Upload
others
View
4
Download
0
Embed Size (px)
Citation preview
Page 1 of 49
Warrego Energy Limited (WGO)
Oil
& G
as: E
xp
lore
r
$0.195
$0.35
Hartleys Brief Investment Conclusion
Key Personnel
Greg Columbus Non-Executive Chairman
Dennis Donald CEO & MD
Duncan MacNiven Executive Director
Owain Franks Executive Director
Mark Routh Non-Executive Director
David Biggs Non-Executive Director
Top Shareholders
Duncan MacNiven 19.99%
Dennis Donald 19.99%
Company Address:
Level 6, 10 Bridge Street,
Sydney NSW 2000
Target Price: $0.350
Issued Capital: 708.3m
- fully diluted 715.8m
Market Cap: $138.1m
- fully diluted $139.6m
Current Cash (end Sept) $13.476m
Current Debt (end Sept) $0.000m
Source: Hartleys Research
Authors:
Aiden Bradley
Energy Analyst
Ph: +618 9268 2876
WGO.asxSpeculative Buy
17 Jan 2020
Share Price:
12mth Price Target:
WGO is an oil and gas developer/explorer
focused on its recent discovery at West Errgulla-
2 in the North Perth Basin.
WARREGO ENERGY LIMITED (WGO)
An Extremely Cheap Gas Valuation Warrego Energy Limited (‘WGO’ or the ‘Company’) was founded by Dennis
Donald and Duncan MacNiven in 2007 to bid by competitive tender for EP469.
WGO subsequently secured the financial backing of two Dutch companies in
2014 via a farm-in to shoot a 3D seismic survey (covering one third the block)
in late 2014. In 2018 WGO farmed out 50% of the block and operatorship to
Strike Energy Ltd (‘STX’) in exchange for $600,000 in cash and STX meeting
the first $11m of the costs of the West Erregulla-2 well. In March 2019, WGO
completed a reverse takeover of Petrel Energy Limited (‘PRL’) to list on the
ASX and West Erregulla-2 spudded at the beginning of June 2019. The result
is an estimated gas resource net to WGO of circa 730bcf, over 500bcf of
which is in the high quality Kingia reservoir. A great job by all involved.
World Class Discovery and more to come. The West Erregulla JV expect to drill 1-2 appraisal wells on EP469 in 2020
and undertake a further 3D Seismic Survey on the remainder of the permit.
Only one third of the block has been mapped by 3D seismic. A number of
follow up targets have been identified already within EP469. WGO also holds
100% of the frontier EPA-0127 license. EPA-0127 extends to 2.2 million acres
(8,700 km2) across the Coolcalalaya Sub-basin and while little exploration
work has been done within the basin, it is expected to be prospective for
Permian (including Kingia) and older play types. WGO are working to
complete a native title agreement and farm-in for EPA-0127 in 2020.
Additionally, WGO has a position in another potential large gas play in Spain
with interests in two permits, Tesorillo and Ruedalabola. The JV is (subject to
funding) planning to spud a well at the Tesorillo prospect in 2020.
Our 12-month forward valuation is 35c per share. WGO has a 50% stake in a World Class onshore gas discovery in the Perth
Basin. The EP469 license also contains a number of follow up leads and
prospects and the frontier Coolcalalaya Sub-basin does seem to offer longer
term potential. In Spain, the key catalyst will be whether the Tesorillo prospect
is funded and drilled in 2020. WGO has a strong management team, with
material ‘skin in the game’. Key events for WGO in 2020 include further
appraisal on EP469 which will provide additional information on the scale of
the ultimate recoverable resource. Additional 3D on the block will also likely
be shot with a view to firming up follow up drillable targets. WGO retains the
right to market their share of the gas independently and there could be news
flow in 2020 regarding potential future gas sales. WGO hope to complete a
native title agreement and farm-in for EPA-0127 in 2020. The JV is (subject
to funding) planning to spud a well at the Tesorillo prospect in 2020. Despite
the scale of the discovery, the market continues to value it highly
conservatively at 20-30c/GJ. This depressed valuation is due to the current
pessimistic outlook for WA gas prices and hence the value of Perth Basin
gas, which is overdone in our opinion. Based primarily on our value for EP469
(minus corporate costs) we derive a 12-month forward valuation and target
price of 35c per share. Given the upside to our value and the expected
continued positive Kingia/High Cliff news flow in the basin we initiate
coverage of WGO with a Speculative Buy rating.
Hartleys Limited ABN 33 104 195 057 (AFSL 230052) 141 St Georges Terrace, Perth, Western Australia, 6000
Hartleys does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the
firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single
factor in making their investment decision. Further information concerning Hartleys’ regulatory disclosures can be found on Hartleys
website www.hartleys.com.au
0.00
0.05
0.10
0.15
0.20
0.25
0.30
0.35
0.40
0.45
.
5.
10.
15.
20.
25.
30.
35.
40.
45.
50.
Dec-19Aug-19Apr-19Dec-18
Volume - RHS
WGO Shareprice - LHS
Sector (S&P/ASX SMALL RESOURCES) - LHS
A$ M
Warrego Energy Ltd
Source: IRESS
Hartleys Limited Warrego Energy Limited (WGO) 17 January 2020
Page 2 of 49
SUMMARY MODEL
Warrego Energy Limited Share Price 17 Jan 20
WGO $0.1950 Speculative Buy
Directors Company Details
Share Price $0.1950 Greg Columbus Non-Executive Chairman
Market Capitalisation $138m Dennis Donald CEO & MD
Net Cash (30 Sep 2019) $13.5m Duncan MacNiven Executive Director
Issued Capital 708.3m Ow ain Franks Executive Director
ITM options 0.0m Mark Routh Non-Executive Director
Options 7.5m David Biggs Non-Executive Director
Issued Capital (fully diluted ITM options) 708.3m
Issued Capital (fully diluted all options) 715.8m Top Shareholders m shs %
EV $124.7m Duncan MacNiven 141.6 19.99%
Valuation $0.350 Dennis Donald 141.6 19.99%
12Mth Price Target $0.350
Unpaid Capital N o (m) $ (m) A ve P r % Ord
Various 7.5 0.8 11.16 1.1%
Valuation Summary
Asset
A$m A$ps
EP469 (West Erregulla 2) 227 0.32
STP-EPA-0127 2 0.00
Spain 5 0.01
EP469 Exploration 31 0.04
Corporate and Other -17 -0.02
Total 248 0.35
Key Permits / Prospects Expected WGO and Industry News flow Project
Unrisked
Net Interest NPV10** 2H19 West Erregulla-2 Success Completed
Perth Basin 2H19 Beharra Springs Deep Success Completed
EP469 (West Erregulla 2) 50% A$227m 1H20 Independent Resource certif ication EP 469
STP-EPA-0127 100% 1H20 Lockyer Deep-1 w ell drilling EP 368
Spain (Cadiz Province) 2020 West Erregulla Appraisal Drilling EP 469
Tesorillo 85% 2020 3D Seismic Survey EP 469
2020 Gas marketing EP 469
2020 Spud w ell Tesorillo
2020 Complete native titile and farm-in EPA-0127
1C 2C 3C 2022 Initial Production EP 469
Kingia 428 502 588
High Cliff 68 91 117
Wagina* 104 137 182
Current Total 600 730 887
*Propestive resource subject to further testing
Analyst: Aiden Bradley
Phone: 08 9268 2876
Sources: IRESS, Company Information, Hartleys Research
West Erregulla Contingent Resource BCF (net to WGO)
WGO is an oil and gas developer/explorer focused on its
recent discovery at West Errgulla-2 in the North Perth Basin.
Valuation
Last Updated: 17/01/2020
Key Market Information
Investment Summary
Hartleys Limited Warrego Energy Limited (WGO) 17 January 2020
Page 3 of 49
HIGHLIGHTS Warrego Energy Limited (‘WGO’ or the ‘Company’) was founded by Dennis Donald
and Duncan MacNiven in 2007 to bid by competitive tender for EP469. WGO
subsequently secured the financial backing of two Dutch companies in 2014 via a
farm-in to shoot a 3D seismic survey (covering one third the block) in late 2014. In
2018 WGO farmed out 50% of the block and operatorship to Strike Energy Ltd
(‘STX’) in exchange for $600,000 in cash and STX meeting the first $11m of the
costs of the West Erregulla-2 well. In March 2019, WGO completed a reverse
takeover of Petrel Energy Limited (‘PRL’) to list on the ASX and West Erregulla-2
spudded at the beginning of June 2019. The rest, (as) they say, is history!
