by Alison Sammes

DISCLAIMER : I AM A LARGE SHAREHOLDER IN HPR

THE INFORMATION HERE IS FROM PUBLIC SOURCES OR INTERNALLY GENERATED FROM PUBLIC DATA USING REASONABLE ASSUMPTIONS AND ARE CONSIDERED ACCURATE

THIS IS NOT AUTHORISED BY HPR AND IS MY OWN WORK

BARRY DAWES

Key Points

New ASX-listed entity has royalty interests over 18 permits
7 permits in the Amadeus Basin could support 100smillion bbls oil and >50TCF gas
Many conventional and unconventional oil and gas targets
Possible major world class resource of helium in Amadeus Basin
High leverage to oil, gas and LNG prices
Cash flow current from 4 income streams in 2014
Expect royalty income from 6 permits by 2016, 8 by 2018
Major exposure to third party exploration programmes
Multi decade asset and revenue growth expectations
Risked NPV12 24 month valuation target A$1.59/share

As a former Founding Director and as a major shareholder I am delighted to see the outstanding potential unfolding at long last. Capital raising markets have been difficult these last few years but the underlying fundamentals of a good oil price and access to export markets through the new LNG projects has transformed the hydrocarbon exploration scene and the massive stealth onshore oil and gas exploration boom in Australia is now well underway. The activity in conventional oil and gas in the Cooper Basin is extraordinary but it is the activity in the unconventional sector seeking tight oil and gas and shale oil and gas in South Australia, Northern Territory, Queensland and Western Australia that is changing Australia’s hydrocarbon fortunes.

In addition, HPR has exposure to exploration activity with potentially very large targets totalling in excess of 2.0 Bn bbls in offshore projects in the Carnarvon Basin and offshore Seychelles in the new East African oil province.

Phoenix is well placed to share in some of these exciting new developments and others as well.

Note the performance of the large North American royalty companies like Franco Nevada and Royal Gold that have grown into major corporations with large long term portfolios that give a pipeline of growth and exposure to commodity prices and commensurate high PE Ratios.

Torrens Energy (TEY.ASX) made a scrip takeover bid for unlisted Phoenix Oil and Gas royalty company and has also raised A$6m to provide working capital. The name has been changed to High Peak Royalties (HPR.ASX) and listing is set for Monday 5 May 2014.

The HPR royalty portfolio has been accumulated over almost 6 years and includes exposure to many important hydrocarbon basins such as Surat, Amadeus, Officer, Cooper/Eromanga, Bass Strait and offshore Browse and has prominent industry players such as Conoco-Philips, BG Group, Santos, Karoon, Central Petroleum and Nexus Energy as tenement operators. The new strong working capital position should see additional royalties acquired.

Revenues have been modest to date but should increase substantially with the startup of the BG Group Gladstone LNG plant(GLNG) that will produce its first LNG in late 2014 (note that an official start date for gas production from HPR’s interests in PL 171 and ATP574 is not yet available) and as oil production in STO/DLS’s ATP299 increases under the current drilling programme. Whilst the BG LNG royalties and ATP 299 will generate the largest near term revenue it is likely that the 1% royalties over CTP’s Amadeus Basin tenements may become by far the biggest asset. Even just the prospective hydrocarbon gas and liquids discovery with helium at Mt Kitty may prove that to be the case in the very near term.

The offshore exploration activities on large targets might also mean large values to HPR despite the modest royalty interests.

The potential revenues without an operating cost base or capex obligation should grow and could potentially be very large over time. This may become a new style of asset class with the potential of increasing earnings year after year for many years to come. This style of revenue stream should attract a high premium in the market over time and we should all be rewarded with growing fully franked dividends.

Also because HPR has interests in many projects with several tier one operators the news flow should be very strong from numerous sources.

The HPR opportunity is large and complex but it should be long and exciting.

The royalty portfolio covers 18 tenements and can be grouped into three major sectors

2.125-2.5% Qld coal seam gas royalties
1.0% Amadeus Basin oil, gas and helium royalties
Minor interests in producing or potential producing tenements in Australia and overseas.

All may seem modest but in today’s world of growing demand for gas and oil and with the days of peak conventional oil behind us these royalties are valuable and even a very small exposure may bring in very large rewards.

This table gives a quantified risked assessment of HPR’s interests.

