DJ Carmichael Research Report February 2014

Material Funding Secured

OEX has completed a capital raising of $6.8 million through the placement of 94.75 million new shares priced at 7.2c/sh. We believe the strengthening of OEX’s balance sheet is a positive step in the lead-up to the high impact Cambay-77H well as it provides material contingency funding for potential cost overruns. We maintain our Speculative Buy recommendation.

Key Points:

  • $6.8m capital raising strengthens balance sheet. OEX has completed a capital raising of $6.8 million through the placement of 94.75 million new shares priced at 7.2c/sh. Funds will be used towards development of the Cambay PSC including the drilling of the high impact 77H well scheduled to spud between the 22 February 2014 and 9 March 2014, aerial gravity survey in the Canning Basin and for working capital purposes, including potential new ventures.  
  • Positive step by management in our view. We are highly encouraged by management’s decision to ensure material contingency funding for the Cambay-77H well given recent drilling programs have had large cost overruns across the market. We believe the additional well contingency funding mitigates a key risk of OEX’s ability to fund potential cost overruns.  
  • Material upside potential in success case. 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 (30%) current 2C resources (25mmbbls oil and 149bcf gas) to reserves. Our estimated value upside on a commercial flow-rate for the Cambay-77H well is ~15c/share. OEX believes a flow rate of over 4mmscf/d gas would be commercial.  
  • Robust cash position with additional Magna payment to come. OEX finished the Dec Quarter 2013 with $7.2m cash which does not include the additional US$2m to be received from Magna for the exercise of Magna's 5% option which is expected in 2Q CY14. Therefore, the recent capital raising has almost doubled OEX’s December 2013 cash balance. The current gross cost estimate for the Cambay-77H well is ~US$12.8m with OEX's share being ~US$5.8m. If required, OEX also has a £7.5 million, three year Equity Financing Facility with Darwin Strategic Limited which provides further contingency funding for OEX.   
  • Aerial gravity survey to de-risk Canning Basin acreage. OEX’s funding position will also fund the aerial gravity survey (estimated cost of $0.7m to $1.4m) of its Canning Basin acreage which should de-risk the asset and support future farm-out activities.
  • Catalysts. 1) Spud of Cambay-77H well (1Q CY2014), 2) Gas contract for Cambay-77H (1Q/2Q CY2014), 3) Farm-out of Canning Basin acreage (2Q/3Q CY2014), 4) Cambay-77H well test result (2Q CY2014) and 5) Production approval for Cambay-73 and B-3 wells (1Q/2Q CY2014).  
DJ Carmichael Research Report February 2014