Fig. 1: Location of WGO’s acreage
Source: WGO
WGO history;
• 2007- Warrego Energy Ltd UK founded by Dennis Donald and Duncan
MacNiven.
• 2008- Secured EP469.
• 2013- Initial farm out of 80% of EP469.
• 2014- 3D seismic completed over one third of EP469.
• 2015- Reacquired 100% of EP469.
• 2018- Farmed out 50% of EP469 and operatorship to STX.
Hartleys Limited Warrego Energy Limited (WGO) 17 January 2020
Page 4 of 49
• March 2019- WGO listed on ASX via RTO of PRL.asx; adding their acreage
in Spain (at Tesorillo) and Perth Basin (EPA-0127).
• August 2019- Gas discoveries in the Kingia and Wagina sandstones.
• September 2019- Gas discovery in High Cliff Sands announced
Success at West Erregulla-2 culminated in a highly successful well test in the Kingia
Sandstone reservoir. Three intervals totalling 48 metres (from 4,799 metres to 4,851
metres) flowed at a maximum rate of 69 mmcf/d on a 2-inch choke at 700 psig well
head pressure over a 1-hour period. The High Cliff Sands were intersected at
4,918m MDRT. Net pay was 10m in a gross gas column of at least 22m. Porosity
up to 16% was measured. The Wagina Sandstone was intersected at 4,106m
MDRT, with net pay of 10m recorded in a gross gas column of 79m. Porosities of up
to 14% and reservoir pressure in excess of 6,800 psia were measured.
Fig. 2: West Erregulla-2 – Three discoveries in one
Source: STX
Fig. 3: Wagina, Kingia and High Cliff Discoveries
Source: STX
The result is an estimated gas resource net to WGO of circa 730bcf, over 500bcf of
which is in the high quality Kingia reservoir.
Hartleys Limited Warrego Energy Limited (WGO) 17 January 2020
Page 5 of 49
Fig. 4: West Erregulla-2 Contingent Resource
Source: Igesi Consulting Pty Ltd (Tony Cortis and Co)
Fig. 5: West Erregulla-2 Prospective Resource
Source: STX
The JV expect to drill 1-2 appraisal wells on EP469 in 2020 and undertake a further
3D Seismic Survey on the remainder of the permit. Only one third of the block has
been mapped by 3D seismic.
Fig. 6: Future Activity outlined by operator STX
Source: STX
A number of follow up targets have been identified already within EP469 as shown
below.
Hartleys Limited Warrego Energy Limited (WGO) 17 January 2020
Page 6 of 49
Fig. 7: West Erregulla-2 follow up prospects
Source: STX
WGO also holds 100% of the frontier EPA-0127 license.
Fig. 8: Coolcalalaya Sub-basin
Source: Various
EPA-0127 extends to 2.2 million acres (8,700 km2) across the Coolcalalaya Sub-
basin and while little exploration work has been done within the basin, it is expected
to be prospective for Permian (including Kingia) and older play types.
WGO hope to complete a native title agreement and farm-in for EPA-0127 in 2020.
Hartleys Limited Warrego Energy Limited (WGO) 17 January 2020
Page 7 of 49
Fig. 9: EPA-0127 Permian Potential
Source: Various
Additionally, WGO has a position in another potential large gas play in Spain with
interests in two permits, Tesorillo and Ruedalabola.
Fig. 10: Spanish Permits
Source: WGO
The JV is (subject to funding) planning to spud a well at the Tesorillo prospect in
2020. WGO currently holds an 85% interest in the Tesorillo Project with Prospex Oil
and Gas plc (PXOG.lse) holding the other 15%. PXOG has an option to acquire a
further 34.9% at an exercise price of €1.725 million.
The target is the conventional sandstone gas reservoirs encountered in a 1956
discovery which is located just 3km from a 40” gas pipeline. NSAI in 2015 estimated
a P50 gross unrisked prospective resources of 830Bcf, with up to 2.3Tcf (P10).
Hartleys Limited Warrego Energy Limited (WGO) 17 January 2020
Page 8 of 49
Fig. 11: Large conventional sandstone targets
Source: WGO
In mid-December WGO announced they are acquiring a 50.1% indirect interest in
El Romeral (PXOG are acquiring the other 49.9% in the project), an integrated gas
production and power station operation located in the Guadalquivir basin in southern
Spain. Initial consideration for 100% is €750,000. El Romeral comprises three
production licences, a 100%-owned 8.1 MW power station supplied by three
producing wells (currently producing 150mcf/d net). The licenses also contain 13
identified prospects, two undeveloped discoveries with a best estimate of 5Bcf of
gross contingent resources and eleven prospects with 90 Bcf gross best estimate
unrisked prospective resources.
North Perth Basin Overview
The North Perth Basin has been revitalised in the past few years through a trifecta
of major gas discoveries in the Kingia/High Cliff formation - Waitsia, West Erregulla-
2 and Beharra Springs Deep.
Fig. 12: Basal Wagina Discoveries
Source: STX
Hartleys Limited Warrego Energy Limited (WGO) 17 January 2020
Page 9 of 49
Fig. 13: Kingia and High Cliff Discoveries - Key Waitsia and West Erregulla-2 wells
Source: STX
Larger players, Mitsui and BPT have material exposure. Mitsui acquired AWE
acreage’s and BPT obtained their position through the acquisition of Lattice Energy
from ORG.
https://mitsuiepmidwest.com.au/ and https://www.beachenergy.com.au/perth-basin/
STX’s exposure is through their 50% stake in the West Erregulla-2 acreage and the
UIL acreage they acquired. STX have secured 2,768 km² of net acreage and they
estimate that 40% of it is prospective for the Kingia, High Cliff and Wagina plays.
Fig. 14: STX’s Oil and Gas Potential Fairway
Source: STX
Hartleys Limited Warrego Energy Limited (WGO) 17 January 2020
Page 10 of 49
As shown, WGO have the other 50% in the West Erregulla-2 block, but also a vast
acreage position in the Coolcalalaya Sub-basin to the North.
https://warregoenergy.com/assets-projects/australia
MIN took over ownership of EGO’s acreage, so also have exposure to the play,
along with partner NWE in the upcoming Lockyer Deep well (likely to be the next
Kingia target to be drilled).
We believe NWE has exposure to the Kingia/High Cliff play in EP368/EP426 (NWE
20% in EP368 and 22.22% in EP426), where three Kingia/HC prospects have been
confirmed and in EP 413 (NWE 27.9%), which is just to the south of L14.
https://www.enres.com.au/
https://norwestenergy.com.au/projects/lockyer-deep/
KEY have acreage just to the north of Waitsia on the Bookara Shelf (with TEG) and
have acreage offshore (WA-481-P) with PGY.
http://www.keypetroleum.com.au/perth-basin
https://www.pilotenergy.com.au/australia-wa-481-p
MEL and VEN have recently farmed into a Kingia oil prospect with RCMA/Jade
Energy in L14. According to MEL, ‘the Western Flank area in block L14 has been
highlighted to have the potential of large shallow undrilled structures with oil charged
Kingia sands which are highly permeable gas reservoirs in the Waitsia field circa
10km to the North West’.
http://www.metgasco.com.au/asx-announcements/independent-report-increases-
cervantes-prospective-resources
https://jade-holdings.com/
There is also potential Kingia/High Cliff prospectivity offshore, and PGY, RMP and
TEG have acreage that looks at least worth testing for the play.
The latest Kingia discovery was made by BPT/Mitsui at Beharra Springs Deep. The
well was drilled to 4,170m and intersected 65m of Kingia reservoir interval between
3,935m-4,000m (36m net pay estimate). BPT have indicated this is comparable to
the reservoir interval at Waitsia-4 (note Waitsia-4 looked like the best well tested on
the Waitsia field). Additionally, no gas-water contact was encountered. Average
porosity was 14.5%, with porosities up to 21% logged (looks marginally better than
Waitsia and West Erregulla-2).
