Next Investors logo grey

Bowsprit acquisition clears path for Sun

Published 01-AUG-2019 00:00 A.M.

|

4 minute read

Hey! Looks like you have stumbled on the section of our website where we have archived articles from our old business model.

In 2019 the original founding team returned to run Next Investors, we changed our business model to only write about stocks we carefully research and are invested in for the long term.

The below articles were written under our previous business model. We have kept these articles online here for your reference.

Our new mission is to build a high performing ASX micro cap investment portfolio and share our research, analysis and investment strategy with our readers.


Click Here to View Latest Articles

Overview: Sun Resources NL ("Sun Resources", "Sun", "the Company") is an Australian energy company focused on oil and gas exploration in the Gulf of Mexico, USA. Its principal asset is a 100% interest in the Bowsprit Project ("the Project"), which consists of two granted petroleum leases covering 4.6km2 of shallow transitional waters of Louisiana. The Project is estimated to host contingent resources of 0.76million barrels (2C gross), and unrisked prospective resources of an additional 1.72 million barrels (Best; gross). Since initiating coverage in May 2018, Sun has advanced the technical studies on the project, but appraisal drilling did not occur as scheduled. Sun has now acquired 100% interest to accelerate project funding and drilling.

Exploration.jpg

Catalysts: Sun Resources has resolved a major hurdle with the 100% acquisition of the Bowsprit Project, as progressing the project was impossible unless both partners were funded. Whilst the project is already behind schedule, there is potential to bringing the field on production in 2020 if subsequent farm-out discussions are successful. The coming appraisal drilling is designed to demonstrate the potentially robust economics of the project and finding the optimum funding method could be a major value driver.

CallOut icon

Potentially significant upside

Hurdles: Bowsprit is running significantly behind schedule and there is no guarantee that Sun can progress appraisal drilling and financing discussions as expected. Sun remains reliant on external capital to expedite commercial field development and there is a risk that further funding may be needed to prepare Bowsprit for commercial oil production. There remains a significant technical risk and there is no guarantee appraisal results will be favorable. The bowsprit is in a strategically good location with upside potential in prospective resources, however as it is a small-scale project, Sun may need to acquire other assets in order to sustain a long-term production profile.

Sun needs to prove the move to buy out the partner is the right one
Investment View: Commercial discussions did not progress as forecasted but we continue to see significant upside for Bowsprit and remain attracted to the potential robust economics of the project and pathway to near-term, profitable oil production. While the recent project delays have negatively impacted sentiment, we believe it does not threaten the long-term commercial viability of the project. However, the coming period is critical as timely and cost-effective execution is required to restore shareholder confidence and accelerate commercial delivery. Funding remains a key risk but could also be a major value driver if delivered at favourable terms to shareholders. We resume coverage as we believe SUN is a speculative opportunity suitable for investors with an appetite for risk. Our initial valuation of 1.2c was based on a 50% interest in the project and we are placing this valuation under review to monitor Sun's progress. Should Sun be able to bring the project back on track in the next few months, the upside potential in the share price could be considerable.

THE BULLS AND THE BEARS

CallOut icon

THE BULLS SAY

  • The Bowsprit Project offers potentially robust economics with potential IRR’s exceeding 200%
  • The Bowsprit Project has a history of modest oil production in the 1960s prior to the advent of modern exploration techniques such as 3D seismic and horizontal drilling
  • Location within the Gulf of Mexico shallows provides ready availability of critical infrastructure and expertise
  • The 100% acquisition of Bowsprit clears the way to accelerate appraisal drilling and financing following a significant delay and provides significantly enhanced economics if the project is successful
  • A near term farm-out transaction and appraisal drilling targeted for Q1 2020 are the major value drivers, potentially providing the foundation to convert existing resources to reserves
  • The Board and major shareholders have supported the Company during the delay
  • SUR is valued as a shell and there could be significant upside in the event of commercial success
CallOut icon

THE BEARS SAY

  • Oil prices are volatile and there is no guarantee that future oil production can be achieved at a profit
  • Sun Resources has an immediate need to raise capital, hence its development plan at Bowsprit is currently unfunded. There is no guarantee it can secure funding on terms beneficial for current shareholders
  • The project area is quite small, limiting exploration upside beyond the current resource estimates. Over 70% of the resource is classed as prospective, which RISC Advisory Ltd has assessed the chances of success to be 1 in 5.
  • Whilst farm-out negotiations can mitigate Sun Resources capital demands, it reduces the Company’s exposure to drilling success
  • Achieving an attractive valuation is contingent on all of Bowsprit’s 2C contingent and Best case prospective resource converting into reserves and does not take into account success rate probabilities ascribed by RISC Advisory Ltd.



General Information Only

S3 Consortium Pty Ltd (S3, ‘we’, ‘us’, ‘our’) (CAR No. 433913) is a corporate authorised representative of LeMessurier Securities Pty Ltd (AFSL No. 296877). The information contained in this article is general information and is for informational purposes only. Any advice is general advice only. Any advice contained in this article does not constitute personal advice and S3 has not taken into consideration your personal objectives, financial situation or needs. Please seek your own independent professional advice before making any financial investment decision. Those persons acting upon information contained in this article do so entirely at their own risk.

Conflicts of Interest Notice

S3 and its associated entities may hold investments in companies featured in its articles, including through being paid in the securities of the companies we provide commentary on. We disclose the securities held in relation to a particular company that we provide commentary on. Refer to our Disclosure Policy for information on our self-imposed trading blackouts, hold conditions and de-risking (sell conditions) which seek to mitigate against any potential conflicts of interest.

Publication Notice and Disclaimer

The information contained in this article is current as at the publication date. At the time of publishing, the information contained in this article is based on sources which are available in the public domain that we consider to be reliable, and our own analysis of those sources. The views of the author may not reflect the views of the AFSL holder. Any decision by you to purchase securities in the companies featured in this article should be done so after you have sought your own independent professional advice regarding this information and made your own inquiries as to the validity of any information in this article.

Any forward-looking statements contained in this article are not guarantees or predictions of future performance, and involve known and unknown risks, uncertainties and other factors, many of which are beyond our control, and which may cause actual results or performance of companies featured to differ materially from those expressed in the statements contained in this article. S3 cannot and does not give any assurance that the results or performance expressed or implied by any forward-looking statements contained in this article will actually occur and readers are cautioned not to put undue reliance on forward-looking statements.

This article may include references to our past investing performance. Past performance is not a reliable indicator of our future investing performance.