Warrego Energy Limited (WGO) Energy Limited 200117.… · • 2008- Secured EP469. • 2013- Initial farm out of 80% of EP469. • 2014- 3D seismic completed over one third of EP469.

Page 1 of 49

Warrego Energy Limited (WGO)

Oil

& G

as: E

xp

lore

r

$0.195

$0.35

Hartleys Brief Investment Conclusion

Key Personnel

Greg Columbus Non-Executive Chairman

Dennis Donald CEO & MD

Duncan MacNiven Executive Director

Owain Franks Executive Director

Mark Routh Non-Executive Director

David Biggs Non-Executive Director

Top Shareholders

Duncan MacNiven 19.99%

Dennis Donald 19.99%

Company Address:

Level 6, 10 Bridge Street,

Sydney NSW 2000

Target Price: $0.350

Issued Capital: 708.3m

- fully diluted 715.8m

Market Cap: $138.1m

- fully diluted $139.6m

Current Cash (end Sept) $13.476m

Current Debt (end Sept) $0.000m

Source: Hartleys Research

Authors:

Aiden Bradley

Energy Analyst

Ph: +618 9268 2876

E: [email protected]

WGO.asxSpeculative Buy

17 Jan 2020

Share Price:

12mth Price Target:

WGO is an oil and gas developer/explorer

focused on its recent discovery at West Errgulla-

2 in the North Perth Basin.

WARREGO ENERGY LIMITED (WGO)

An Extremely Cheap Gas Valuation Warrego Energy Limited (‘WGO’ or the ‘Company’) was founded by Dennis

Donald and Duncan MacNiven in 2007 to bid by competitive tender for EP469.

WGO subsequently secured the financial backing of two Dutch companies in

2014 via a farm-in to shoot a 3D seismic survey (covering one third the block)

in late 2014. In 2018 WGO farmed out 50% of the block and operatorship to

Strike Energy Ltd (‘STX’) in exchange for $600,000 in cash and STX meeting

the first $11m of the costs of the West Erregulla-2 well. In March 2019, WGO

completed a reverse takeover of Petrel Energy Limited (‘PRL’) to list on the

ASX and West Erregulla-2 spudded at the beginning of June 2019. The result

is an estimated gas resource net to WGO of circa 730bcf, over 500bcf of

which is in the high quality Kingia reservoir. A great job by all involved.

World Class Discovery and more to come. The West Erregulla JV expect to drill 1-2 appraisal wells on EP469 in 2020

and undertake a further 3D Seismic Survey on the remainder of the permit.

Only one third of the block has been mapped by 3D seismic. A number of

follow up targets have been identified already within EP469. WGO also holds

100% of the frontier EPA-0127 license. EPA-0127 extends to 2.2 million acres

(8,700 km2) across the Coolcalalaya Sub-basin and while little exploration

work has been done within the basin, it is expected to be prospective for

Permian (including Kingia) and older play types. WGO are working to

complete a native title agreement and farm-in for EPA-0127 in 2020.

Additionally, WGO has a position in another potential large gas play in Spain

with interests in two permits, Tesorillo and Ruedalabola. The JV is (subject to

funding) planning to spud a well at the Tesorillo prospect in 2020.

Our 12-month forward valuation is 35c per share. WGO has a 50% stake in a World Class onshore gas discovery in the Perth

Basin. The EP469 license also contains a number of follow up leads and

prospects and the frontier Coolcalalaya Sub-basin does seem to offer longer

term potential. In Spain, the key catalyst will be whether the Tesorillo prospect

is funded and drilled in 2020. WGO has a strong management team, with

material ‘skin in the game’. Key events for WGO in 2020 include further

appraisal on EP469 which will provide additional information on the scale of

the ultimate recoverable resource. Additional 3D on the block will also likely

be shot with a view to firming up follow up drillable targets. WGO retains the

right to market their share of the gas independently and there could be news

flow in 2020 regarding potential future gas sales. WGO hope to complete a

native title agreement and farm-in for EPA-0127 in 2020. The JV is (subject

to funding) planning to spud a well at the Tesorillo prospect in 2020. Despite

the scale of the discovery, the market continues to value it highly

conservatively at 20-30c/GJ. This depressed valuation is due to the current

pessimistic outlook for WA gas prices and hence the value of Perth Basin

gas, which is overdone in our opinion. Based primarily on our value for EP469

(minus corporate costs) we derive a 12-month forward valuation and target

price of 35c per share. Given the upside to our value and the expected

continued positive Kingia/High Cliff news flow in the basin we initiate

coverage of WGO with a Speculative Buy rating.

