PROFIT AND LOSS
Year ending 30 June Unit 2012a 2013e 2014e 2015e 2016e Assumptions FY10A FY11A FY12E FY13E FY14E FY14E
Revenue 0 0 14 82 271 Gold (US$/oz) #REF! #REF! #REF! 0 90 90
Expenses 0 (1) (8) (35) (116) US$/A$ #REF! #REF! #REF! #REF! 0.99 0.96
EBITDA 0 (12) (9) 29 133 Gold (A$/oz) #REF! #REF! #REF! #REF! 91 94
Depreciation and amortisation 0 (0) (4) (20) (43)
EBIT 0 (12) (14) 8 90 Equity Gold Production (000 ozs) FY10A FY11A FY12E FY13E FY14E FY14E
Net interest expense 0 0 (2) (8) (19) Southern Cross #REF! #REF! #REF! #REF! #REF! #REF!
PBT 0 (12) (16) (0) 71 Leonora - Gw alia #REF! #REF! #REF! #REF! #REF! #REF!
Tax Expense 0 0 0 0 0 - King Of The Hills #REF! #REF! #REF! #REF! #REF!
NPAT (reported) 0 (12) (16) (0) 71 Total #REF! #REF! #REF! #REF! #REF! #REF!
Adjustments (after-tax) Total cash cost incl royalty (A$/oz) #REF! 0 0 #DIV/0! 68 39
NPAT (adjusted) 0 (12) (16) (0) 71
JORC Resource Estimates Owned Mt g/t Au Au (koz)
PROFIT AND LOSS (INTERIM) Leonora - Gw alia 100% 15.7 8.3 4,187
Year ending 30 June Unit 2012a 2013e 2014e 2015e 2016e - King Of The Hills 100% 2.4 5.3 413
EBITDA Margin (%) na na -64% 35% 49% - Tow er Hill 100% 3.0 4.5 437
Effective tax Rate (%) #DIV/0! 0% 0% 0% 0% - Other 100% 5.9 2.0 377
EPS Reported (cps) #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! - Total 100% 27.0 6.2 5,414
EPS Normalised (cps) #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! Southern Cross - Marvel Loch 100% 6.0 3.2 614
EPS grow th (%) #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! - Transvaal 100% 3.4 4.9 535
Op. Cash Flow (cps) #REF! #DIV/0! #DIV/0! #DIV/0! #DIV/0! - Nevoria 100% 3.4 4.1 443
DPS (cps) #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! - Other 96% 7.0 2.8 631
Payout Ratio (%) #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! - Total 100% 19.8 3.5 2,223
Franking (%) #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! Total 46.9 5.1 7,637
Cash Flow Statement ($M) Leverage FY10A FY11A FY12E FY13E FY14E FY14E
Year ending 30 June Unit 2012a 2013e 2014e 2015e 2016e
Pre-Tax Operating Cash Flow #REF! #REF! #REF! #REF! #REF! #REF! Net Debt (Cash)/Equity #REF! 0% #DIV/0! #DIV/0! #DIV/0! #DIV/0!
Tax Paid #REF! #REF! #REF! #REF! #REF! #REF! Net Debt/(Cash)/Total Assets #REF! 0% #REF! #REF! #REF! #REF!
Operating Cash Flow #REF! 130 #REF! (2) (2) 29 Interest/(Income) Cover (x) nm nm nm nm nm nm
Exploration & Development #REF! (142) (110) (82) (72) (68)
Property, Plant & Equipment #REF! (12) (10) (8) (7) (6)
Other Investing Items #REF! 5 0 (6) (9) (15) Valuation Ratios (x) FY10A FY11A FY12E FY13E FY14E FY14E
Investing Cash Flow #REF! (150) (120) (96) (88) (88) Normalised P/E #DIV/0! #REF! #DIV/0! #DIV/0! #DIV/0! #DIV/0!
Inc/(Dec) in Equity #REF! Price/Op Cash Flow #REF! #REF! #REF! #DIV/0! #DIV/0! #DIV/0!
Inc/(Dec) in Borrow ings #REF! (4) (9) EV/EBITDA #REF! #REF! #DIV/0! -4.0 -11.4 7.7
Dividends and Other #REF! #REF! #REF! #REF! #REF! #REF! EV/EBIT #REF! #REF! #DIV/0! -4.0 -7.8 26.4
Financing Cash Flow #REF! #REF! #REF! #REF! #REF! #REF!
Inc/(Dec) in Cash #REF! (23) 0 0 0 0
Valuation
Balance Sheet ($M) FY10A FY11A 2012a 2013e 2014e 2015e
Cash #REF! 0 1 3 3 3 Leonora, Southern Cross Mines #REF! #REF! #REF! #REF!
Other Current Assets #REF! 57 #REF! #REF! #REF! #REF! Exploration & Oth. Mineral Assets #REF! #REF! #REF! #REF!
Property, Plant & Equipment #REF! 106 116 126 125 123 Total Mineral Assets #REF! #REF! #REF! #REF!
