New Zealand Energy is an independent company that explores and develops oil and natural gas assets in New Zealand. Its property portfolio covers nearly two million acres of conventional and unconventional prospects in the Taranaki Basin and East Coast Basin of New Zealand's North Island.
"We view an investment in NZEC at this time to have a large degree of speculation and exploration risk due the company's early stage of development and limited operating history," Credit Suisse analyst David Phung said.
"Having said that, we view favorably upon the company's assets in the proven multi-zone Taranaki basin, where NZEC and its competitors have had notable success recently."
The company's East Coast basin permits hold an estimated 21 billion barrels of oil in place, Credit Suisse said.
"While still in its early stages, we are optimistic that this shale play could eventually bear fruit, given the numerous oil and gas seeps in the area while early analysis suggests comparable reservoir characteristics to other shale plays in North America."
Indeed, one of New Zealand Energy's competitors has recently farmed out its acreage to Apache (NYSE:APA), bringing significant financial and human resources to de-risk the play.
"Ultimately we could see New Zealand Energy conduct a similar transaction to mitigate its risk."
Upon success, Credit Suisse notes that it could see a recovery factor near 10% "like that of some oil shale plays in North America" which would translate to over 2.1 billion barrels recoverable.
"Should this asset reach commerciality, the value generation potential would likely be significant. Although in its early stages of exploration, we are optimistic at this juncture due to the numerous oil and gas seeps in the area and initial analysis suggesting comparable reservoir characteristics to some North American shale plays," Phung said.
Despite a relatively short operating history of less than two years, the company has managed to obtain over 2 million net acres of land in New Zealand's Taranaki and East Coast basin provising New Zealand Energy with a ready inventory of leads and prospects or a multiyear exploration drilling campaign.
"We view the Taranaki basin favorably as it is a proven hydrocarbon basin with multi-zone potential," Credit Suisse's Phung added.
New Zealand Energy's current drilling program calls for another eight wells to be drilled in the Taranaki basin before year-end and at least one shallow well per month in 2013. With a relatively small reserves base, each well result could be a "meaningful" catalyst.
"We could see the company continue its aggressive land capture strategy in the upcoming 2012 bid round."
In its note, Credit Suisse said that the proven Taranaki basin offers multiple prospective zones, both shallow and deeper prospects.
"It is with these shallower and capital-intensive zones that we believe NZEC will drill in the near term in order to build its production and cash flow."
To date, the company has drilled five successful wells, with three currently producing.
"Although we prefer a longer track record of success, we view favorably upon the multizone Taranaki basin and remain optimistic that NZEC can continue to execute its drilling program successfully," Credit Suisse said in its note.
Deeper zones in the Taranaki offers higher-impact reserves and production, but at higher risk. Credit Suisse does not believe that New Zealand Energy has reached this crossroad yet, as the company continues to focus on shallower zones to build its production base.
"However, perhaps two years out and contingent on drilling success, we could see NZEC target deeper gas and condensate plays to take that next step of growth.
Credit Suisse's Phung said it believes that New Zealand Energy is differentiated from its Canadian domestic juniors as well as the Canadian international peer group on assets and geography.
"Contrasting its Canadian domestic junior peers, the company benefits from Brent oil pricing without concern for widening oil price differentials. Additionally, New Zealand appears to be in an environment with rising natural gas prices, compared with stagnantly low prices in North America," Phung said in his note.
At current oil and gas prices in New Zealand, the company's projects "all appear to be robust". Oil projects appear to be economical at US$60 per barrel, while natural gas projects are already robust and are likely to become more so with rising natural gas prices.
As a growing company in its early stages of development, New Zealand Energy is likely to require additional capital.
"Given our current forecast and contingent upon a strategic acquisition closing, the company could elect to raise equity or perhaps establish a credit facility to cover any potential shortfall," the Credit Suisse analyst said.
"We currently estimate a shortfall of C$18 million at year-end 2012 and for capital expenditures to exceed cash flow in 2013."