Hartleys Limited ABN 33 104 195 057 (AFSL 230052) 141 St Georges Terrace, Perth, Western Australia, 6000

Hartleys does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the

firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single

factor in making their investment decision. Further information concerning Hartleys’ regulatory disclosures can be found on Hartleys

website www.hartleys.com.au

0.00

0.05

0.10

0.15

0.20

0.25

0.30

0.35

0.40

0.45

.

5.

10.

15.

20.

25.

30.

35.

40.

45.

50.

Dec-19Aug-19Apr-19Dec-18

Volume - RHS

WGO Shareprice - LHS

Sector (S&P/ASX SMALL RESOURCES) - LHS

A$ M

Warrego Energy Ltd

Source: IRESS

http://www.hartleys.com.au/

Hartleys Limited Warrego Energy Limited (WGO) 17 January 2020

Page 2 of 49

SUMMARY MODEL

Warrego Energy Limited Share Price 17 Jan 20

WGO $0.1950 Speculative Buy

Directors Company Details

Share Price $0.1950 Greg Columbus Non-Executive Chairman

Market Capitalisation $138m Dennis Donald CEO & MD

Net Cash (30 Sep 2019) $13.5m Duncan MacNiven Executive Director

Issued Capital 708.3m Ow ain Franks Executive Director

ITM options 0.0m Mark Routh Non-Executive Director

Options 7.5m David Biggs Non-Executive Director

Issued Capital (fully diluted ITM options) 708.3m

Issued Capital (fully diluted all options) 715.8m Top Shareholders m shs %

EV $124.7m Duncan MacNiven 141.6 19.99%

Valuation $0.350 Dennis Donald 141.6 19.99%

12Mth Price Target $0.350

Unpaid Capital N o (m) $ (m) A ve P r % Ord

Various 7.5 0.8 11.16 1.1%

Valuation Summary

Asset

A$m A$ps

EP469 (West Erregulla 2) 227 0.32

STP-EPA-0127 2 0.00

Spain 5 0.01

EP469 Exploration 31 0.04

Corporate and Other -17 -0.02

Total 248 0.35

Key Permits / Prospects Expected WGO and Industry News flow Project

Unrisked

Net Interest NPV10** 2H19 West Erregulla-2 Success Completed

Perth Basin 2H19 Beharra Springs Deep Success Completed

EP469 (West Erregulla 2) 50% A$227m 1H20 Independent Resource certif ication EP 469

STP-EPA-0127 100% 1H20 Lockyer Deep-1 w ell drilling EP 368

Spain (Cadiz Province) 2020 West Erregulla Appraisal Drilling EP 469

Tesorillo 85% 2020 3D Seismic Survey EP 469

2020 Gas marketing EP 469

2020 Spud w ell Tesorillo

2020 Complete native titile and farm-in EPA-0127

1C 2C 3C 2022 Initial Production EP 469

Kingia 428 502 588

High Cliff 68 91 117

Wagina* 104 137 182

Current Total 600 730 887

*Propestive resource subject to further testing

Analyst: Aiden Bradley

Phone: 08 9268 2876

Sources: IRESS, Company Information, Hartleys Research

West Erregulla Contingent Resource BCF (net to WGO)

WGO is an oil and gas developer/explorer focused on its

recent discovery at West Errgulla-2 in the North Perth Basin.

Valuation

Last Updated: 17/01/2020

Key Market Information

Investment Summary


Page 3 of 49

HIGHLIGHTS Warrego Energy Limited (‘WGO’ or the ‘Company’) was founded by Dennis Donald

and Duncan MacNiven in 2007 to bid by competitive tender for EP469. WGO

subsequently secured the financial backing of two Dutch companies in 2014 via a

farm-in to shoot a 3D seismic survey (covering one third the block) in late 2014. In

2018 WGO farmed out 50% of the block and operatorship to Strike Energy Ltd

(‘STX’) in exchange for $600,000 in cash and STX meeting the first $11m of the

costs of the West Erregulla-2 well. In March 2019, WGO completed a reverse

takeover of Petrel Energy Limited (‘PRL’) to list on the ASX and West Erregulla-2

spudded at the beginning of June 2019. The rest, (as) they say, is history!

