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Norwest Energy: Closer To Unlocking Value With Perth Basin Shale Gas Exploration And Evaluation

Norwest Energy (ASX: NWE) is currently poised to carry out key fracture stimulation operations on its Arrowsmith-2 exploration well; positive results here will be a key driver to unlocking the shale gas potential of the Perth Basin, Western Australia.

Should this current program prove up the ability of the thick shale intervals in the Basin to produce gas (and possibly liquids in the higher zones), the likely result will be an expanded work program for the Company, aimed at both full appraisal of the discovery and implementation of an extended development plan for future activities.

The Company has not neglected the conventional oil and gas potential of its Perth Basin assets either, with ongoing work continuing throughout the Basin across its other assets, in order to further assess the leads and prospects in one of Australia's petroleum provinces.

Norwest also holds exploration permits in the under-explored Wessex Basin in the UK, located near the giant Wytch Farm oil field.

Share Price: A$0.06
Issued Shares: 874.18 million
Market Cap: A$52.45 million
Cash: A$2.62 million
EV: A$49.83 million

ANALYSIS

While Australian shale gas exploration is still in its infancy, with early and late stage exploration being carried out in the Cooper, Perth and Canning Basins, Morgan Stanley has projected that exploration spending could hit A$1 billion in the next couple of years.

Other shale gas wells that have been recently fracture stimulated (fracced) and tested include Falcon Oil & Gas's (CVE: FO) Shenandoah-1 well in the Beetaloo Basin, NT and Beach Energy's (ASX: BPT) Holdfast-1 and Encounter-1 wells in the Cooper Basin SA, with similar work currently underway on Senex Energy's (ASX: SXY) Sasanof-1 well, also located in the Cooper Basin, SA. Arrowsmith-2 is the first dedicated shale gas well to be drilled and fracced in Western Australia.

The Halliburton fracture stimulation equipment is currently being utilised in the Cooper Basin campaign, however once this schedule is complete, the equipment will be mobilised to the Perth Basin, where it will complete a three well frac program including Norwest's Arrowsmith-2 well and AWE's Woodada Deep-1 and Senecio-1 wells.

While the Perth Basin is just behind the Cooper Basin in the exploration process, Norwest appears undervalued compared to other shale gas explorers.

In the past year, whilst interest in shale gas has grown, the company's share price has grown from A$0.05 in May 2011 to the current A$0.06 - a 20% increase. During this time, it hit a low of A$0.029 in December last year and a high of A$0.087 on 26 March 2012.

Beach, a larger and more diversified company, has grown from A$0.93 to A$1.295 during the same period, or a 39.3% increase, with a high of A$1.765, largely on the back of its shale gas exploration.

New Standard Energy (ASX: NSE), which like Norwest has largely just exploration assets, has grown from A$0.185 to A$0.475, up 156.8%, despite having only participated in the Lawford-1 well that failed to intersect the target Laurel Formation and is only now set to drill its first 3 wells under its Goldwyer farm-in project with ConocoPhillips.

Company Name ASX Code Price (cps) Market Cap ($m) Net Cash ($m) EV ($m)
New Standard Energy NSE 48.5 141.75 23.5 118.25
Empire Oil & Gas EGO 0.018 85.42 8.1 77.32
Norwest Energy NWE 0.062 52.45 2.6 49.83

Comparing Norwest with its peers on an EV basis, there is no value accorded to a success with fracture stimulation of Arrowsmith-2.

We believe a successful frac and test of Arrowsmith-2 could increase Norwest's valuation.

We believe a successful frac and test of Arrowsmith-2 would significantly increase Norwest's valuation from around $50 million to $90-$100 million.

Further incremental gains may also be seen from successes in the company's conventional oil and gas exploration both in the Perth and Wessex basins.

MANAGEMENT TEAM

Peter Munachen is Norwest's chief executive officer and has 37 years corporate and administration experience in hydrocarbon and Mineral Resources companies. He has served as a director or executive in a number of listed companies, specialising in corporate finance and project acquisition. He is also a director of East Africa Resources(ASX: EAF) and Currie Rose Resources (TSXV: CUI).