1 Queensland CSM Royalties

The Queensland CSM royalties underpin the value of the company in the near term through strong revenue generating potential through export sales gas for LNG from the Peat and from the BG Group tenements.

%	Tenement	Name	Operator	Area km2	Reserves	Pj	FY12a	FY13a	FY14e	FY15e	FY16e	Fy17e
					3P	2P	Pj	Pj	Pj	Pj	Pj	Pj

2.125	PL 101	Peat	Conoco	n.av.	n.av.	116.8	7.89	2.79	3	6	7	7
2.500	PL 171	Pinelands	BG Gp	175	1000	136.4	0	0	0	0	0	65
2.500	ATP 574	Polaris	BG Gp	231	1500	12.1	0	0	0	0	0	95

Prices for sales gas into the new LNG plants should be related to the cif (delivered) prices of LNG into the main Asian markets. Current prices are around US$18/Gj and are linked to oil prices (the so called JCC -Japanese Crude Cocktail – less about US$3/bbl). This is usually about 14-16% of the US$ oil price expressed in US$/Gj.

Prices have been high in recent years and should stay high as the world increases its dependence on gas, and LNG in particular. The above graphics show the LNG price into Japan(the main market) and data from BG Group in 2013 forecasting over 6%pa growth in seaborne trade in LNG out to 2025. Gas consumption globally is around 24% of total energy consumption but is <5% in China so imports there can only increase.

The royalty HPR will receive will be the same as that the Queensland Govt will receive and it should be something like a `net back’ after the cost of recovering, processing, pipelining, conversion to LNG, storage and shipping. A conservative calculation of around US$15/Gj less US$8-9/Gj of production, transport, processing and shipping costs should give a `net back’ royalty pricing of US$5-8/Gj for gas into those export LNG markets. Naturally Qld will seek the maximum price it can get!

The Peat Tenement (HPR 2.125% royalty)

The existing Peat gas field operated by Conoco Philips and Origin Energy has become part of the 8.6mtpa APLNG Project. The royalty income is currently quite modest and whilst the reserves are limited a higher price should apply in future years as gas is diverted to the export LNG market. Origin has already flagged its intention to supply BG Group with ramp up gas from 2015 for 10 years. Some portion of this may come from Peat as it is the nearest tenement to Gladstone and is already on the main pipeline.

Source: Origin Energy

In addition a major deep gas target lies within the tenement boundaries and may be tested in the medium term.

A notional value of only about A$1m is appropriate here but this could be much larger over time.

BG Group Tenements (HPR 2.50%)

The BG Group permits (in JV with Senex, CNOOC and Tokyo Gas) have 3P reserves estimated at 1500Pj and 1000Pj for ATP 574 and PL 171 respectively. The wells to date have exhibited high deliverability and should be brought into production in 2015 or 2016. BG Group will drill 6 more wells in 2014 that should add substantially to the current combined 2P reserves of 148Pj.

The exact start up of gas deliveries from these permits is not currently known but it should be in FY16. Forecasts are from FY17.

The 3P reserves are expected to provide a 60% recovery and should show high initial delivery then a sharp decline but should have a very long tail. These figures are indicative only and need to be risk adjusted but are a useful guide.

On these terms the revenues at US$5, US$6, US$7 and US$/Gj and starting in FY17 could look like this.

This is pretax EPS of A$20-34m in the first full year (Pre tax EPS of A$0.12 -0.20)

On the same basis the after tax NPVs at various discount rates on 165m shares would become:-

2 The Amadeus Basin Tenements 1% over something potentially really large

I have had over thirty years watching the Amadeus Basin with a first visit in 1980. The opportunity was challenging with very old rocks that might not have any more hydrocarbons, where the geology was highly fractured and where reservoirs were thought to be poor and certainly `tight’.

The early wells were drilled without seismic and sited from aerial photos but the first commercial oil and gas was found in 1964 at Mereenie and more gas at Palm Valley in 1965. Gas was also found earlier at Oorammina in 1963 and another 25-30 wells were drilled with only the 29BCF Dingo gas field discovery in 1984 providing any real success. Production began from Mereenie and Palm Valley in the mid 1980s.