Fig. 1: Location of WGO’s acreage

Source: WGO

WGO history;

• 2007- Warrego Energy Ltd UK founded by Dennis Donald and Duncan

MacNiven.

• 2008- Secured EP469.

• 2013- Initial farm out of 80% of EP469.

• 2014- 3D seismic completed over one third of EP469.

• 2015- Reacquired 100% of EP469.

• 2018- Farmed out 50% of EP469 and operatorship to STX.


Page 4 of 49

• March 2019- WGO listed on ASX via RTO of PRL.asx; adding their acreage

in Spain (at Tesorillo) and Perth Basin (EPA-0127).

• August 2019- Gas discoveries in the Kingia and Wagina sandstones.

• September 2019- Gas discovery in High Cliff Sands announced

Success at West Erregulla-2 culminated in a highly successful well test in the Kingia

Sandstone reservoir. Three intervals totalling 48 metres (from 4,799 metres to 4,851

metres) flowed at a maximum rate of 69 mmcf/d on a 2-inch choke at 700 psig well

head pressure over a 1-hour period. The High Cliff Sands were intersected at

4,918m MDRT. Net pay was 10m in a gross gas column of at least 22m. Porosity

up to 16% was measured. The Wagina Sandstone was intersected at 4,106m

MDRT, with net pay of 10m recorded in a gross gas column of 79m. Porosities of up

to 14% and reservoir pressure in excess of 6,800 psia were measured.

Fig. 2: West Erregulla-2 – Three discoveries in one

Source: STX

Fig. 3: Wagina, Kingia and High Cliff Discoveries

Source: STX

The result is an estimated gas resource net to WGO of circa 730bcf, over 500bcf of

which is in the high quality Kingia reservoir.


Page 5 of 49

Fig. 4: West Erregulla-2 Contingent Resource

Source: Igesi Consulting Pty Ltd (Tony Cortis and Co)

Fig. 5: West Erregulla-2 Prospective Resource

Source: STX

The JV expect to drill 1-2 appraisal wells on EP469 in 2020 and undertake a further

3D Seismic Survey on the remainder of the permit. Only one third of the block has

been mapped by 3D seismic.

Fig. 6: Future Activity outlined by operator STX

Source: STX

A number of follow up targets have been identified already within EP469 as shown

below.


Page 6 of 49

Fig. 7: West Erregulla-2 follow up prospects

Source: STX

WGO also holds 100% of the frontier EPA-0127 license.

Fig. 8: Coolcalalaya Sub-basin

Source: Various

EPA-0127 extends to 2.2 million acres (8,700 km2) across the Coolcalalaya Sub-

basin and while little exploration work has been done within the basin, it is expected

to be prospective for Permian (including Kingia) and older play types.

WGO hope to complete a native title agreement and farm-in for EPA-0127 in 2020.


Page 7 of 49

Fig. 9: EPA-0127 Permian Potential

Source: Various

Additionally, WGO has a position in another potential large gas play in Spain with

interests in two permits, Tesorillo and Ruedalabola.

Fig. 10: Spanish Permits

Source: WGO

The JV is (subject to funding) planning to spud a well at the Tesorillo prospect in

2020. WGO currently holds an 85% interest in the Tesorillo Project with Prospex Oil

and Gas plc (PXOG.lse) holding the other 15%. PXOG has an option to acquire a

further 34.9% at an exercise price of €1.725 million.

The target is the conventional sandstone gas reservoirs encountered in a 1956

discovery which is located just 3km from a 40” gas pipeline. NSAI in 2015 estimated

a P50 gross unrisked prospective resources of 830Bcf, with up to 2.3Tcf (P10).


Page 8 of 49

Fig. 11: Large conventional sandstone targets

Source: WGO

In mid-December WGO announced they are acquiring a 50.1% indirect interest in

El Romeral (PXOG are acquiring the other 49.9% in the project), an integrated gas

production and power station operation located in the Guadalquivir basin in southern

Spain. Initial consideration for 100% is €750,000. El Romeral comprises three

production licences, a 100%-owned 8.1 MW power station supplied by three

producing wells (currently producing 150mcf/d net). The licenses also contain 13

identified prospects, two undeveloped discoveries with a best estimate of 5Bcf of

gross contingent resources and eleven prospects with 90 Bcf gross best estimate

unrisked prospective resources.

