DJ Carmichael Research Report October 2013

Explorers Note: Leveraged to Growing Energy Demand
Oilex Ltd (OEX) is a diversified oil and gas explorer focused on tight gas exploration in India (Cambay Basin) and unconventional exploration in Australia (Canning Basin). We believe OEX is at the early stage of a turnaround and offers investors near term exposure to an emerging tight gas play which could delineate a material resource in the lucrative energy market of India. Furthermore, OEX’s recent entry into the Canning Basin, Western Australia, which is considered one of the most promising emerging shale plays in the country, provides OEX with an attractive balance of near term production and blue-sky exploration diversified across two countries. We therefore believe OEX is an attractive Speculative Buy.

Key Points:

  • Attractive macro-environment in India. The macro-economic environment in India is very supportive of oil and gas development due to the expectation that energy demand will double by 2030 resulting in India becoming increasingly energy import dependant unless there is a significant ramp-up in domestic production.  
  • Gas prices rising to $8/mcf. Due to the increasing energy demand and the recognition of the need to accelerate domestic gas development and production, the Government of India announced an increase to the domestic gas price to ~$8/mcf from April 2014. This increased gas price will improve the economics of the Cambay project considerably, in our view.  
  • Success at Cambay-77H could materially re-rate OEX. The high impact Cambay-77H well is expected to be spud in 1Q CY2014 and in a success case could materially re-rate the company by delivering near term production and converting some of OEX’s current 2C resources (37mmbbls oil and 222bcf gas) to reserves. Cambay-77H will be a 350 metre horizontal, four stage  fracture stimulation (two fracks per stage) offset well from the previously drilled Cambay-76H (500 metres away) and will be drilled to a target depth of 1,700m.  
  • Recent farm-out to Magna provides material funding for Cambay-77H well. OEX divested a 10% interest of its 45% interest in the Cambay project to private UK investment vehicle Magna Energy (Magna) in August 2013 for US$4m which should fund a material amount of OEX’s share of the upcoming Cambay-76H well. Magna also has an option to acquire an additional 5% for US$2m.
  • Entry into Canning Basin provides asset diversification and blue-sky upside. OEX has recently diversified its asset base with the award of a Special Prospecting Authority and two exploration permits covering the entire Wallal Graben (a deep undrilled half-graben) in the Canning Basin, Western Australia. OEX's material acreage of ~4mm acres provides investors high leverage to a future farm-out and blue-sky exploration potential.
  • A significant number of near term catalysts. The key near term catalysts for OEX include:  1) Approval of service contracts for Cambay-77H (4Q CY2013), 2) Spud of Cambay-77H well (1Q CY2014), 3) Farm-out of Canning Basin acreage (1Q CY2014), 4) Cambay-77H well test result (1Q/2Q CY2014) and 5) Production approval for Cambay-73 and B-3 wells (1Q CY2014).
Download the full report here