The Canning Superbasin in Western Australia covers about half a million square kilometres and is known to contain substantial oil and gas prospects. The United States Energy Information Agency has identified it as having the largest shalegas potential in Australia. The big questions are where are these resources and can they be extracted economically?
Buru Energy (ASX: BRU) has a net equity acreage of over 10% of this area (that’s over 14 million acres) where it has the rights to explore. With funding from a partnership with Mitsubishi Corporation, it has had an active drilling program running for some time. Working with an independent consultant, Buru believes it has a prospective resource on its acreage of 66 trillion cubic feet of gas and 4 billion barrels of oil.
The Ungani field is producing oil for sale but at a limited rate before full field development. The oil is currently trucked to the BP Kiwana refinery in Perth but, with a prospective 300 million barrels on a risked basis, the company is looking to export through an existing port such as Broome or Port Hedland in the northwest of the state.
The company recently released the full year accounts highlighting results but, as it releases weekly drilling progress reports, the annual results do not present any great surprises. At its current stage of development, Buru requires cash rather than generating it, selling only $3m worth of oil but spending about $40m on operations and exploration. Earlier this year, it raised $74m from a share issue and has about $62m in the bank. Its statutory loss for 2012 was $5.5m.
Even though oil prices have retreated somewhat and there is a glut of gas in the United States, Buru’s prospects have seen its share price rocket over the past year from about $0.58 to a high of over $3.50, falling back to around $2.70 today.
Buru faces challenges transitioning from exploration to production. Not only does it need to drill and operate wells, it needs to deliver the gas and oil to customers, possibly building a pipeline for gas but this is expensive. While it is conceivable that capital expenditure requirements might be funded through cash generated by sales of oil and gas condensate, or with the help of the Mitsubishi partnership, the possibility of further large equity raisings cannot be ruled out.
Woodside Petroleum (ASX: WPL) is the largest oil and gas company on the ASX and warrants consideration by investors in this segment but it is not really comparable with Buru. Maverick (ASX: MAD) has been a stellar performer this year, but perhaps is now also facing funding issues for development. AWE (ASX: AWE) benefits from its ongoing Tui oil field production but exploration success has not come easily in the last few years.
There are a lot of oil and gas stocks listed on the ASX, many of which are not going to generate any returns for investors. A re-ranking of reserves can lead to major share price movement as witnessed by Buru and Maverick over the last twelve months. Perhaps that phase might be over for these two and capital expenditure requirements for both of them probably means that any dividends may be a long way in the future.
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Motley Fool contributor Tony Reardon owns shares in AWE, Buru and Woodside. The Motley Fool‘s purpose is to help the world invest, better. Take Stock is The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Click here now to request your free subscription, whilst it’s still available. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.