Exploration & Development #REF! 306 405 481 560 628 Net Financials2 #REF! #REF! #REF! #REF!
Total Assets #REF! 469 #REF! #REF! #REF! #REF! Total #REF! #REF! #REF! #REF!
Short-term Debt #REF! 10 0 0 39 121
Other Current Liabilities #REF! 57 #DIV/0! #DIV/0! #DIV/0! #DIV/0! Valuation Base: #REF! Upside : #REF!
Long-term Debt & Convert. Notes #REF! 2 17 52 Premium / (Discount) to share price #REF! #REF!
Other Non Current Liabilities #REF! 43 #DIV/0! #DIV/0! #DIV/0! #DIV/0! Valuation sensitivity to:
Total Liabilities #REF! 112 #DIV/0! #DIV/0! #DIV/0! #DIV/0! +/- 10% move in gold price #REF! #REF!
Total Equity #REF! 436 #DIV/0! #DIV/0! #DIV/0! #DIV/0! +/- 10% move in the $US/$A rate #REF! #REF!
Net Debt (Cash) #REF! 0 (1) (3) 53 170
Current price $0.00
Major Shareholders Million (%) Date Recommendation Buy
M & G Group - 0.0 0/01/00 Risk rating High
Van Eck Associates Corp - 0.0 0/01/00 12-month price target #REF!
J P Morgan Chase & Co - 0.0 0/01/00
SOURCE: COMPANY DATA; BELL POTTER SECURITIES ESTIMATES. Notes: 1. May not add because of dilution effects. 2. Includes corporate costs.
Base Case Upside Case
$ M $ per share 1 $ M $ per share 1
Sun Resources NL as at 5 August 2013
Recommendation Buy, Speculative
Price $0.032
Target (12 months) $0.095
Table 8 - Financial summary
SOURCE: BELL POTTER SECURITIES ESTIMATES
PROFIT AND LOSS FINANCIAL RATIOS
Year ending 30 June Unit 2012a 2013e 2014e 2015e 2016e Year ending 30 June Unit 2012a 2013e 2014e 2015e 2016e
Revenue A$m 0 1 13 73 258 NPAT (adjusted) A$m (4) (12) (13) 3 67
Expenses A$m (5) (13) (22) (50) (140) Adjusted EPS (Basic) A¢/shr (0.5) (0.6) (0.5) 0.1 2.2
EBITDA A$m (5) (12) (8) 24 118 EPS grow th % na na na na na
Depreciation and amortisation A$m (0) (0) (3) (13) (34) PER x na na na 32.7 1.4
EBIT A$m (5) (12) (11) 10 84 DPS A¢/shr - - - - -
Net interest expense A$m 0 0 (1) (7) (17) Franking % - - - - -
PBT A$m (4) (12) (13) 3 67 Yield % - - - - -
Tax Expense A$m - - - - - Free Cash Flow (FCF) A$m (2) (2) (42) (88) (104)
NPAT (reported) A$m (4) (12) (13) 3 67 FCF / share A¢/shr (0.2) (0.1) (1.6) (3.0) (3.5)
Adjustments (after-tax) A$m - - - - - Price / FCF x na na na na na
NPAT (adjusted) A$m (4) (12) (13) 3 67 FCF yield % na na na na na
EV / EBITDA x (14.6) (4.1) (15.0) 9.8 3.0
PROFIT AND LOSS (INTERIM) EV / EBIT x (14.5) (4.1) (11.2) 22.5 4.2
Year ending 30 June Unit Dec-11a Jun-12a Dec-12a Jun-13e Dec-13e EBITDA margin % na na na 32% 46%
Revenue A$m 0 (0) 0 1 5 EBIT margin % na na na 14% 33%
Expenses A$m (3) (2) (6) (7) (9) Return on assets % na na na 1% 18%
EBITDA A$m (3) (2) (6) (6) (4) Return on equity % na na na 8% 98%
Depreciation and amortisation A$m (0) (0) (0) (0) (1) LIQUIDITY & LEVERAGE
EBIT A$m (3) (2) (6) (6) (3) Net Debt (Cash) A$m (1) (4) 35 141 266
Net interest expense A$m 0 0 0 0 (1) Net Debt / Equity % -7% -14% 109% 404% 262%
PBT A$m (3) (2) (6) (6) (4) Net Debt / (Net Debt + Equity) % -7% -16% 52% 80% 72%
Tax Expense A$m 0 0 0 0 0 Net Debt / Total Assets % -7% -6% 29% 55% 53%
NPAT (reported) A$m (3) (2) (6) (6) (6) Net Debt / EBITDA % 27% 30% -418% 596% 225%
Adjustments (after-tax) A$m - - - - - EBITDA / Interest x (4.9) 2.9 6.2
NPAT (adjusted) A$m (3) (2) (6) (6) (6)
ASSUMPTIONS - Prices
CASH FLOW Year ending 30 June Unit 2012a 2013e 2014e 2015e 2016e
Year ending 30 June Unit 2012a 2013e 2014e 2015e 2016e Crude Oil (WTI) US$/bbl 94 92 90 91 93
OPERATING CASH FLOW Natural Gas (Henry Hub) US$/kft3 3.0 3.3 3.5 3.5 3.5
Receipts A$m 0 1 13 72 252 Condensate US$/bbl 87 85 83 83 83