The geoscientists at the Northern Territory Geological Survey NTGS in recent years have done an extraordinary job in bringing so much data together through onsite mapping, aero surveys, navel gazing and picking up the work done by early explorers like Exoil (discoverers of Mereenie, Palm Valley and Oorammina), Amadeus Oil, Pancontinental Petroleum and many more. Central Petroleum has provided a wealth of information. The data is excellent and comprehensive and is serving as a very valuable base in the exploration finally now really underway with Santos’s A$150m farmin in with Central Petroleum.

I had the good fortune to be the instigator of Central Petroleum with John Heugh’s Merlin Petroleum’s Pedirka and Georgina Basins combining with the Amadeus Basin companies to merge to form the new company. Martin Place Securities also underwrote the listing of Central and later on, as He Nuclear, farmed into the Magee helium/gas/condensate discovery of 1992 and the Mt Kitty prospect. Helium is used in the high pressure gas `pebble bed’ nuclear reactors – much safer and 50% more efficient than conventional nuclear power stations, hence He Nuclear. Another MPS company, Petroleum Exploration Australia, farmed in the whole Amadeus and Pedirka shebang to earn 20% by funding seismic and a few sort of stratigraphical wells. Unfortunately the GFC limited that programme somewhat!

So the 1% royalty over much of the Amadeus was a great acquisition for Phoenix and I consider it may prove to be its best asset.

HPR has a 1% royalty over 7 tenements in the Amadeus.

	Targets	Operator	%
EPA 111		CTP	100
EP 112	Magee	Santos	Earning 70%
EP 115	Surprise	Santos *	Earning 70% (*part only)
EP 118		CTP	100
EPA 120		CTP	100
EPA 124		CTP	100
EP 125	Mt Kitty	Santos	Earning 70%

HPR also has two wholly owned permits EP155 and EP 156 that may have value in the future. EP155 is very well placed geologically and has already had one well, Mt Winter, with oil shows. Negotiations are needed with traditional owners.

Four of the Central operated tenements are issued permits and three are applications awaiting issue pending future discussions with traditional owners.

Amadeus Basin showing Central Petroleum’s permits. – HPR has a royalty over 7 of these.

Source: Central Petroleum

The Amadeus is very large in scope in the NT and extends another 150km into WA. Wells are few and far between and seismic is sparse. The age of the Amadeus extends beyond 1100m years, old in most oil terms but large oil and gas fields of similar age exist in China, Russia and Oman. The Amadeus also has three major regional seals that have retained hydrocarbons over hundreds of millions of years. Two, the Chandler Salt and the Gillen Salt effectively cover much of the basin and make the Amadeus an extremely attractive `sub salt’ target that will bring in major oil companies over the next decade. Mt Kitty is likely to confirm this.

Note that Central Pet has now drilled four wells in the Amadeus with a 75% success rate – Surprise, Ooraminna and now Mt Kitty. Drilling of valid 4way dip closures has had a 100% success rate in the Amadeus. An increase in drilling activity might be very exciting to watch.

Geophysical work done by Central included some high definition aeromag that also highlighted many structures that will over time be followed up by regional seismic.

Source: Central Petroleum

This aeromag survey has been an excellent low cost alternative to the very expensive on ground seismic surveys. Over 60 new targets were identified.

The Amadeus is also the target for large scale unconventional oil and gas as the concept of basin centred continuous gas or oil reservoirs is better understood along with many targets in tight gas, such as Mt Kitty.

The Amadeus Basin has had very few wells and little seismic for such a large producing basin.

Source: NTGS

The Amadeus is vast and complex. Over 170,000km2 and multiple tectonic events and only about 40 exploration wells. It has a fair claim to have the lowest drill ratio of any onshore producing basin in the world with only about 1 well per 4000km2.

It has three prominent proven petroleum systems providing source, trap, reservoir and seal in order of increasing age:

Stokes Siltstone -Stairway Sandstone- Horn Valley Siltstone (Mereenie, Surprise Palm Valley)
Chandler – Arumbera (Dingo Orange)
Gillen Salt-Heavitree ( Mt Kitty Magee)

Because the Amadeus is recognised as a relatively shallow basin (targets <3000m) much of the strata has not been cooked up too much so still fits within the `oil window’ which extends as low as 2500m in Surprise. This means that oil any may have not yet been heated too much, hydrogenated and converted into gas

Geoscientists have also recognised the potential of another 7 other potential but less defined petroleum systems in increasing age in the:-

Stairway “shale”
Late Cambrian Goyder Formation
Middle Cambrian Upper Shannon Fm
Giles Creek Dolomite Basal shale
Intra Chandler Formation shales
Aralka Formation
Bitter Springs Formation (Loves Creek Member)

The maps show the Amadeus to be over 600km long and the important salt seals are over much the Basin.