An assessment of the recoverable volumes will be undertaken following the
completion of wireline evaluation and production testing. BPT will now shoot the
Trieste 3D over the coming months to firm up further Kingia targets.
Hartleys Limited Warrego Energy Limited (WGO) 17 January 2020
Page 11 of 49
Fig. 15: Beharra Springs Deep
Source: BPT
We have long held the view that the Waitsia discovery by AWE was not a one off,
but was likely just one discovery in what would become a broader Kingia/High Cliff
Play that would develop. We previously showed in our research the Kingia/High Cliff
‘Kookaburra’. This was the area in ‘yellow’ (see map below) that we believed (based
on old well data etc) would be prospective for the Kingia/High Cliff. This was based
on the depth recorded at Waitsia. The West Erregulla-2 well proved that we were
still way too conservative and that the good quality Kingia/High Cliff reservoir goes
deeper, much deeper.
Based on this new data we extended the prospective area out to circa this depth
(and based on known Kingia/HC occurrences), the new prospective area would be
extended to the East, to the red line as shown. So, West Erregulla-2 was obviously
very exciting news not just for the JV but also a number of other Perth Basin
explorers. This has been made more so by the subsequent success of the Beharra
Springs Deep well.
Could the play get even bigger and better? Potentially yes. The Kingia/High Cliff
formation also extends offshore and to the north of the Waitsia and West Erregulla-
2 discoveries (including the Bookara Shelf and Coolcalalaya Sub-basin). These
areas are unproven but obviously now offer tantalising potential.
Hartleys Limited Warrego Energy Limited (WGO) 17 January 2020
Page 12 of 49
Fig. 16: Current Hartleys view on the Kingia / High Cliff Play
Source: UIL and Hartleys. Licenses continue to change hands. So, for example, UIL is now STX, AWE
now Mitsui, Empire now Mineral Resources etc. For an up to date record of license holders follow these
links;
https://pgr.dmp.wa.gov.au/PGR/Titles/DisplayTitle.aspx?d=XDNv1x6VxXQyGRsORwN86azNxdVRtolD
bEiD9r1IvYU%3D, http://www.dmp.wa.gov.au/Documents/Petroleum/PD-SBD-GEO-102D.pdf.
Hartleys Limited Warrego Energy Limited (WGO) 17 January 2020
Page 13 of 49
The depth and thickness of the Kingia/High Cliff formation will likely determine the
ranking of likely leads and prospects and determine which areas are targeted first.
Fig. 17: Depth and thickness of Kingia/High Cliff Formation
Source: DMP and Hartleys.
Fig. 18: HHSS Isopach
Source: STX
While the three major Kingia discoveries to date have recovered gas, there is the
possibility for Kingia oil discoveries to the West of the play (closer to the coast and
potentially offshore).
Hartleys Limited Warrego Energy Limited (WGO) 17 January 2020
Page 14 of 49
Fig. 19: Oil and Gas Potential Fairways
Source: MEL
Key Challenge – West Coast Gas Market
A key challenge facing the West Erregulla-2 JV partners will be their ability to sell a
1Tcf volume of gas in the West Australian gas market (at a reasonable price and in
a reasonable time frame). We believe this is the key concern for investors and why
the gas in the ground is being valued so modestly.
Data on the market outlook provided by both WGO and STX have in our opinion
added to these concerns, rather than diminished them. Which was not the intention.
The data clearly shows the market has been oversupplied in recent times, but that
the market will tighten (balance) from 2021 and enter a period of deficit (based on
current supply options) from 2025-26.
Fig. 20: WA Gas Market Outlook as presented by WGO
Source: WGO
Hartleys Limited Warrego Energy Limited (WGO) 17 January 2020
Page 15 of 49
However, this deficit (based on flat demand) could be fully met by just 3 LNG projects
at the NWS (assuming they are sanctioned).
Fig. 21: 3 LNG projects could fil l the shortfall
Source: WGO
The Australian Energy Market Operator has recently released their annual review of
the Gas market in WA (2019 Western Australia Gas Statement of Opportunities).
https://www.aemo.com.au/Gas/National-planning-and-forecasting/WA-Gas-
Statement-of-Opportunities
Their conclusion in this addition, is that the market is adequately supplied for the
rest of this decade (to 2029). In 2019, Wheatstone and Pluto added 245 TJ/day of
gas supply capacity to the WA domestic gas market. An additional 126.5 TJ/day of
gas supply capacity is expected to become available by 2021 from an expansion of
the Xyris production facility from 11.5 TJ/day to 20 TJ/day in 2020 and the second
tranche from the Gorgon domestic gas plant (118 TJ/day) in 2021.
Post 2022, prospective supply is forecast from Scarborough (150 TJ/day from 2024)
and Browse (230 TJ/day from 2026).
These ‘likely’ projects if they go ahead are sufficient to meet their forward estimates
of demand.
Hartleys Limited Warrego Energy Limited (WGO) 17 January 2020
Page 16 of 49
Fig. 22: AEMO Gas Supply and Demand Outlook
Source: AEMO
These estimates are a key factor underpinning the general view that WA gas prices
will stay ‘lowish’ this decade, and new projects will find it hard to be developed.
Fig. 23: WA Gas Prices – Historical domestic gas contract prices
(A$/GJ, nominal) and ABS PPI
Source: ABS and DMRS
The WA gas market continues to be predominantly supplied by offshore LNG
projects (due to the Government’s 15% gas reservation policy) with historically
around 70% of consumption in the South West Interconnected System (SWIS),
although non-SWIS demand (mining use in the North) is the fastest growing. The
SWIS extends from Kalbarri in the north, Kalgoorlie in the east and Albany in the
south.
WA gas demand is highly concentrated by user and industry. Retail and other small
industrial users make up less than 10% of total consumption. We believe close to
80% of end users (either direct gas or gas fired electricity generation) are in the
Hartleys Limited Warrego Energy Limited (WGO) 17 January 2020
Page 17 of 49
mining and minerals processing sectors (Ammonia manufacturing makes up a
further 10-11%).
Fig. 24: WA’s largest gas consumers
Source: GBB 2015
Fig. 25: Snapshot of WA Supply and Demand
Source: gbbwa
Hartleys Limited Warrego Energy Limited (WGO) 17 January 2020
Page 18 of 49
Fig. 26: WA Gas Production by Facility
Source: gbbwa
Fig. 27: WA Gas Consumption by Region
Source: gbbwa
The current pessimistic outlook for WA gas prices and Perth Basin gas (as
evidenced by the market valuations of both STX and WGO) is overdone in our
opinion.
Hartleys Limited Warrego Energy Limited (WGO) 17 January 2020
Page 19 of 49
Fig. 28: WA Spot Gas Prices
Source: gasTrading
It does not consider the potential for ‘new’ demand to be created as a result of the
access to such a large volume of cheap onshore gas (see below from the AEMO on
what prices could stimulate new demand). Nor the potential for this Perth Basin gas
to displace (directly or indirectly) more expensive current or future offshore supplies.
Fig. 29: Gas price estimates that could result in changes in gas
consumption.
Source: AEMO and GMPs
Figure 30 shows the DMP’s forecast of future demand from 2009 versus what actual
demand occurred due to the lack of reasonably priced gas.
Current actual consumption is 600-700TJ/d lower than they had forecast, mostly
from the mining sector. While a proportion of this is likely explained by overly
optimistic assumptions on new projects etc. by the DMP, we still estimate (based on
diesel consumption growth by the mining sector etc. over the past decade that
realistically somewhere between 200-270TJ/d of potential demand was choked and
failed to materialise because of the lack of available supply.
Hartleys Limited Warrego Energy Limited (WGO) 17 January 2020
Page 20 of 49
Fig. 30: Forecast supply and DMP natural gas consumption
(TJ/d)
Source: DMP 2009
Perth Basin gas is obviously, due to its potential low-cost nature and location, highly
competitive with alternative sources of supply (offshore LNG projects) in WA.
