DJ Carmichael Research Report December 2013

Cambay-77H to Spud 1Q CY2014

We are encouraged by the recent milestones being delivered by OEX management which include the farm-out of a 10% to 15% interest of Cambay-77H to Magna Energy Ltd (Magna), securing a rig for Cambay-77H which is expected to be spud in 1Q CY2014 and the finalisation of contingency funding for Cambay-77H. We believe OEX provides investors with an attractive balance of near term production and blue-sky exploration diversified across two countries. We therefore maintain our Speculative Buy recommendation.

Key Points:
  • Cambay -77H to Spud 1Q CY2014. OEX has secured a rig (Essar rig 4) for the drilling of the Cambay-77H well which is expected to spud in 1Q CY2014. This timing is in line with our estimates and we believe the drilling of the Cambay-77H well will be a material catalyst for OEX. In a success case, Cambay-77H could materially re-rate the company by delivering near term production and converting some of OEX‟s (35%) current 2C resources (29mmbbls oil and 173bcf gas) to reserves.
  • Magna expected to exercise additional 5% interest option on Cambay. OEX received the balance of US$3.8m from Magna Energy Ltd (Magna) for the sale of a 10% participating interest in the Cambay Production Sharing Contract leaving OEX with a 35% interest. Magna also has the option to acquire an additional 5% upon payment of US$2m which they are expected to exercise in early 2014 providing further funding to OEX to drill the Cambay-77H well. If Magna acquires an additional 5%, OEX‟s equity share will decrease to 30%.
  • Funding in place to cover Cambay-77H well cost. The current gross cost estimate for the Cambay-77H well which is due to spud in 1Q CY2014 is ~US$12.8m with OEX‟s share being ~US$5.8m. Assuming Magna exercises its option to acquire an additional 5% for US$2m then a total of $US6m will be raised by the farm-out fully covering OEX‟s share of the well costs (US$5.8m).
  • Contingency funding secured just in case. OEX has secured a £7.5 million, three year Equity Financing Facility (“EFF”) with Darwin Strategic Limited (“Darwin”) which provides contingency for potential cost overruns at Cambay-77H. We are pleased that OEX has secured additional funding sources as contingency for any well cost overruns well ahead of time given the high percentage of recent drilling programs which have been executed significantly over budget. However we believe OEX will explore all funding options at the appropriate time including the EFF and will look to use the facility which offers the lowest cost of capital.
  • Canning Basin farm-out expected to be completed end 1H CY2014. OEX continues to progress the farm-out of its Canning Basin acreage which it expects to be completed by end 1H CY2014.
  • Catalysts. 1) Spud of Cambay-77H well (1Q CY2014), 2) Gas contract for Cambay-77H (1Q CY2014), 3) Farm-out of Canning Basin acreage (2Q CY2014), 4) Cambay-77H well test result (2Q CY2014) and 5) Production approval for Cambay-73 and B-3 wells (1Q CY2014). result (2Q CY2014) and 5) Production approval for Cambay-73 and B-3 wells (1Q CY2014).
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DJ Carmichael Research Report December 2013