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Buru Energy Ltd: THE INVESTMENT CASE

Buru Energy has oil flowing again at Ungani project in Western Australia

Cash on hand should gain momentum as production increases towards the target rate of 3,000 bopd.
Checking oil samples in front of tanks at Ungani project
INVESTMENT OVERVIEW: BRU The Big Picture
Analysts at Hartleys view Buru as significantly undervalued with its 61 cent valuation implying substantial upside

Buru Energy Limited (ASX:BRU) has brought the Ungani 1 and 2 wells at the Ungani Oilfield Project in Western Australia back into production with strong results.

After a short initial period of free-flow, the pumps in both wells were restarted without incident.

They are now producing a combined total of about 2,400 barrels of oil per day (bopd).

Water cuts of about 10% to 12% are significantly lower than when the wells were shut-in in January owing to adverse weather which caused closure of the access road.

High-value assets in Canning Basin

Buru’s petroleum assets and tenements are onshore in the Canning Basin in the southwest Kimberley region.

While the flagship Ungani project is a high-quality conventional asset, Buru has an active exploration program aimed at increasing its oil resources.

Analysts at Hartleys view the stock as significantly undervalued with its valuation of 61 cents per share implying substantial potential upside to this morning’s opening price of 36.5 cents.

Ungani 4 and 5

With the field back on production, testing operations have also commenced on the new Ungani 4 and Ungani 5 wells that were drilled late last year before the field shut-in.

Ungani 5 has flow tested at initial rates of up to 1,226 barrels per day of essentially clean oil and is currently shut-in for pressure build-up.

This result is generally in line with expectations and provides important confirmation of additional resources and production from the previously unaccessed Eastern Fault Block of the Ungani Oilfield.

The construction of the Ungani 5 flow line to the Ungani central production facility is expected to be completed and commissioned in about seven days.

Once Ungani 5 is connected it will be produced into the Ungani production facility as part of the company’s long-term operations.

Ungani 4 has been temporarily suspended while Ungani 5 is being tested and connected but operations to maximise production will resume once Ungani 5 testing operations are complete.

Exploration program aimed at multiple targets

Planning for the 2018 drilling program of up to four exploration wells is continuing.

The drilling program will be subject to conclusion of the current farm-out negotiations which are proceeding satisfactorily.

Hartleys analyst Aiden Bradley is of the view that the chance of securing a suitable farm-out partner has been enhanced by the buoyant oil price.

The positive impact of the oil price is evident over the last 12 months (below) when comparing Buru’s impressive share price performance (bottom) with the commodity price movement.

Strong cash flow for remainder of 2018

The planned drilling locations for this program include a range of play types including the proven Ungani Dolomite and the play opening Reeves oil discovery in the Ungani Far West well.

Buru’s cash flows for the first quarter of 2018 were significantly impacted by the unexpected shut-in of the field.

However, management’s projections indicate that it has sufficient financial resources to undertake its ongoing and planned activities which mainly revolve around the 2018 drilling program.

Production cash inflows for the third and fourth quarters of 2018 are forecast to be robust.

Cash on hand should gain momentum as production increases towards the target rate of 3,000 bopd.

Weather interruptions have not impacted fundamentals

Bradley noted that the recent weather interruptions have not impacted his valuation.

He said: “Our 12-month forward valuation and target price remains unchanged at 61 cents per share.

“A small decrease in net present value (NPV) due to the production delay has been compensated by the higher current oil price.

“The NPV10 is based on our base case for the Ungani Oil Field of 3,000 bopd peak production, 6.3 billion barrels of recoverable oil and a $100 per barrel long-run oil price.”

The valuation also contains a heavily risked value for future oil potential along the Ungani Trend.

The broker expects that this prospective play will continue to be de-risked by continued success at Ungani and any positive outcome from Buru’s intended farm-out process.

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