North Perth Basin Overview

The North Perth Basin has been revitalised in the past few years through a trifecta

of major gas discoveries in the Kingia/High Cliff formation - Waitsia, West Erregulla-

2 and Beharra Springs Deep.

Fig. 12: Basal Wagina Discoveries

Source: STX


Page 9 of 49

Fig. 13: Kingia and High Cliff Discoveries - Key Waitsia and West Erregulla-2 wells

Source: STX

Larger players, Mitsui and BPT have material exposure. Mitsui acquired AWE

acreage’s and BPT obtained their position through the acquisition of Lattice Energy

from ORG.

https://mitsuiepmidwest.com.au/ and https://www.beachenergy.com.au/perth-basin/

STX’s exposure is through their 50% stake in the West Erregulla-2 acreage and the

UIL acreage they acquired. STX have secured 2,768 km² of net acreage and they

estimate that 40% of it is prospective for the Kingia, High Cliff and Wagina plays.

Fig. 14: STX’s Oil and Gas Potential Fairway

Source: STX


Page 10 of 49

As shown, WGO have the other 50% in the West Erregulla-2 block, but also a vast

acreage position in the Coolcalalaya Sub-basin to the North.

https://warregoenergy.com/assets-projects/australia

MIN took over ownership of EGO’s acreage, so also have exposure to the play,

along with partner NWE in the upcoming Lockyer Deep well (likely to be the next

Kingia target to be drilled).

We believe NWE has exposure to the Kingia/High Cliff play in EP368/EP426 (NWE

20% in EP368 and 22.22% in EP426), where three Kingia/HC prospects have been

confirmed and in EP 413 (NWE 27.9%), which is just to the south of L14.

https://www.enres.com.au/

https://norwestenergy.com.au/projects/lockyer-deep/

KEY have acreage just to the north of Waitsia on the Bookara Shelf (with TEG) and

have acreage offshore (WA-481-P) with PGY.

http://www.keypetroleum.com.au/perth-basin

https://www.pilotenergy.com.au/australia-wa-481-p

MEL and VEN have recently farmed into a Kingia oil prospect with RCMA/Jade

Energy in L14. According to MEL, ‘the Western Flank area in block L14 has been

highlighted to have the potential of large shallow undrilled structures with oil charged

Kingia sands which are highly permeable gas reservoirs in the Waitsia field circa

10km to the North West’.

http://www.metgasco.com.au/asx-announcements/independent-report-increases-

cervantes-prospective-resources

https://jade-holdings.com/

There is also potential Kingia/High Cliff prospectivity offshore, and PGY, RMP and

TEG have acreage that looks at least worth testing for the play.

The latest Kingia discovery was made by BPT/Mitsui at Beharra Springs Deep. The

well was drilled to 4,170m and intersected 65m of Kingia reservoir interval between

3,935m-4,000m (36m net pay estimate). BPT have indicated this is comparable to

the reservoir interval at Waitsia-4 (note Waitsia-4 looked like the best well tested on

the Waitsia field). Additionally, no gas-water contact was encountered. Average

porosity was 14.5%, with porosities up to 21% logged (looks marginally better than

Waitsia and West Erregulla-2).

An assessment of the recoverable volumes will be undertaken following the

completion of wireline evaluation and production testing. BPT will now shoot the

Trieste 3D over the coming months to firm up further Kingia targets.


Page 11 of 49

Fig. 15: Beharra Springs Deep

Source: BPT

We have long held the view that the Waitsia discovery by AWE was not a one off,

but was likely just one discovery in what would become a broader Kingia/High Cliff

Play that would develop. We previously showed in our research the Kingia/High Cliff

‘Kookaburra’. This was the area in ‘yellow’ (see map below) that we believed (based

on old well data etc) would be prospective for the Kingia/High Cliff. This was based

on the depth recorded at Waitsia. The West Erregulla-2 well proved that we were

still way too conservative and that the good quality Kingia/High Cliff reservoir goes

deeper, much deeper.

Based on this new data we extended the prospective area out to circa this depth

(and based on known Kingia/HC occurrences), the new prospective area would be

extended to the East, to the red line as shown. So, West Erregulla-2 was obviously

very exciting news not just for the JV but also a number of other Perth Basin

explorers. This has been made more so by the subsequent success of the Beharra

Springs Deep well.

