AWE Limited's second quarter report: What investors need to know

Shrinking production wasn't enough to affect AWE Limited's (ASX:AWE) full year forecasts, which remain unchanged.

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For the company that announced the biggest onshore gas discovery in Australia since the 1960s, shares in AWE Limited (ASX: AWE) haven't had a standout year, remaining essentially flat on where they were twelve months ago.

Of course, that could mean the company is a total bargain.

Today's second quarterly report provides an opportunity to evaluate that; here's what readers need to know:

  • Total production down 14% on the previous half-year, partly due to a planned maintenance shutdown on the BassGas project
  • Full-year production still in line to meet guidance of 4.6-5.1 million barrels of oil equivalent (mmboe)
  • Revenue dropped 9% on the previous quarter thanks to realised oil prices declining from $100 to $80 per barrel
  • Sold portions of BassGas/Yolla and Trefoil projects for $80-$85 million in cash (depending on certain conditions)
  • Flow-testing of the potentially massive Senecio field remains a priority and should occur in February and continue into the following quarter
  • Cash of $81 million in the bank, combined with drawn debt of $58 million (from a $300m facility) for a net cash position of $23 million at the end of December 2014

There are a number of things to take away from this report.

Firstly AWE still appears to retain a premium for its prospective explorations (albeit not a major one), having dropped only ~30% from its recent heights compared to a 50% decline in oil prices.

Secondly, AWE can expect another, more significant decline in revenue next quarter, as its realised oil price of $80 a barrel is substantially above the market price for oil at the moment.

The company does contain substantial risk, in that it is still trading at an astronomical valuation despite its recent falls, and future share price growth is contingent on development of its untapped reserves.

Should low oil and/or gas prices remain for longer periods, the company may have to take on additional debt to fund its expansion plans, and the potential for delays could leave shareholder investments languishing for longer than is ideal.

However with that said, AWE continues to look like a moderate-risk, high-reward buying opportunity – especially if the Waitsia/ Senecio discoveries turn out to be everything they were promised to be.

Another way to get in on AWE's giant gas discovery would be to purchase shares in Origin Energy Limited (ASX: ORG), which co-owns 50% of the Senecio joint venture with AWE.

Shareholders can expect to receive more comprehensive information on production and expenses from AWE's half-yearly report which will be released on 25 February.

Motley Fool contributor Sean O'Neill doesn't own shares in any company mentioned.

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