The following is an extract from the report.
EVERYBODY NEEDS GOOD NEIGHBOURS
WHL Energy is anticipating the imminent drilling of the Palta-1 well in Shell's WA-384-P permit which is contiguous to WHL's WA-460-P (33%) permit.
Palta-1 drilling imminent
The drill rig contracted to drill the Palta-1 well in Shell's WA-384-P permit is currently listed as "enroute" to the well location.Octanex NL had announced that the well was due to spud in Q3 so we assume that the spud date must be imminent.
Shell's WA-384-P permit lies south of WHL's WA-460-P permit and the Palta prospect straddles both permits. WHL estimates that the Palta prospect could contain 13.5Tcf, with 2.5Tcf in WHL's permit.
This is only the second well to be drilled in the region, and the first since 2005, when Woodside drilled the Falcone-1 well and found a 35m gas column in the Mungaroo formation. The Falcone-1 well was located approximately 50km North of Palta-1.
Shell is drilling the Palta-1 well to earn a 75% interest in the permit (Mitsubishi has farmed in for the other 25%). Given the likely high cost (potentially $60m - $80m) to drill Palta-1 (1,350m of water and 60-75 days to drill), it could be assumed that Shell has high expectations for the well.
Possibility of 2.5 Tcf in WA-460-P
WHL estimates that 2.5 Tcf of the Palta target could lie in the WA-460-P permit. If we apply a rule of thumb exploration value of $1 per mcf and a probability of success (POS) of 10% then this implies a value of 4.8cps for WHL's share of the permit. In a success case, WHL's interest could be worth 48cps.
Speculative Buy - near term catalyst without the expense
Being located near to a discovery can sometimes provide a catalyst for share price appreciation, however, holding a permit that potentially contains part of a discovery is reason to be excited. The Palta-1 well is likely to spud soon and we could know the results in 60-75 days, post drilling.
WHL's shares could trade up to the 4.8cps risked value noted above while the well is being drilled. However, given the target is not actually being drilled in WHL's permit and the distance of Palta-1 to WHL's permits could be as much as 10km, we would not expect the full unrisked value to be reflected in WHL's shares.
There is also a risk that Shell does not disclose the results of the well, which could cause some confusion post drilling.
If Shell does have success and WHL's estimate of the 13.5Tcf is supported, then this would have a flow on affect to the POS of WA-460-P. A 30% POS results in a value of 14.4cps.
WHL has done a good job of spreading its exploration risk over the last year which we believe has retained potential upside but has limited downside.
We retain our Speculative Buy recommendation with a price target of 12.5cps.
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