POE - Macquarie boosts target
Pan Orient Energy - POE CN
Exploration success at L53
• Pan Orient’s L53-D2 exploration well has tested 1,015bbl/d (POE 100% WI) from one of six potential conventional reservoir intervals observed in the well. Pan Orient is producing the well on a 90-day production test, and will apply for a long-term production license, which is expected to be awarded within 120 days.
• Production. As of 9 January 2012, corporate production was 2,122bbl/d, so a single zone in the L53-D2 well has effectively increased Pan Orient’s production capacity by 50%. The first appraisal of this discovery will test additional zones encountered in the L53-D2 well (Pan Orient cannot commingle production on this concession). With up to 12 additional locations in inventory, Pan Orient could conceivably triple or quadruple production from the L53 concession in 2012.
• Reserves. Pan Orient’s most recent P50 resource estimate for the L53-D East prospect is 7.4mbbl. The terms of the L53 concession are similar to Pan Orient’s core assets at L33/44, where Proven reserves are worth ~US$23.00/bbl (PV10AT, ~US$90.00/bbl crude pricing). On an unrisked basis, we estimate the L53-D discovery would be worth C$2.97/sh. Pan Orient indicates that it has at least two other fault compartments to test in the vicinity of this discovery, which would be additive to our unrisked valuation.
• Perception. Pan Orient has historically been associated with high-decline production from volcanic reservoirs, which are extremely difficult to predict, and have resulted in a discounted valuation for the company. If Pan Orient is able to generate typical conventional production profiles from the L53 sandstones, we believe a more reasonable valuation for these assets would be 2.5–3.0x cashflow (compared to <2.0x for volcanic production). If this is the case, we believe that Thai production alone could support a share price in excess of C$5.00/sh.
Earnings and target price revision
• 2012 CFPS up 39% to C$1.42. Target price up C$1.00 to C$5.50/sh.
• 12-month price target: C$5.50 based on a 1.0x core NAV & 2.5x 2012 EV/DACF (50/50 weight) methodology.
• Catalyst: exploration drilling at Citarum (Indonesia) and L53-G (Thailand).
Action and recommendation
• Although appraisal risk remains, the L53-D2 discovery looks encouraging, and we see room for the stock to run further as Pan Orient demonstrates a long-term production history from the concession. Indonesian exploration remains a free option on our estimates even following the recent move in the stock.