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Stonecap Securities says New Zealand Energy represents "steady growth with low risk"

New Zealand Energy Corp (

CVE:NZ

) received initial coverage from Stonecap Securities, which handed out an "outperform" rating and a one-year target price of $3.75 - up considerably from the current price of $2.91 per share.

The New Zealand-focused oil and gas producer is seen by Stonecap to represent "steady growth with low risk".

Stonecap analyst Aminul Haque said immediate production and cashflow is expected from the Taranaki Basin in New Zealand's North Island.

The company's two permits in Taranaki are offset by a number of producing wells and recent successful discoveries, the research report said, with New Zealand Energy achieving "very encouraging" early results from its first two wells.

The oil and gas company plans to complete or drill eight more well through the remainder of the year.

Earlier this month, the company said its Copper Moki-2 well in the Taranaki Basin was then producing out of the Mt. Messenger formation roughly 700 barrels of oil per day (bbl/d), and around 850 thousand cubic feet of natural gas per day(mcf/d).

It also said that its Copper Moki-3 well encountered 12 metres of net pay in the Mt. Messenger formation and 15 metres of net pay in the Moki formation. The company said it planned to complete and flow test both formations.

New Zealand Energy controls two permits covering 169,949 net acres in the Taranaki Basin. It achieved production in December 2011 from Copper Moki-1, its first discovery well in the Taranaki Basin that has produced more than 62,000 barrels of oil to date since it was first tested last August.

The company also holds large land positions in the East Coast Basin of North Island, said Stonecap, and although under-explored, these basins hold "large conventional and non-conventional oil potential."

The report also noted that New Zealand is an OECD (Organisation for Economic Co-operation and Development) country, with a "stable democracy and an advanced legal system."

"It has an attractive and predictable regulatory and royalty environment that makes it compelling for oil and gas investment," Stonecap continued.

New Zealand also has a growing internal market for oil and gas, with an "excellent" infrastructure and distribution system, Stonecap's Haque said.

"Increasing dependence on imports guarantees a favorable environment for domestic producers."

The capital markets firm's target price for New Zealand Energy is based on its estimate of the value of risked resources, a resource estimate by an independent reserve engineer and the oil and gas company's recent exploration successes.

The $3.75 target price implies a 12-month return of 29 per cent.

Haque concluded: "NZEC is well positioned to continue its early success and increase production with the help of an extensive exploration program.

"The company also has significant cash resources to scale up its exploration program."

Indeed, the company, which closed a $63.4 million bought deal financing in late March, plans on drilling nine wells and completing two seismic programs in 2012.

Company production from the Mt. Messenger formation earlier this month stood at 1,000 barrels of oil per day and 2,050 mcf/d, with an additional 341 barrels oil equivalent per day of natural gas plus associated liquids to be tied in by the end of the second quarter.

The oil and gas company's exploration strategy is to prioritize wells identified on 3D seismic that have well-defined, lower-risk Mt. Messenger targets, coupled with additional exploration potential from the Urenui, Moki or Kapuni formations.

The Taranaki Basin is currently New Zealand's only oil and gas producing basin, generating around 130,000 barrels of oil equivalent per day from 18 fields.

New Zealand Energy is targeting production of 3,000 barrels of oil equivalent per day by year-end, and also said that its Copper Moki-4 has been drilled to the target depth of 2,125 metres.

The company's peers in the New Zealand-focused exploration and production space include TAG Oil (TSE:TAO) and KEA Petroleum (LON:KEA), which only recently drilled its first successful well on a Taranaki permit, Stonecap said.