Armour Energy Limited (ASX:AJQ) is a junior energy producer and explorer with assets across northern, southern and eastern Australia. On a strategy of increasing its focus on its Surat and Cooper basins programmes, the company is progressing well through the initial phase of Surat workover activity. We highlight the innovative financing and partnering agreements enabling the company to undertake the production enhancement strategy, capturing upside whilst preserving capital and minimising equity dilution. Initial results are encouraging with Warroon-1 ‘free-flowing’ gas, with rates increasing as the clean-up activity continues. The gas operating environment underpins a strong economic opportunity with a continuing supply squeeze and persisting high prices. AJQ remains well positioned to benefit from planned work programmes over the next 12 months. Success in the Surat campaign, in particular, can deliver tangible production upside and lift confidence weightings across what will likely be a multi-year prospect portfolio.
Armour Energy is a junior oil and gas company holding a production base with expansion options; and an extensive exploration portfolio across three Australian states. The portfolio consists of exploration and development plays, reflecting a mix of relatively moderate risk and early exploration-stage prospects with significant, success-case growth potential. The company has commenced its production expansion plan for the Surat Basin, funded by innovative partnering/financing deals (refer RaaS note – 6 December).
The Surat production enhancement campaign is progressing through the post-frack clean- up phase with strong initial encouragement from the Warroon-1 (W-1) well. The re- stimulation was successfully completed, noting the ‘frack size’ is nearly 3.5x greater than that conducted previously (Nov-2020). The well began free-flowing gas quite quickly after the commencement of clean-up and with only some 10% of the stimulation fluid pumped out the well is delivering 325mcfd and climbing as more fluid is recovered. Clean-up operations are expected to continue over the next three-five weeks before indicating a post-frack, stable production rate. We previously highlighted (RaaS Flash Note – 31-Jan) that the Myall Creek-2 well was undergoing a 30-day test with initial gas rates ranging between 200-300mcfd. Success will flow through to the remaining frack and drilling opportunities in the portfolio. There is inherent upside on delivering more gas through a plant with ullage and operating on a dominantly fixed-cost basis.
We retain a risked valuation of $265mn (14cps) ascribed to AJQ noting the significant NAV premium to the reference share price (2.0cps), which reflects an overly discounted value of the Queensland assets awaiting success outcomes from the current production enhancement activity. Comparative reserve metrics highlight the relative undervaluing of the company’s reserves base to peers but gas in the ground needs to be developed – a re-rating likely awaits tangible delivery of the gas growth strategy. In our view, the most attractive assets in the current gas market are those already in production with incremental (and material) growth opportunities. We note that AJQ fits that template.
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