The two key source rocks are the Horn Valley Siltstone(`HVS’) in the northern section and the much older Gillen Member across the southern and western sections.

Petroleum System A

The HVS fits within the Larapinta Group which hosts the Stokes Siltstone- HVS – Stairway Sandstone-Pacoota strata and hosts the Surprise, Mereenie and Palm Valley.

The HVS is the source of oil and gas for the current production in Surprise, Mereenie and Palm Valley. It has a high TOC and has been recorded as up to 422m thick. It is a source rock for conventional traps and is a major target for unconventional oil and gas.

NTGS has published a series of data on unconventional oil and gas potential as shale gas and as Basin Centered Gas in the Larapinta Group with a mean of 1.14bn barrels of oil and 27.8TCF of gas.

Oil

Prospective resource

P90

(mmbbl)

Mean

(mmbbl)

P10

(mmbbl)

Horn Valley Sltst

207

1,140

2,500

DSWPET (2011)

Source: NTGS

Gas

	Prospective resource
	P90 Pj (BCF)	Mean Pj (BCF)	P10 Pj (BCF)
Stairway Sst	1,1167 (1,100)	5,408 (5,1000	11,135 (10,500)	Basin Centred Gas	DSWPET (2011)
Horn Valley Sltst	2,757 (2,600)	11,983 (11,360)	25,239 (23,800)	Shale gas	DSWPET (2011)
Pacoota Sst	2,545 (2,400)	10,392 (9,800)	20,891 (19,796)	Basin Centred Gas	DSWPET (2011)
Total (Larapinta Gp)	11,771 (11,100)	27,784 (26,200)	48,461 (45,700)		DSWPET (2011)

Source: NTGS

The thickest zones are in the north where the HVS is more than 140m thick. A very rough area x thickness model puts about 45% of the HVS sediment volume in EP115, 15% in EP111, 12% in EP112 and 6% in EP124.

Isopachs (thickness) of Horn Valley Siltstone Source Rock

Source: NTGS

And the HVS becomes more oil prone in the west and mostly in EP115 and EPA124 with some in EP111. All very valuable tenements.

Hydrocarbon types in Horn Valley Siltstone Source Rock

Source: NTGS

Geoscientists consider that the Larapinta Group with the HVS as source may have similarities with the Bakken Shale in the Williston Basin in the US in having basin centred continuous oil and gas reservoirs with hydrocarbons migrating up the Pacoota and Stairway Sandstones into conventional reservoirs like Mereenie and Surprise.

Source: DWSPETT NTGS

Now consider that with the HVS (mostly in EP 111 EP 12 and EP115 where HPR holds 1% royalty) a very large hydrocarbon charge has been generated but only three holes have been drilled, Mereenie, Mt Winter and Surprise. And note:-

Surprise -1 is 140km from Mereenie oil field yet the oil is identical
both are tiny compared to the volumes of hydrocarbons generated.
The Mt Winter well (1970?) with oil shows is the only well between them.

Conclusions are that much more oil is probably trapped in reservoirs in this part of the basin.

Many years of exploration will be required here before the possibilities are exhausted.

Note that all successful wells have been `four way dip closures’ but many other types of traps are likely to be found.

HPR’s wholly owned EP155 Mt Winter permit has had the only well between Mereenie and Surprise and which had oil shows. Hindsight and better seismic have shown that Mt Winter was drilled off structure and the site has five targets in three petroleum systems.

Surprise West Well Section

Source: NTGS

This is Surprise on the west side of the fault. The top green section is the reservoir but other reservoirs may exist below. Surprise West is 0.5-2.0million barrels and is now in production at about 500bopd. Should it be maintained for one year that would be 180,000bbl worth A$18m and A$180,000 to HPR and perhaps a net PV of A$2m to HPR.

Surprise East will be drilled in this June Qtr with a target of about 15mmbbls as shown on the left hand side.

15 mmbbls could be worth A$15m to HPR.

Santos has just completed 327 line km of new seismic northwest of Mereenie in EP115 and also 1587km in the south and east and is reported to be very pleased with the results. More action here.