Perth Basin gas is the closest supply source for key GPG and R&C demand centres.
Fig. 31: Location of GPG and R&C Demand Nodes in WA
Source: Core Energy & Resources
Hartleys Limited Warrego Energy Limited (WGO) 17 January 2020
Page 21 of 49
These two end markets are expected to see price increases for end users going
forward, as recently estimated by Core Energy and Resources.
Fig. 32: Power Generation by Source
Source: gbbwa
Fig. 33: Power Generation by Operator
Source: gbbwa
They estimated that wholesale delivered prices to generators in WA would increase
by almost A$2/GJ between 2021 and 2033, due to a strengthening link with LNG
netback prices.
Hartleys Limited Warrego Energy Limited (WGO) 17 January 2020
Page 22 of 49
Fig. 34: WA GPG Gas Price Projections / Neutral Scenario /
A$/GJ real, 01/2018
Source: Core Energy & Resources. Note: Pinjar, Kwinana (all), Cockburn and Neeradup; and Wagerup
and Pinjarra follow same respective price paths.
The following is Core’s estimate of the movement in wholesale delivered prices to
major retail R&C demand nodes.
Fig. 35: R&C Delivered Price Retail Gas Price (WA) / A$/GJ real,
01/2018
Source: Core Energy & Resources
Perth Basin gas given its high well deliverability (from the Kingia especially) and
onshore location, will be a highly flexible source of supply. Easily scalable and
flexible to meet demand requirements.
Hartleys Limited Warrego Energy Limited (WGO) 17 January 2020
Page 23 of 49
Fig. 36: West Erregulla development phases to meet demand
Source: WGO
Perth Basin is also close to gas infrastructure.
Fig. 37: Access to infrastructure
Source: WGO
Which currently has ample spare capacity.
Hartleys Limited Warrego Energy Limited (WGO) 17 January 2020
Page 24 of 49
Fig. 38: Domestic Gas Production Facility Average Production
and Utilization
Source: gbbwa and EnergyQuest
Major gas pipelines traverse the Basin.
Fig. 39: Oil and Gas Potential Fairways
Source: DMP
Fig. 40: Gas Transmission Pipelines in WA
Source: gbbwa
Hartleys Limited Warrego Energy Limited (WGO) 17 January 2020
Page 25 of 49
So, while the WA gas market is currently adequately supplied and will remain
competitive over the coming decade, Perth Basin gas has enormous advantages
over other potential sources of supply. It is low cost, close to market, with flexible
volumes.
Fig. 41: Perth Basin Gas Advantages
Source: STX
This provides it with a multitude of pathways to market.
Fig. 42: Pathways to commercialization
Source: STX
Tax change boosts competitiveness further
In mid-2019, the Treasury Laws Amendment (2019 Petroleum Resource Rent Tax
Reforms No. 1) Act 2019 repealed PRRT for onshore Oil and Gas developments.
This is a potentially significant boost for the Perth Basin gas developments, which
have low capital costs (and hence low potential PRRT tax credits). PRRT was
applied at a rate of 40% to a project’s taxable profit (project income less project
expenditure, project exploration expenditure and exploration expenditure
transferred in from other related PRRT projects. The state royalty is also credited
against PRRT).
Hartleys Limited Warrego Energy Limited (WGO) 17 January 2020
Page 26 of 49
This means that the Perth Basin projects will now be subject to state royalty and
federal income tax only. The rate of royalty is normally set at 10% of the wellhead
value for a primary production licence and 12.5% of the wellhead value for a
secondary production licence. The wellhead value is derived by taking the gross
value of petroleum recovered, and deducting all costs incurred between a defined
valve on the Christmas tree and the point of sale. The effective royalty rate post
these deductions tends to be circa 8.5-9.0%.
Federal income tax is levied at 30% of gross income less allowable deductions.
Deductions include exploration costs, development cost depreciation, operating
costs, decommissioning costs, the royalty and PRRT.
EVENTS
Key events for WGO in 2020 include further appraisal on EP469 which will provide
additional information on the scale of the ultimate recoverable resource. Further 3D
on the block will also likely be shot with a view to firming up follow up drillable targets.
WGO retains the right to market their share of the gas independently and there could
be news flow in 2020 regarding potential future gas sales.
WGO hope to complete a native title agreement and farm-in for EPA-0127 in 2020.
The JV is (subject to funding) planning to spud a well at the Tesorillo prospect in
2020.
Fig. 43: WGO Events 2019-2020
Source: WGO and Hartleys
INDUSTRY EXPOSURE WGO is exclusively focused on gas exploration. Their main focus is on the Perth
Basin, were they have had a major conventional gas discovery at West Erregulla-2.
GEOGRAPHIC EXPOSURE WGO is currently focused on conventional gas exploration in WA and Spain.
Exploration in the North Perth Basin has been revitalised by three large gas
discoveries in the Kingia/High Cliff formation.
Other operators in the region include BPT, NWE, MIN, STX, KEY, TEG, PGY, Mitsui
and Jade Energy.
KEY SUPPLIERS & CUSTOMERS Exploring for oil and gas onshore in WA is not without its challenges. Native Title,
environmental, permitting and regulatory (e.g. moratorium on fracking) challenges
exist.
1H19 2H19 1H20 2020 circa 2022
West Erregulla-2
Beharra Springs Deep Success
Independent Resource certif ication
Lockyer Deep-1 w ell drilling EP 368
West Erregulla Appraisal Drilling EP 469
3D Seismic Survey EP 469
Gas marketing EP 469
Spud w ell Tesorillo
Complete native titile and farm-in EPA-0127
Initial Production EP 469
Hartleys Limited Warrego Energy Limited (WGO) 17 January 2020
Page 27 of 49
Additional issues in the basin can be the lack of equipment and qualified personnel.
These issues are, however, becoming less of a challenge as drilling activity picks
up and rigs, people and equipment are more readily available in the basin (and at a
more reasonable price).
Once discovered, challenges still exist for oil and gas onshore WA. It can be costly
to process, transport and export oil due to the lack of available infrastructure and
distance from fields to market. However, this has partially been the result of the
relatively small size of oil discoveries in the past.
The WA gas market is also reasonably well supplied with relatively few large
customers dominating the market. As a result, prices are relatively low in a national
context. It can therefore prove a challenge to sell discovered gas in WA in large
volumes and at an acceptable price.
MANAGEMENT, DIRECTORS AND
MAJOR SHAREHOLDERS
WGO have a highly experienced management team with significant ‘skin in the
game’ (equity holding) - Dennis Donald (Co-Founder & MD) 19.9%, Duncan
MacNiven (Co-Founder and Executive Director) 19.9%, Greg Columbus (Non-
executive Chairman 4.8%), Owain Franks (Executive Director) 3.0%, Mark Routh
(Non-executive Director) 2.3%, David Biggs (Non-executive Director) <1% and
David Casey (CEO of Australia and APAC) 1.2%.
Fig. 44: Management Shareholdings as at 21 November 2019
Source: WGO
The Board and Senior management have extensive experience in both the oil and
gas sector and operating in Western Australia.
Greg Columbus (Chairman)
Greg has 15 years’ experience as managing director and main board Director for
Clarke Energy Limited. Prior to Clarke, Greg was the executive General Manger for
AMEC Plc in ANZ for 12 years. In total, Greg has over 30 years business experience
in delivering large complex Oil & Gas projects.
Dennis Donald (Group CEO and MD)
Hartleys Limited Warrego Energy Limited (WGO) 17 January 2020
Page 28 of 49
Co-founder of WGO. Dennis began his Oil and Gas career with Shell in the North
Sea in the early 1970’s. He set up a specialist drilling consultancy, Leading Edge
Advantage in 1998 with Duncan MacNiven as legal counsel growing it into a global
brand within 10 years.
Duncan MacNiven (Executive Director)
Co-founder of WGO. Between 1990 and 2002, Duncan worked as outsourced oil
and gas counsel for Pentex Energy and Sibir Energy. In addition to Leading Edge
Advantage, Duncan’s business partnership with Dennis has overseen the
successful sales of Alba Resources to Nautical Petroleum and The Downhole
Consumables Business.