Michael Fry serves as Norwest Energy's chairman. He has extensive experience in capital markets and corporate treasury management specialising in the identification of commodity, currency and interest rate risk and the implementation of risk management strategies. He is also the chairman of Red Fork Energy (ASX: RFE) andChallenger Energy (ASX: CEL).

Henry Kennedy is a non-executive director of Norwest who has been instrumental in the formation and/or development of a number of successful listed companies, including Pan Pacific Petroleum (ASX: PPP), New Zealand Oil & Gas (ASX: NZO), Mineral Resources and Otter Exploration. He is also the chairman of Pancontinental Oil & Gas (ASX: PCL).

PERTH BASIN - SHALE GAS

Norwest's flagship asset is its shale gas play in the Perth Basin, Western Australia, which the United States' Energy Information Agency last year estimated could hold 59 trillion cubic feet (NYSE:TCF) of gas. The report also found the Perth and Canning Basins combined hold the world's fifth largest reserves of shale gas.

The Perth Basin has also been identified as being analogous to the highly prolific Eagle Ford shale in Texas, according to a study commissioned by Norwest that benchmarked its geology with analogs in the U.S. With the strong level of activity and high expectations that North American independents have placed on the Eagle Ford, the comparison is a strong tick in the Perth Basin's favour.

Geologically, the Basin contains three thick shale sequences, which preliminary work has indicated have the right characteristics for gas - the Kockatea Shale, the Carynginia Formation and the Irwin River Coal Measures.

AWE, which holds the majority stake in EP413, previously estimated the middle interval of the Carynginia could hold 13-20 TCF of gas throughout the Perth Basin, while modelling by Norwest based on a 60 metre Carynginia interval indicated the potential for up to 3TCF of gas within EP413 alone.

These are potentially conservative numbers, as the Arrowsmith-2 well intersected over 1000m of shale formations during drilling including a 250 metre Carynginia interval, an overlying 450 metre section of the Kockatea Shale, a 330 metre section of the underlying Irwin River Coal Measures and a 22 metre section of the deepest interval, the High Cliff Sandstones.

Elevated gas readings were also observed in the target sections during drilling.

The upcoming fracture stimulation and testing of the Arrowsmith-2 well will play a key role in determining the ability of the northern Perth Basin shales to produce commercial quantities of gas, and subsequently, will determine Norwest's plans going forward.

The Halliburton fracture stimulation equipment, currently expected to arrive in June, will first frac the High Cliff Sandstone formation in the Arrowsmith-2 well (the deepest target at circa 3300m). Then while cleanup and flow back is carried out on this zone, the frac spread will be deployed to one of the other two wells in the program.

It will then return to continue the process of fraccing the remaining intervals in the Arrowsmith-2 well. The frac spread will be continually mobilised between the three wells through the campaign in order to maximise use of the equipment and reduce standby charges.

This program is expected to take up to 8 weeks, with early results expected in the first few weeks along with more solid data being available at the end of the program.

While Arrowsmith-2 is a vertical well designed for evaluation of all the shale gas formations, it will give some indication as to how productive the various shales are, and will provide valuable insight into how to improve the frac program design of future horizontal wells.

Success at AWE's Woodada Deep-1 and Senecio-1 wells would also provide support for the presence of laterally extensive productive shales.

To top it off, Norwest has interests in more than 1 million acres (4046.8 square kilometres) in northern Perth Basin permits that contain these prospective shales. These include its 27.8% interest in EP413 where the Arrowsmith-2 well is located; 100% interest in TP/15; 20% stakes in EP368 and EP426; 6.278% interest in L14; and 100% in special prospecting authority STP-SPA-0013.