2013 seismic programme west of Mereenie and in Southern Part of the Amadeus Basin

Source:Santos Mar 2014

Petroleum System B The Heavitree-Gillen Salt System

The Heavitree is a basal sandstone sitting on top of basement and extending over most of the Amadeus and well into WA. This is the reservoir.

The Gillen Member is both source and seal and has evaporite and salt strata that have been mobile and can get squeezed like toothpaste into voids and can act as impermeable seals. The Gillen Salt has sealed Mt Kitty and Magee for over 800m years and given that the helium is still present and at a very high concentration it has been a very good seal.

The Heavitree extends west into WA and gets to more than 600m thick to the west. It is well represented in EP115 and EPA 124 where HPR holds its 1% royalty. No well has been drilled in the mid to lower half of the basin west of Wallara 1.

Source: NTGS

The Heavitree is extensive and may support multi-TCF resources of hydrocarbons and helium.

Note that:-

Magee-1 recovered 6.2%He and 39% methane gas from 4.5m the Heavitree with 9% porosity
Mt Kitty recovered 5.8% He and methane gas from the 109m in the Heavitree
Both had high nitrogen
The wells are identical in gas make up yet are over 100km apart
The Heavitree extends a further 400km to the west and is up to 1000m thick
The Heavitree is a continuous system could be a massive hydrocarbon/helium reservoir

The Mt Kitty well followed up the Magee well drilled in 1992 by CRA. That was the first well to penetrate the Gillen Salt to confirm the seal and find the Heavitree beneath.

The Magee well flowed about 63Mscf/d to surface with the following characteristics:

Methane 39%
Condensate 9% (ethane, propane butane etc)
Helium 6.2%
Nitrogen 43.6%

The 6.2% He at Magee, like the 5.8% at Mt Kitty, is an extreme statistical outlier amongst over 400 US gasfields in having a very high He level but with high methane and other hydrocarbons. Most higher helium deposits have lots of nitrogen (air is 78% nitrogen so nothing valuable here!) so helium with no methane can be uneconomic. Magee and Mt Kitty have both helium and hydrocarbons to establish economic operations.

Source: MPS & USGS

The NTGS gives the potential at Mt Kitty very well so here it is in its own words from March 2014:

Source: NTGS

So the 0.5MMCFD flow was as expected. Separate gas flows of each 0.5MMCFD were noted from four separate zones; 2144m, 2156m, 2186m and 2252m. The well will need fraccing and/or horizontal drilling but it should flow very well.

The target was 3TCF of gas/helium. Central was more cautious at 1TCF but I have heard that the Heavitree target thickness was 60m and came in at 109m. So could be bigger. Who knows? No one just now.

This was the section.

Source: NTGS

And this the diagrammatic representation.

Source: NTGS

Central recently stated that the Mt Kitty discovery ` could be the catalyst to interconnect the Northern Territory with the Eastern Seaboard gas market’.

Central also published a helium project study in 2010 that concluded that a helium project could run well based on a gas input feed of 20MMCFD into an onsite LNG plant and railing and trucking LNG and liquid helium out through Darwin.

Capex of A$420m gave annual revenues at A$98-143mpa and an NPV of A$111m-556m. LNG and helium prices have doubled since then so the NPVs must be around A$1000m now.

The royalty income could be A$2-3m pa just from one project.

There is so much more on the Amadeus to discuss and so much is very technical but very positive. We can now sit back and let the operators deliver whatever is really there. I am sure many Big Oil companies will be excited by the subsalt discovery and once the remaining EPAs (especially EPA 111 and EPA124) are converted to EPs the there will be many farmin offers to Central. And carries for HPR.

I didn’t get to the third petroleum system in the Amadeus nor the other royalties but they are smaller than the CSM and the Amadeus at present and I will cover them at a later date.

Do note that even the Seychelles royalty at just 0.075% covers potential of over 3.203 billion barrels to give US$240m in ground and

and 0.2% of Karoon’s WA482P with this! Note 0.2% of 2.234bn bbls@ US$100/bbl = US$446m!

The risked values are far less but global exploration is continuing and the quality of these long term targets should be assessed within the next few years.

All the smaller permits are covered here.

I will just leave you with these images.

The geologists out there will find them fascinating. For laypeople, the shapes of great curves with overlying flat sediments are very exciting. Let’s hope Santos decides to beef up its efforts.