Owain Franks (Executive Director - Finance, Strategy & Delivery)
Owain has been a director of Warrego since 2011, most recently being its Corporate
Development Director and Special Adviser to the Board. Owain was previously a
senior partner in PwC in the UK for 21 years and a former Senior Adviser to the
Board of Dana Petroleum plc and principal adviser to Canamens Energy Limited.
Mark Routh (Non-executive Director)
Mark was Chairman of the Board of Warrego Energy Ltd since October 2010 and
moved to be a non-executive director upon the merger with Petrel Energy. Mark
served as the Chief Executive Officer of AIM listed Independent Oil and Gas Plc
from August 2011 until February 2018 and served as its Chairman from February
2018 until December 2018. He was the Founder and Managing Director of CH4
Energy Ltd from 2002 until 2006, when it was acquired by Venture Production plc.
He served 10 years with Hess in the UK, 6 years with BP in the UK and 5 years with
Schlumberger in South East Asia and the UK.
David Biggs (Non-executive Director)
David was CEO and Managing Director of AWE Limited (AWE.asx). Prior to AWE,
Mr Biggs spent 3 years as CEO of Cue Energy Limited, and before that, almost 20
years with BHP Billiton Petroleum.
Ian Kirkham (CFO and Company Secretary)
Formerly Chief Financial Officer and Company Secretary for Eastern Star Gas
Limited (ESG.asx), the subject of a $924m takeover by Santos Limited (STO.asx).
David Casey (CEO – Australia and Asia Pacific)
Former MD of PRL. Prior to that was MD of Eastern Star Gas Limited and from 2001
to 2005 David was executive director and chief operating officer at Molopo Energy.
Peter Veenhof (EVP – Joint Ventures, Uruguay and Spain)
Peter joined Shell in 1985. In 1998 Peter joined Clyde Petroleum, working on New
Ventures and Exploration. In 2001 Peter became the Exploration Manager for
Conoco and subsequently Wintershall Noordzee and was responsible for a high-
activity portfolio across the UK, NL, Germany and Denmark. In June 2007 he joined
Dyas as New Ventures Manager and became Commercial Manager in 2008 and
CEO in 2009.
Hartleys Limited Warrego Energy Limited (WGO) 17 January 2020
Page 29 of 49
RECOMMENDATION & RISKS
INVESTMENT THESIS & RECOMMENDATION WGO has a 50% stake in a World Class onshore gas discovery in the Perth Basin.
The EP469 license also contains a number of follow up leads and prospects, further
3D seismic will likely be required to refine them. WGO seems to have less acreage
in the core of the Kingia/High Cliff play than partner STX (who acquired their position
from UIL), but the frontier Coolcalalaya Sub-basin does seem to offer longer term
potential. WGO’s assets in Spain have potential, near term the key catalyst here will
be whether the Tesorillo prospect is funded and drilled in 2020.
Despite the scale of the discovery (over 500bcf net to WGO in the high quality Kingia
sandstone alone), the market continues to value it highly conservatively (current
WGO market cap is circa $150m) at 20-30c/GJ. This is a sizeable discount to the
approximate 60c/GJ we estimate Mitsui paid for AWE’s stake in Waitsia (a valuation
which we also view as low).
Fig. 45: Valuation of Waitsia vs. West Erregulla
Source: STX
Even at a 60c/GJ acquisition cost, the gas from a Waitsia or West Erregulla style
discovery could be delivered to Perth for circa $3/GJ or the North West for sub
$4/GJ. So, gas valued at this level in the ground or below by the equity market will
undoubtedly attract acquisition interest from a host of WA’s downstream gas users.
WGO has discovered close to 700PJ of gas and is one of only a handful of
companies with acreage exposed to the exciting Kingia/High Cliff play. As such there
is the potential for it to be involved in M&A as other players jostle to gain exposure
to what is fast becoming a World class play.
Hartleys Limited Warrego Energy Limited (WGO) 17 January 2020
Page 30 of 49
Fig. 46: Delivered gas prices from West Erregulla
Source: Hartleys
We have modelled our own range of potential future development options. Our base
case assumes production of over 900PJ of gas (gross), with a peak production rate
of 200TJ/d. Assuming an average realised gas price of $5/GJ over the life of the
project, it would still generate close to A$900m of free cash flow net to WGO.
Fig. 47: West Erregulla potential production profile
Source: Hartleys
The value of WGO’s discovery is obviously highly dependent on when, how and at
what price they sell the gas.
Based on a range of scenarios we have run; it is clear that the equity market is
currently valuing the gas using some extremely conservative assumptions.
Hartleys Limited Warrego Energy Limited (WGO) 17 January 2020
Page 31 of 49
Fig. 48: Valuation range at differing realized gas prices
Source: Hartleys
This, combined with the obvious appeal of the gas to larger downstream players
(and hence the potential for M&A involving WGO) underpins our positive view on
WGO. There will also be a number of further catalysts in 2020-21 including new
seismic identifying further follow up leads and prospects, the potential for additional
high impact exploration in WA or Spain and progress on securing first gas sales.
Fig. 49: Timetable of Events
\
Source: Hartleys and WGO.
Based primarily on our risked value for EP469 (minus corporate costs) we derive a
12-month forward valuation and target price of 35c per share. Given the upside to
our value, which includes a highly risked value for exploration and only the legacy
PRL value for Spain, and the expected continued positive Kingia/High Cliff news
flow in the basin we initiate coverage of WGO with a Speculative Buy rating.
Fig. 50: Valuation and Price Target
\
Source: Hartleys and WGO.
1H19 2H19 1H20 2020 circa 2022
West Erregulla-2
Beharra Springs Deep Success
Independent Resource certif ication
Lockyer Deep-1 w ell drilling EP 368
West Erregulla Appraisal Drilling EP 469
3D Seismic Survey EP 469
Gas marketing EP 469
Spud w ell Tesorillo
Complete native titile and farm-in EPA-0127
Initial Production EP 469
Hartleys Limited Warrego Energy Limited (WGO) 17 January 2020
Page 32 of 49
We believe successful small cap E&P companies have a combination of a
focused, well thought out strategy combined with the competitive advantages
to pursue it and the right management (with incentives aligned with
shareholders) in place to implement it.
Strategy
It is our opinion that smaller resource companies are likely to be more successful if
they have a strategy focused on one particular area or play type. WGO historically
was very narrowly focused on exploring in the North Perth Basin and in one license
in particular. The reverse takeover of PRL has diversified the portfolio, but it remains
predominantly an onshore conventional gas exploration (and soon to be
development) company.
Competitive Advantage
WGO has a long history of operating in the North Perth Basin and has access to
modern seismic data. The Directors and management have extensive experience in
oil and gas exploration and in the Perth Basin.
Management & Alignment
WGO’s Board and management team has been strengthened further in the past
year. Management also have extensive skin in the game as shown earlier, further
aligning their interests with other shareholders.
Overall, we rate WGO well above ‘Average’ (versus our coverage universe) on our
indicative measures of performance. The focused strategy on conventional gas
exploration and the Perth Basin is a positive in our opinion as is the management
teams relevant experience and shareholder alignment.
RISKS WGO like all junior oil and gas explorers is a risky investment. They are likely to drill
further appraisal wells and shoot 3D seismic on EP 469 in 2020 and this will require
funding.
WGO is not a producer and therefore will continue to require third party capital to
pursue its exploration and new venture opportunities (e.g. Spain).
WGO operates in an industry with high regulatory, land access, fiscal and sovereign
risks.
The value of their West Erregulla-2 discovery remains subject to its development
timetable and local gas prices in WA.
Maintaining partner alignment remains important.
Hartleys Limited Warrego Energy Limited (WGO) 17 January 2020
Page 33 of 49
Fig. 51: Key assumptions and risks for valuation
Assumption Risk of not realising
assumption
Downside risk to share price if assumption is
incorrect Comment
West Erregulla-2 Development Timetable
High High Our valuation for WGO is largely made up of WGO’s 50% stake in the West Erregulla-2
discovery. This valuation is highly dependent on the eventual development timetable,
production profile and realised gas prices. We believe our assumptions are realistic given our understanding of the WA gas market, but the
range of possible outcomes is wide. In the event that WGO fails to secure gas sales, it is likely to become a takeover target. We also include a highly risked value for future WA
exploration in our 12-month forward valuation, which may prove highly conservative in the
medium given the prospectivity of their acreage.