Exploration success in the Perth Basin can rapidly be converted to production due to existing infrastructure, with the Dampier to Bunbury Pipeline and the Parmelia Pipeline both passing close to EP413, as well as close proximity to major markets both in Perth and the emerging Mid West mining province. Of the two pipelines, the Parmelia Pipeline that runs from Dongara to Perth remains under-utilised, with just a third of its full capacity of 90 TJ per day being used.

Western Australia has the added advantage of having short term gas prices ranging from A$8 to A$15 per gigajoule, the highest domestic gas prices in Australia.

This potential attracted India's Bharat PetroResources to farm into EP413 in 2010.

PERTH BASIN - CONVENTIONAL OIL & GAS

Norwest's Perth Basin assets are also prospective for conventional oil and gas.

EP413 contains the Robb, Aiyeenu, Stockyard, Weelawadji and Uniwa leads and prospects that will all be evaluated for both conventional and unconventional hydrocarbon potential.

Norwest is currently remapping and evaluating leads in permit TP/15, located close to the producing Cliff Head oil field in the offshore Perth Basin. Norwest has recently received approval on the renewal of this permit by the Western Australia Department of Mines and Petroleum, including a comprehensive five year work program.

TP/15 holds the Capel, Smithbrook and Xanadu leads that have the potential to hold 40 million, 22 million and 28 million barrels of oil respectively.

Over in the Origin Energy (ASX: ORG) operated EP368 and EP428 blocks, the joint venture expects to shoot a key 3D seismic survey in early 2013 over the North Erregulla prospect that straddles the two permits.

The survey will improve the structural interpretation of the prospect, which was discovered in 1967 by the North Erregulla-1 well. While this well had intersected just 3 metres of pay in the Wagina Formation, recent interpretation has suggested that it was drilled down-dip of the crest and that a potentially large up-dip oil accumulation may be present.

North Erregulla could hold 22 million barrels of oil in the Dongara Sandstone; 3 million barrels in the Arranoo Member of the Kockatea Shale; and 100 billion cubic feet of recoverable gas in the Permian aged High Cliff Sandstone.

Norwest is paying its 20% share of costs in the two permits while Empire Oil & Gas (ASX: EGO) is free carried through its 40% share of drilling by Origin.

Meanwhile, Norwest is in the process of converting STP-SPA-0013 into an exploration licence.

The company had in August last year acquired 2139 line kilometres of Falcon airborne gravity gradiometry and magnetic data that indicated the permit has potential for shallow shale gas, deep shale gas and conventional hydrocarbon traps.

STP-SPA-0013 is a compilation of 21 onshore blocks that covers 860 square kilometres between Lancelin and Green Head.

WESSEX BASIN

Besides its Perth Basin assets, Norwest is also active in the UK's Wessex Basin, having recently shot 54 kilometres of 2D seismic aimed at providing a clearer picture of the onshore Razorback prospect on the Isle of Wight permit PEDL 239.

Data from the survey, which was a major improvement over previous surveys, has now been processed, and is currently being interpreted and evaluated. This dataset will then be combined with existing 2D seismic to update Norwest's mapping over the Razorback prospect.

This will further assist in the identification of a potential drill location for the Razorback prospect. Razorback is located in a central position on the Isle of Wight and is Norwest's top-ranked prospect in the 170.6 square kilometre PEDL 239.

It targets the Triassic Sherwood Sandstone and the secondary Jurassic Oolite reservoir. The prospect could contain 43 million barrels oil in-place or 14 million barrels un-risked recoverable oil.

Razorback is located east of and relatively close to the giant Wytch Farm field, which has produced over 400 million barrels of oil to date.

Norwest has invested over 3 years in extensive technical work, including mapping of migration pathways, reservoir distribution and seal quality, providing better understanding of the structural history of PEDL 239 and surrounding regions in order to better identify the prospect.

Over in PEDL 238, the company has identified seven leads ranging in size from the large Mooneye lead to the much smaller Coho lead. Mooneye could hold up to 53.88 million barrels of recoverable oil while Coho could hold 10.76MMbbl.