Payments A$m (1) (3) (12) (41) (124) Natural Gas Liquids US$/bbl 61 60 59 59 59
Tax A$m - CURRENCY
Net interest A$m 0 0 (1) (7) (17) USD / AUD US$/A$ 1.03 1.03 0.91 0.88 0.85
Other A$m
Operating cash flow A$m (1) (2) (1) 23 111 ASSUMPTIONS - Product Sales
INVESTING CASH FLOW Year ending 30 June Unit 2012a 2013e 2014e 2015e 2016e
Cap Ex and exploration A$m (10) (16) (57) (128) (231) Crude Oil (WTI) Mbbl 0.1 0.6 2.0
Other A$m Natural Gas (Henry Hub) Bcf 0.2 1.0 3.5
Investing cash flow A$m (10) (16) (57) (128) (231) Condensate Mbbl 0.0 0.1
FINANCING CASH FLOW Natural Gas Liquids Mbbl 0.0 0.1
Net equity proceeds A$m 10 19 20
Debt proceeds A$m 45 171 341 CAPITAL STRUCTURE
Debt repayments A$m Issued Securities Unit
Dividends A$m Ordinary shares m 1,984.9
Other A$m Performance rights (exercisable at 0.1¢ by 30/4/17) m 140.0
Financing cash flow A$m 10 19 65 171 341 Unlisted options (exercisable at 2.5 - 12¢ betw een 6/1/14 to 3/5/16) m 173.3
Change in cash A$m (1) 1 7 19 46 Total m 2,298.2
Balance Sheet ($M) Major Shareholders
Year ending 30 June Unit 2012a 2013e 2014e 2015e 2016e M (%)
ASSETS Amerril Energy LLC 292.0 14.7% 12/09/12
Cash and short term investments A$m 1 4 11 30 75 JDK Nominees Pty Ltd 40.8 2.1% 31/03/13
Accounts receivable A$m 0 0 0 0 0 Dr W G Martinick 29.0 1.5% 3/07/13
Inventory A$m Gejaso Pte Ltd 18.2 0.9% 14/06/13
Property, Plant & Equipment A$m 0 0 9 18 27
Exploration & development A$m 17 53 101 210 401 VALUATION
Other A$m
Total assets A$m 18 57 120 257 503
LIABILITIES Exploration Assets - Texas, USA 369 0.13 1,103 0.38
Accounts payable A$m 0 0 2 2 2 - Other 6 0.00 15 0.00
Borrow ings A$m 0 0 32 119 239 - Total 374 0.13 1,118 0.38
Other A$m 0 0 2 3 4 Net Financials2 (27) (0.01) (27) (0.01)
Total liabilities A$m 0 0 49 179 355 Total 347 0.13 1,090 0.37
SHAREHOLDERS EQUITY
Share capital A$m 55 74 94 94 94 Current price $0.032
Reserves A$m 1 1 1 1 1 Recommendation Buy
Retained earnings A$m (38) (50) (63) (60) 7 Risk rating Speculative
Total equity A$m 18 25 32 35 102 12-month price target $0.095
Weighted average shares m 1,140 1,985 2,982 2,982 2,982
SOURCE: COMPANY DATA; BELL POTTER SECURITIES ESTIMATES. Notes: 1. On an equity diluted basis assuming effects of a share issue in FY14; may not add because of
dilution effects.
2. Includes corporate costs and additional equity.
Base Case Upside Case
$ M $ per share 1 $ M $ per share 1
Date of change
Page 22
Sun Resources NL (SUR) 5 August 2013
Bell Potter Securities Limited ACN 25 006 390 7721
Level 38, Aurora Place 88 Phillip Street, Sydney 2000
Telephone +61 2 9255 7200 www.bellpotter.com.au
Recommendation structure
Buy: Expect >15% total return on a
12 month view. For stocks regarded
as ‘Speculative’ a return of >30% is
expected.
Hold: Expect total return between -5%
and 15% on a 12 month view
Sell: Expect <-5% total return on a
12 month view
Speculative Investments are either start-up
enterprises with nil or only prospective
operations or recently commenced
operations with only forecast cash flows, or
companies that have commenced
operations or have been in operation for
some time but have only forecast cash
flows and/or a stressed balance sheet.
Such investments may carry an
exceptionally high level of capital risk and
volatility of returns.
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A related party to Peter Arden owns 400,000 shares in SUR.
Disclosure: Bell Potter Securities acted as a broker to the $20m two-stage placement in August and September 2012 and received fees for that service.