Funding Risk Medium High Our valuation assumes that the company
raises a further $10m late in 2020. WGO looks like it is well funded for the near term.
However, 2 appraisal wells and further 3D in EP 469 could cost $15-20m (net), which would
require additional funding.
Country Risk Medium High Western Australia ranks favourably versus many other oil and gas producing regions. However, it does have risks, particularly
around land access, native title and environmental approvals. These have
prevented or delayed development/exploration activities in the past. Risks in Spain seem to be
similar.
Supplier and Partner Risk Medium Medium The ability to access equipment and qualified people in WA has on occasion been a
challenge and relatively costly. However, post the recent Kingia successes, rig slots now seem to be available and well costs are
actually likely to fall with an increase in activity. WGO is partially reliant on STX as operator of
EP469 and Prospex Oil and Gas plc (PXOG.lse) for funding of the Tesorillo Project.
JV misalignment remains a risk.
Commodity Price Risk High High The value of any discovery is obviously subject to oil and/or gas prices. Currently the market
seems to be pessimistic on the outlook for WA gas prices, diminishing the value ascribed to
any discovery made.
Conclusion We believe that our $/GJ valuation of the West Erregulla-2 discovery is reasonable (a $5/GJ overall realised
gas price and first sales in late 2021) and our future exploration values are highly risked.
Source: Hartleys Research
Hartleys Limited Warrego Energy Limited (WGO) 17 January 2020
Page 34 of 49
SIMPLE S.W.O.T. TABLE Strengths 50% stake in a world class onshore discovery, with
over 500bcf of net reserves in the high quality Kingia reservoir. Large acreage position exposed to the Kingia/High Cliff play in the North Perth Basin with further leads and prospects in EP469. Extensive experience in the Basin. High quality management team.
Weaknesses Further funding likely required. Reliance on partners Reliance on much larger off takers for gas sales. Key person risk.
Opportunities Ability to sell gas at a much higher value than currently ascribed by the market. Acreage remains underexplored. M&A and consolidation potential in a very exciting play fairway.
Threats Sovereign and regulatory risk. Further weakness in WA gas market. Inability to secure partner alignment. Access to rigs and equipment on good terms.
Source: Hartleys Research
Hartleys Limited Warrego Energy Limited (WGO) 17 January 2020
Page 35 of 49
APPENDIX The Search for the Kingia/High Cliff – It is bigger and goes deeper
than even we thought (and we were bullish!).
We have written extensively over the past couple of years on the potential of the
Kingia/High Cliff Play in the Perth Basin (such as ‘In search of the Kingia/High Cliff
Sandstone’ (19 May 2017) and ‘Change of CEO as Kingia/High Cliff ‘Play’ Heats Up’
(25 July 2017)). The discovery of high-quality reservoir in the Kingia and High Cliff
Sandstones (KHC) at Waitsia revitalised interest in the challenging Perth Basin
(historically just 20 commercial oil and gas fields from circa 360 wells drilled).
Fig. 52: Perth Basin – Discovered Reserves
Source: AWE
Exploration results over the past 60 years in the Perth Basin overall were
disappointing. Despite good to excellent source rocks, since the 1950s over 350
onshore and offshore wells have resulted in just circa 20 commercial oil and gas
discoveries (and most are small and only one offshore).
There are four main petroleum systems in the basin:
1. Permian (e.g. Cliff Head, Whicher Range)
2. Triassic (e.g. Dongara, Erregulla, Mount Horner, and Yardarino)
3. Jurassic (e.g. Walyering)
4. Cretaceous (e.g. offshore Gage Roads-1 non-commercial oil discovery)
The Permian (Late and Early) Plays represent the vast majority of commercial
discoveries in the Basin. The Late Permian dominated up until the late 2000’s with
recent successes more focused on the Early Permian reservoirs. According to work
undertaken by Murphy Oil the average pool size for the Late Permian is 9mmboe
and 33mmboe for the Early Permian. This increased prospect size is one of the
reasons for the renewed interest in exploration in the Basin in recent years.
Given the quality source rocks widespread throughout the Basin, a high proportion
of wells drilled (particularly targeting the Permian reservoirs) encounter
hydrocarbons.
Hartleys Limited Warrego Energy Limited (WGO) 17 January 2020
Page 36 of 49
The Late Permian historical ‘technical’ discovery rate is circa 37%. However, as
shown earlier, commercial discoveries have proven much more elusive. Extensive
faulting and uplifting has occurred in the Basin, which has resulted in poor quality
reservoirs and poor trap mechanisms.
Based on a study by Murphy Oil, within the Late Permian play trap failure is the most
common reason for an exploration well failure (48% of the time), reservoir was not
effectively developed in 24% of wells, charge was missing in 16% and non-trap
related seal failure caused 12% of failures. Even when adequate reservoir and
trapping were present, a number of factors including the extensive faulting
throughout the basin resulted in the relatively small pool sizes flagged earlier. Given
the remoteness of the Perth Basin and resulting high costs, this has been another
factor in the low rate of ‘commercial’ success.
Since the late 2000’s the focus of explorers has shifted from the Late to Early
Permian Plays. This is partially the result of the potential for larger discovery sizes.
However, the ‘technical’ success rate in the deeper Early Permian targets has been
a much lower 17%. The causes for failure are varied, but most of the dry holes have
been drilled off structure (highlighting the requirement for 3D seismic, which again
can be punitively expensive in the Basin). The majority of wells also lacked effective
reservoir (poor permeability and/or porosity) and breached traps.
In summary the Perth Basin has always been a very tempting target for exploration
(driven by excellent source rocks) but with some very significant technical and
financial challenges.
Industry interest in the Northern portion of the Basin was revitalised by AWE’s
800PJ+ Waitsia discovery in the Kingia / High Cliff Sandstone.
The Senecio-3 discovery well was drilled in 2013. The Waitsia-1 and Waitsia-2
appraisal wells were drilled in 2015 and the Waitsia-3 and Waitsia-4 wells were
drilled in 2017.
Fig. 53: Permo-Triassic Petroleum System and Plays at Senecio -3
Source: STX Corporate Presentation
Hartleys Limited Warrego Energy Limited (WGO) 17 January 2020
Page 37 of 49
Testing of all four wells confirmed the highly productive KHC reservoir. The Waitsia-
4 well tested at an average rate of 89.6Mmscf/d from a 50m interval.
Following the Waitsia-3 and Waitsia-4 results, gross 2P Reserves were increased
by 80% to 820PJ in December 2017. These deeper zones tested (i.e. KHC sands)
in the Waitsia discovery well (Senecio-3) were previously generally discounted by
the industry in the mistaken belief that reservoir quality would be universally poor
below 3000m.
However, the KHC sands in the Waitsia wells exhibited porosity of greater than 11%
and permeability of 10-100+mD. The Waitsia-4 well flowed at an extremely high
90mmscf/d.
Mitsui subsequently acquired AWE’s stake in Waitsia and Beach Energy (BPT)
acquired ORG’s stake through their acquisition of Lattice. These deals likely delayed
follow up exploration by the JV in the Basin until 2019.
On the terraces the existing 3D data is generally of poor quality, with deeper
horizons poorly imaged due to coastal limestones. This has likely also led to a
slowdown in follow up exploration activity. As you shift further East, the quality of 3D
does improve. However, generally the Kingia/High Cliff also becomes deeper.
Fig. 54: Poor 3D over crest of Waitsia
Source: STX Corporate Presentation
Hartleys Limited Warrego Energy Limited (WGO) 17 January 2020
Page 38 of 49
Background on the Kingia / High Cliff Sandstone
The High Cliff Sandstone is an Early Permian sequence of interbedded sandstone,
conglomerate and minor siltstone.
