June 5, 2002 BUSINESS AND INVESTING > THE SPECULATOR
SERUM ISLAND TONIC
Kalrez Energy did something right three years ago when it bought Santos' petroleum interests on Indonesia's Serum Island for $2.75m. The oil market was in a trough then with the crude price languishing around $US12 ($A21)/barrel. Since then, the company has weathered many frustrations, including development delays, cost overruns and negative sentiment about Indonesia that impacted on the share price.
Today, however, the spot oil price has topped $US26/barrel and the company believes it's on a positive path – provided it can fill its current capital raising. Indeed, at the current offer price of 6¢ a share (plus one free option), the stock is selling at a significant discount to net asset backing and well below an independent valuation of 2.6¢ to as much as 5.5¢ a share.
Kalrez (ASX code: KRZ) was formerly gold prospector Kalgoorlie Resources before it moved into oil with the Santos purchase. During the past year, the shares have drifted down from a high of 3.5¢ as the company was forced to raise funds through discounted placements that saw share capital balloon to 652.7 million shares. Just before news of the latest planned issue, Kalrez's shares were trading at 1¢. They have now slipped to 0.06¢ with a prospectus out offering 850,000 shares at 0.06¢ plus a one-for-one free option to acquire another share at 20¢ by June 30, 2003.
The issue, if filled, will raise $5.1m and enable Kalrez to retain its interest in production and development wells on Serum Island. Although the issue is not underwritten, broker Terrain Securities is backing the issue. According to Kalrez general manager Simon Lill, Terrain has guaranteed to place 360 million shares together with a "best endeavours" pledge for another 250 million. That's three-quarters of the way there.
Kalrez has interests in two production-sharing contract areas on Serum, which lies north-east of Timor and close to the western end of Papua (formerly Irian Jaya). They are:
100% of the mature Bula oilfield on the northern coast purchased from Santos for $2m in 1999 and producing 530 barrels/day, enough to keep the company's "face washed" in Indonesia, said Lill; and
2.5% of a surrounding onshore area of 7500 sq km in partnership with Kufpec (Indonesia), a wholly owned subsidiary of Kuwait Petroleum Corporation.
Within the joint-venture block, first oil production is due to begin in July from the Oseil Phase 1 project at 12,000 to 20,000 barrels/day. Kalrez's share would be 300 to 500 barrels/day net. At the minimum production rate, that should return Kalrez a net cashflow of $2.4m/year based on a conservative Brent oil price of $US20/barrel and a $US/$A exchange rate of US55¢. At the higher production rate, net cashflow should be $4m to $4.5m a year, according to projections from oil analyst Russell Langusch, who was retained by Kalrez to produce an assessment of the company. Probable expansion of Oseil Phase 2 next year could add a further30,000 barrels/day to gross production by early 2004.
Beyond the Oseil project, operator Kufpec has stepped up exploration across the under-explored joint-venture block. A well spudded in April, the Lola Kecil No 1, is due to be completed before mid-May targeting a potential reservoir of 44 million barrels of oil adjoining the Oseil pipeline to the coast. A second exploration well is scheduled in Kufpec's 2003 drilling program.
Kalrez also owns a drilling rig bought and refurbished for $US2.2m which is contracted to Kufpec plus 75% of an LTS (low temperature separation) gas plant, which is currently idle in Jakarta awaiting work. Replacement cost is estimated at $US9m but a realistic sale price is probably between $US2m and $US3m.
The Langusch report gives Kalrez's present issued shares a conservative net asset value of 2.6¢ based on the remaining Bula reserves valued at $US1/barrel ($4.4m), its share of Oseil Phase 1 reserves at $US1.40/barrel ($2.8m), equipment at cost ($3.8m), the gas plant( $5.8m) and net cash $1.5m. A decent strike in the Lola Kecil well should certainly help the issue.
Sold
10,000 Adamus @ 22¢ $2156
(bought 25¢, 31.01.02)
10,000 Zylotech ops (free issue) @ 1¢ $80
5000 Independence Gold ops @ 16¢ $750
(bought 1¢, 24.02.02)
6000 WA Metals ops @ 1.4¢ $64
(bought 0.5¢, 19.03.02)
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