After waiting for 7 years, Australis (ATS) has finally done what my investment thesis rested on, announcing late last week that it had finally entered into development partnerships.

So what now, what is it worth now based on these deals – that’s what I would like help understanding, this is the only oil and gas company I own and it was to learn a bit more about the industry – so far I have learnt I don’t like Oil and Gas much or know it well enough…

THE DEALS

ATS has a market cap of $20-25m, by 1 January the two deals should mean it should have paid off all debt and have US$12m in the bank plus retain ownership of all it’s current leases but limited earning right interests to existing and new wells but also no up front capex requirement for these to be developed or operated.

Transaction 1 is for the ~160 undeveloped wells sits it has rights to with an un-named “Development Partner” to deploy up to US$46m developing under a Carry Program in which ATS has 20% and the partner 80% of earnings. So ATS doesn’t have to finance the well developments but only get’s 20% of the profit is my understanding. This will be a progressive development program, so only a fraction of the 160 well’s possible will likely be developed, at least as currently planned.

Transaction 2 is for the 30 Operating and 18 Non-Operating wells ATS currently has which are going to be taken over by EQV Group and operated. ATS get’s US$16.9m for selling 90% of the working interest (retains 10%).

THE VALUE

The current market cap is almost fully justified by the net cash that will be in the company from 1 January, so down side risk at this price is limited (but I note that there are no plans announced or probably likely that some or all of that cash will be returned to shareholders now or any time soon – tba?).

I am going to assume that most if not all the value in Transaction 2 is locked in by 1 January with the cash up front. I am also going to apply no value to the 10% interest retained, it will probably covering costs to maintain non developed lease acreage at best.

The value of Transaction 1 is very open ended, if only a few wells are developed, then it probably just covers the cost of keeping the company running. If however all 160 wells got developed it could be worth ~US$200m based on the following logic:

The company estimated a few years ago NPV10 of US$12m for each well at an $80 oil price. At the current oil prices in the mid $60 Field Netback/bbl is about half what it is at $80 (based on cost/bbl from financials). So lets say NPV10 of US$6m per well at current prices which for 160 wells is US$960m of which ATS gets 20% or US$192m.

CONCLUSION

Assuming both transaction go through, it seems like holding my current position is a no brainer, but is it worth buying more… It’s a small position (~1.5%) but is down around half on my average price. So ignoring sunk costs there is space in the portfolio to top up.

My view is that the company is worth anywhere between A$20m and A$300m based on the recent transactions. A stupid big range…

Any thoughts anyone on how to look at this or what else I should look at.

Cheers.

Disc: I own RL