It has been suggested in the past that the High Cliff Sandstone be redefined as a
member unit of the Irwin River Coal Measures, as the contact can be gradational
and the units difficult to distinguish (Le Blanc Smith & Mory 1995; Mory & Iasky
1996).
The High Cliff Sandstone was probably deposited in a delta front environment with
shallow marine, lower deltaic and beach ridge elements (Playford et al. 1976; Baxter
& Lipple 1985; Mory 1995; Mory & Iasky 1996).
The depositional centre for the High Cliff Sandstone appears to be located on the
Allanooka Terrace and Bookara Shelf (Mory & Iasky 1996), and it is thickest upon
the Allanooka Terrace, where the historical maximum intersection of 150m was in
the Mount Horner-1 well (Mory & Iasky 1996). The formation thins to the west onto
the Greenough Shelf and Dongara Terrace.
The High Cliff Sandstone is present across the northern Perth Basin, extending from
the Irwin Terrace west to the Greenough Shelf and Beagle Ridge. It also extends
north on the Coolcalalaya Terrace (van de Graaff et al. 1980) and is present at depth
within the Dandaragan Trough.
The overlying Kingia Sandstone has in the main the same characteristics as the
High Cliff Sandstone. In some locations, it may simply be the top of the High Cliff
Sandstone, in others separated by a narrow shale deposit (the Bit Basher).
Fig. 55: Kingia and High Cliff Sandstone
Source: AWE Corporate Presentation
The Kingia/High Cliff Sandstone was a secondary target for AWE with Senecio-3.
The industry perception was the Early Permian High Cliff Sandstone would not
present good reservoir characteristics at depth.
Hartleys Limited Warrego Energy Limited (WGO) 17 January 2020
Page 39 of 49
Waitsia proved that the Kingia/High Cliff deposited on the Northern Perth Terraces
retained excellent porosity down to at least circa 3,500m at this location. The Kingia
Sandstone while water wet deeper at Irwin-1 still showed good reservoir
characteristics.
The following chart shows the porosity versus present day depth based on log
interpretation of the Kingia and High Cliff reservoirs from wells in the Waitsia Field
and surrounding areas.
Post Waitsia and pre-West Erregulla-2, we held the view that the reservoir quality in
the High Cliff would be retained down to 3,500m and perhaps a bit deeper for the
Kingia. This was based on the data available to us at that time.
The Senecio-3 well hit the Kingia Sandstone at 3,153mTVDRT and the High Cliff
Sandstone at 3,192mTVDRT. The Irwin-1 well was drilled to a total depth of 4,049m.
Based on the view that adequate Kingia/High Cliff porosity would be retained only
above 4,000m, would mean that a large portion of the North Perth Basin in the
Dandaragan Trough etc. would likely be too deep to have retained good porosity.
Fig. 56: Porosity versus present-day depth
Source: AWE
Hartleys Limited Warrego Energy Limited (WGO) 17 January 2020
Page 40 of 49
Fig. 57: Depth Map Top Kingia Horizon
Source: AWE Corporate Presentation
So back in 2017 we concluded, that based on the information and well results to
date, the good quality Kingia/High Cliff Sandstone might be restricted to the
Terraces of the North Perth Basin.
Fig. 58: Basin Terraces and Troughs
Source: NWE
Hartleys Limited Warrego Energy Limited (WGO) 17 January 2020
Page 41 of 49
Another key question for us (and the industry) back in 2017 was whether the Waitsia
discovery was a one-off or part of a broader Kingia/High Cliff Play? We strongly
concluded that it was not a one off and further commercial Kingia/High Cliff
discoveries would be made. The key question then became where?
The Kingia/High Cliff sandstones had been tested previously before Waitsia without
success as outlined by AWE. ‘Exploration for older Permian objectives principally
targeted the High Cliff Sandstone (including the more recently defined Kingia
Sandstone) with more than 20 wells intersecting the formation but without
commercial success. Many of these penetrations had some intervals with good
reservoir quality, and some have flowed hydrocarbons (e.g. Hovea–2), but all occur
at depths less than 3,000 m (Ferdinando et al, 2007). Most of these wells were drilled
on the Beagle Ridge where top seal, cross-fault seal and access to charge are
assessed to be problematic for Early Permian objectives. It was generally assumed
that equivalent sandstones in the deeper parts of the basin would be tight and
therefore not viable as conventional exploration targets.’
An example was the Mountain Bridge-1 well drilled in 1993 just 1km north of the
Arrowsmith accumulation.
Fig. 59: Mountain Bridge 1 well location
Source: Green Rock Energy Ltd
Hartleys Limited Warrego Energy Limited (WGO) 17 January 2020
Page 42 of 49
The following is an extract from ‘Geothermal Prospectivity of the Mountain Bridge
Area, North Perth Basin, Australia’, Mark Ballesteros, Green Rock Energy Ltd.
‘The well was drilled in 1993 to a total depth of 3416m. It penetrated 738m of
Permian sediments prior to encountering granitic basement at 3385m. The results
indicated very poor to nil matrix porosities in the lithologies penetrated below 2600m,
with the exception of the Early Permian High Cliff Sandstone’.
Fig. 60: Mountain Bridge-1 Logs
Source: Green Rock Energy Ltd
‘Analysis of a conventional core cut through the High Cliff Sandstone (3211.3-
3228.8m) showed poor intergranular porosity (1-8%) with negligible permeability
(average 0.01 mD) but the development of intersecting conjugate open fractures
and a brecciated zone at 3224.4m that resulted in good fracture porosity and
permeability (Sagasco, 1993). Importantly, an open hole drill stem test (DST 2a) run
over the interval 3185m-3235m flowed gas-cut water at an estimated rate of 2000-
3000 bpd with 200-250 Mcfd of gas, thus confirming the presence of significant
permeability associated with the fracture system.
For further reading on this subject we would suggest – ‘Sedimentology and
Diagenesis of Potential Permian Reservoir Sandstones, North Perth Basin, Western
Australia’. Jeff Burgess B.Sc. November 1993. Plus, ‘Illite/smectite clays preserving
porosity at depth in Lower Permian reservoirs, northern Perth Basin’, Darren
Ferdinando, January 2007.
Hartleys Limited Warrego Energy Limited (WGO) 17 January 2020
Page 43 of 49
Fig. 61: Seismic line through the Mountain Bridge-1 well
Source: Green Rock Energy Ltd
So back in 2017, having reviewed historical well data, depth charts, company and
acreage releases etc. we very roughly drew on the following map (in yellow) the
‘onshore’ area we believed was most likely prospective for the Kingia/High Cliff Play,
our Kingia/High Cliff ‘Kookaburra’.
Hartleys Limited Warrego Energy Limited (WGO) 17 January 2020
Page 44 of 49
Fig. 62: 2017 - Location of Kingia/High Cliff Sandstone at
suitable depths
Source: UIL Corporate Presentation and Hartleys Research, 2017
Hartleys Limited Warrego Energy Limited (WGO) 17 January 2020
Page 45 of 49
We were too conservative. West Erregulla-2 proved that the good
quality reservoir goes much deeper, materially extending the
play fairway
We did start to question whether the Kingia/High Cliff play could go deeper when
AWE and ORG were awarded the EP320 license on a five-year term in 2016. Post
the success at Waitsia, this license was obviously believed to be prospective for the
Kingia/High Cliff. This JV had committed to shoot 100km2 of 3D seismic on the
license. The location of the Trieste 3D Seismic survey when announced also did
intrigue us. It was located right on the Eastern boundary of the license, overflowing
into UIL’s (now STX’s) acreage to the East. Along with the announcement that the
JV (now BPT and Mitsui) would drill the Beharra Springs Deep well (Kingia at depths
greater than 4,000m) strongly suggested that the technical teams that discovered
Waitsia might believe that the reservoir quality will not be an issue at these deeper
depths.
Fig. 63: Location of Trieste 3D Seismic and Beharra Springs
Deep
Source: BPT Corporate Presentation
Hartleys Limited Warrego Energy Limited (WGO) 17 January 2020
Page 46 of 49
The subsequent success at Beharra Springs Deep and West Erregulla-2 at a depth
of 5,200m obviously proved them right. So how has the good reservoir quality been
retained at such depths?