PEDL 238 also holds the Beluga lead that could hold 8.92MMbbl of recoverable oil in its PEDL 238 portion and another 6.92MMbbl in its Hurst Castle sector.

More recently, the company was awarded five offshore blocks - 98/6b, 98/7b, 98/8, 98/12, and 98/13 - identified as P1928- located between its Isle of Wight permits and the Wytch field.

The Wessex Basin has been underexplored due to the previous focus on the North Sea, as well as its high population and dense development that have made undertaking seismic in the area logistically difficult and expensive.

Norwest's solution to this has been its expertise in various forms of gravity gradiometry surveys with preliminary survey results indicating that the company's geological model for the Basin is sound.

OTHER ASSETS

Norwest owns a 6.278% stake in the Origin operated Jingemia oil field in L14 that provides it with a small revenue stream. During the March 2012 quarter, Jingemia produced 18,868 barrels of oil with 1236.24 barrels net to Norwest for revenue of A$130,706.11.

Norwest is currently reviewing the viability of a chemical enhanced oil recovery program to extend field life, as the field has already produced 4.3 million barrels of its initial in-place resource of 12 million barrels and is deemed unlikely to achieve further significant recovery unless the field is stimulated.

Previous studies by Origin indicated the life of Jingemia could be extended to the third quarter of 2014 and produce a further 254,000 barrels of oil, based on current operating costs and oil price, using enhanced oil recovery techniques.

Jingemia is currently producing 250 barrels of oil per day, 60 barrels above the forecast modelled by Origin.

NEAR-TERM CATALYSTS

Fracture stimulation and testing of Arrowsmith-2 Q2-Q3 2012
Success of AWE's Woodada Deep-1 and Senecio-1 wells Q2-Q3 2012
Acquisition of North Erregulla 3D seismic Q1 2013

ANALYSIS

Australia's shale gas exploration efforts are still in its infancy with early and late stage exploration being carried out in the Cooper, Perth and Canning basins though Morgan Stanley has projected that exploration spending could hit A$1 billion in the next couple of years.

While the Perth Basin is just behind the Cooper Basin in the exploration process, Norwest appears undervalued compared to other shale gas explorers.

In the past year, when interest in shale gas has grown, the company's share price has grown from A$0.05 in May 2011 to the current A$0.06 - a 20% increase. During this time, it hit a low of A$0.029 in December last year and a high of A$0.087 on 26 March 2012.

Beach, a larger and more diversified company, has grown from A$0.93 to A$1.295 during the same period, or a 39.3% increase, with a high of A$1.765, largely on the back of its shale gas exploration.

New Standard Energy (ASX: NSE), which like Norwest has largely just exploration assets, has grown from A$0.185 to A$0.475, up 156.8%, despite having only participated in the Lawford-1 well that failed to intersect the target Laurel Formation and is only now set to drill its first 3 wells under its Goldwyer farm-in project with ConocoPhillips.

While Norwest is next off the cab in having shale gas wells fracced and tested after the Cooper Basin, the company's share price growth has trailed behind other shale gas players.

Company Name ASX Code Price (cps) Market Cap ($m) Net Cash ($m) EV ($m)
New Standard Energy NSE 48.5 141.75 23.5 118.25
Empire Oil & Gas EGO 0.018 85.42 8.1 77.32
Norwest Energy NWE 0.062 52.45 2.6 49.83

Comparing Norwest with its peers on an EV basis, there is no value accorded to a success with fracture stimulation of Arrowsmith-2.

We believe a successful frac and test of Arrowsmith-2 would significantly increase Norwest's valuation from around $50 million to $90-$100 million.

We believe the company is undervalued compared to its peers, a successful frac and test of Arrowsmith-1 could increase Norwest's valuation.

Further incremental gains may also be seen from successes in the company's conventional oil and gas exploration both in the Perth and Wessex basins.

These are all just part of the pipeline of projects that have the potential to take Norwest well up from where it currently stands.

Norwest Energy will be presenting at the upcoming One2One Forum in Sydney on 6 June.

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