AWE has presented previously that good quality Kingia / High Cliff reservoir is
diagenetically controlled. See ‘Waitsia – A new onshore gas resource for Western
Australia’. Suzanne Hunt, GM WA Assets and Engineering, DMIRS Petroleum Day
15th September 2017.
For further reading on this subject we would suggest –
Assessing the diagenesis of northern Perth Basin Permian sandstone reservoirs
using HyLogger spectral data’, WA DMP.
http://dmp.wa.gov.au/Documents/Petroleum/REC-OA-108D.pdf
The potential retention of good quality reservoir at depth in the North Perth basin is
obviously not unique. We recommend the following articles on the subject – notable
exceptions are the Norphlet sandstones of Gulf of Mexico and Garn sandstones of
Kristin field, Norway, where the reservoir quality is preserved with high burial depths.
For instance, the Norphlet sandstone has a burial depth deeper than 6,000m and
temperature up to 215 °C with porosity greater than 20%, whereas the Garn
sandstone has a burial depth between 4,500m and 5,000 m with porosity values
ranging from 18% to 20%.
https://www.sciencedirect.com/science/article/pii/S2405656116300852
https://link.springer.com/chapter/10.1007/978-1-4613-8988-0_10
The presence of clay coatings holds the key.
Fig. 64: High Perm. Vs Low Perm. Sandstone Comparison
Source: AWE
Hartleys Limited Warrego Energy Limited (WGO) 17 January 2020
Page 47 of 49
Clays (containing illite and chlorite which are antidiagenetic in nature) deposited at
the time of burial have the potential to preserve porosity at depth. A chlorite clay
coating can protect the quartz grains from diagenesis and maintains porosity during
burial. The clay coating prevents quartz overgrowths from filling and reducing
intergranular porosity during diagenesis.
Fig. 65: Clay Coating can maintain porosity
Source: STX Corporate Presentation
Even prior to Waitsia, cores taken from the High Cliff Sandstones had shown the
addition of clays and resulting porosity preservation (Corybas-1 well, Ferdinando
2007, see earlier).
Fig. 66: Kingia / High Cliff Depositional Environment
Source: STX Corporate Presentation
In conclusion, we were correct back in 2017 to assume that further deep
Kingia/High Cliff discoveries would be made. But our assumption that they
would be restricted to 4,000m or less was simply too conservative. The
Hartleys Limited Warrego Energy Limited (WGO) 17 January 2020
Page 48 of 49
prospective proven play fairway now (as shown earlier in Figure 16 and below)
is even more extensive and more discoveries will almost certainly follow.
Fig. 67: CURRENT - The Kingia / High Cliff Play
Source: UIL and Hartleys. Licenses continue to change hands. So, for example, UIL is now STX, AWE
now Mitsui, Empire now Mineral Resources etc. For an up to date record of the license holders follow
these links;
https://pgr.dmp.wa.gov.au/PGR/Titles/DisplayTitle.aspx?d=XDNv1x6VxXQyGRsORwN86azNxdVRtolD
bEiD9r1IvYU%3D, http://www.dmp.wa.gov.au/Documents/Petroleum/PD-SBD-GEO-102D.pdf
Page 49 of 49
HARTLEYS CORPORATE DIRECTORY Research Trent Barnett Head of Research +61 8 9268 3052
Mike Millikan Resources Analyst +61 8 9268 2805
John Macdonald Resources Analyst +61 8 9268 3020
Paul Howard Resources Analyst +61 8 9268 3045
Aiden Bradley Research Analyst +61 8 9268 2876
Oliver Stevens Research Analyst +61 8 9268 2879
Michael Scantlebury Associate Analyst +61 8 9268 2837
Janine Bell Research Assistant +61 8 9268 2831
Corporate Finance Dale Bryan Director & Head of
Corp Fin.
+61 8 9268 2829
Richard Simpson Director +61 8 9268 2824
Ben Crossing Director +61 8 9268 3047
Ben Wale Director +61 8 9268 3055
Stephen Kite Director +61 8 9268 3050
Scott Weir Director +61 8 9268 2821
Scott Stephens Associate Director +61 8 9268 2819
Rhys Simpson Associate Director +61 8 9268 2851
Michael Brown Executive +61 8 9268 2822
Registered Office
Level 6, 141 St Georges Tce Postal Address:
Perth WA 6000 GPO Box 2777
Australia Perth WA 6001
PH:+61 8 9268 2888 FX: +61 8 9268 2800
www.hartleys.com.au [email protected]
Note: personal email addresses of company employees are structured
in the following manner: [email protected]
Hartleys Recommendation Categories
Buy Share price appreciation anticipated.
Accumulate Share price appreciation anticipated but the risk/reward is
not as attractive as a “Buy”. Alternatively, for the share
price to rise it may be contingent on the outcome of an
uncertain or distant event. Analyst will often indicate a
price level at which it may become a “Buy”.
Neutral Take no action. Upside & downside risk/reward is evenly
balanced.
Reduce /
Take profits
It is anticipated to be unlikely that there will be gains over
the investment time horizon but there is a possibility of
some price weakness over that period.
Sell Significant price depreciation anticipated.
No Rating No recommendation.
Speculative
Buy
Share price could be volatile. While it is anticipated that,
on a risk/reward basis, an investment is attractive, there
is at least one identifiable risk that has a meaningful
possibility of occurring, which, if it did occur, could lead to
significant share price reduction. Consequently, the
investment is considered high risk.
Institutional Sales Carrick Ryan +61 8 9268 2864
Justin Stewart +61 8 9268 3062
Simon van den Berg +61 8 9268 2867
Digby Gilmour +61 8 9268 2814
Veronika Tkacova +61 8 9268 2836
Wealth Management Nicola Bond +61 8 9268 2840
Bradley Booth +61 8 9268 2873
Adrian Brant +61 8 9268 3065
Nathan Bray +61 8 9268 2874
Sven Burrell +61 8 9268 2847
Simon Casey +61 8 9268 2875
Tony Chien +61 8 9268 2850
Tim Cottee +61 8 9268 3064
David Cross +61 8 9268 2860
Nicholas Draper +61 8 9268 2883
John Featherby +61 8 9268 2811
Ben Fleay +61 8 9268 2844
James Gatti +61 8 9268 3025
John Goodlad +61 8 9268 2890
Andrew Gribble +61 8 9268 2842
David Hainsworth +61 8 9268 3040
Murray Jacob +61 8 9268 2892
Gavin Lehmann +61 8 9268 2895
Shane Lehmann +61 8 9268 2897
Steven Loxley +61 8 9268 2857
Andrew Macnaughtan +61 8 9268 2898
Scott Metcalf +61 8 9268 2807
David Michael +61 8 9268 2835
Jamie Moullin +61 8 9268 2856
Chris Munro +61 8 9268 2858
Michael Munro +61 8 9268 2820
Ian Parker +61 8 9268 2810
Matthew Parker +61 8 9268 2826
Charlie Ransom
(CEO)
+61 8 9268 2868
Heath Ryan +61 8 9268 3053
Tom Shackles +61 8 9268 2802
David Smyth +61 8 9268 2839
Greg Soudure +61 8 9268 2834
Sonya Soudure +61 8 9268 2865
Dirk Vanderstruyf +61 8 9268 2855
Disclaimer/Disclosure
The author of this publication, Hartleys Limited ABN 33 104 195 057 (“Hartleys”), its Directors and their Associates from time to time may hold
shares in the security/securities mentioned in this Research document and therefore may benefit from any increase in the price of those securities.
Hartleys and its Advisers may earn brokerage, fees, commissions, other benefits or advantages as a result of a transaction arising from any advice
mentioned in publications to clients.
Any financial product advice contained in this document is unsolicited general information only. Do not act on this advice without first consulting
your investment adviser to determine whether the advice is appropriate for your investment objectives, financial situation and particular needs.
Hartleys believes that any information or advice (including any financial product advice) contained in this document is accurate when issued.
Hartleys however, does not warrant its accuracy or reliability. Hartleys, its officers, agents and employees exclude all liability whatsoever, in
negligence or otherwise, for any loss or damage relating to this document to the full extent permitted by law.