Could the play get even bigger and better? Potentially yes. The Kingia/High Cliff

formation also extends offshore and to the north of the Waitsia and West Erregulla-

2 discoveries (including the Bookara Shelf and Coolcalalaya Sub-basin). These

areas are unproven but obviously now offer tantalising potential.


Page 12 of 49

Fig. 16: Current Hartleys view on the Kingia / High Cliff Play

Source: UIL and Hartleys. Licenses continue to change hands. So, for example, UIL is now STX, AWE

now Mitsui, Empire now Mineral Resources etc. For an up to date record of license holders follow these

links;

https://pgr.dmp.wa.gov.au/PGR/Titles/DisplayTitle.aspx?d=XDNv1x6VxXQyGRsORwN86azNxdVRtolD

bEiD9r1IvYU%3D, http://www.dmp.wa.gov.au/Documents/Petroleum/PD-SBD-GEO-102D.pdf.


Page 13 of 49

The depth and thickness of the Kingia/High Cliff formation will likely determine the

ranking of likely leads and prospects and determine which areas are targeted first.

Fig. 17: Depth and thickness of Kingia/High Cliff Formation

Source: DMP and Hartleys.

Fig. 18: HHSS Isopach

Source: STX

While the three major Kingia discoveries to date have recovered gas, there is the

possibility for Kingia oil discoveries to the West of the play (closer to the coast and

potentially offshore).


Page 14 of 49

Fig. 19: Oil and Gas Potential Fairways

Source: MEL

Key Challenge – West Coast Gas Market

A key challenge facing the West Erregulla-2 JV partners will be their ability to sell a

1Tcf volume of gas in the West Australian gas market (at a reasonable price and in

a reasonable time frame). We believe this is the key concern for investors and why

the gas in the ground is being valued so modestly.

Data on the market outlook provided by both WGO and STX have in our opinion

added to these concerns, rather than diminished them. Which was not the intention.

The data clearly shows the market has been oversupplied in recent times, but that

the market will tighten (balance) from 2021 and enter a period of deficit (based on

current supply options) from 2025-26.

Fig. 20: WA Gas Market Outlook as presented by WGO

Source: WGO


Page 15 of 49

However, this deficit (based on flat demand) could be fully met by just 3 LNG projects

at the NWS (assuming they are sanctioned).

Fig. 21: 3 LNG projects could fil l the shortfall

Source: WGO

The Australian Energy Market Operator has recently released their annual review of

the Gas market in WA (2019 Western Australia Gas Statement of Opportunities).

https://www.aemo.com.au/Gas/National-planning-and-forecasting/WA-Gas-

Statement-of-Opportunities

Their conclusion in this addition, is that the market is adequately supplied for the

rest of this decade (to 2029). In 2019, Wheatstone and Pluto added 245 TJ/day of

gas supply capacity to the WA domestic gas market. An additional 126.5 TJ/day of

gas supply capacity is expected to become available by 2021 from an expansion of

the Xyris production facility from 11.5 TJ/day to 20 TJ/day in 2020 and the second

tranche from the Gorgon domestic gas plant (118 TJ/day) in 2021.

Post 2022, prospective supply is forecast from Scarborough (150 TJ/day from 2024)

and Browse (230 TJ/day from 2026).

These ‘likely’ projects if they go ahead are sufficient to meet their forward estimates

of demand.


Page 16 of 49

Fig. 22: AEMO Gas Supply and Demand Outlook

Source: AEMO

These estimates are a key factor underpinning the general view that WA gas prices

will stay ‘lowish’ this decade, and new projects will find it hard to be developed.

Fig. 23: WA Gas Prices – Historical domestic gas contract prices

(A$/GJ, nominal) and ABS PPI

Source: ABS and DMRS

The WA gas market continues to be predominantly supplied by offshore LNG

projects (due to the Government’s 15% gas reservation policy) with historically

around 70% of consumption in the South West Interconnected System (SWIS),

although non-SWIS demand (mining use in the North) is the fastest growing. The

SWIS extends from Kalbarri in the north, Kalgoorlie in the east and Albany in the

south.

WA gas demand is highly concentrated by user and industry. Retail and other small

industrial users make up less than 10% of total consumption. We believe close to

80% of end users (either direct gas or gas fired electricity generation) are in the


Page 17 of 49

mining and minerals processing sectors (Ammonia manufacturing makes up a

further 10-11%).

Fig. 24: WA’s largest gas consumers

Source: GBB 2015

Fig. 25: Snapshot of WA Supply and Demand

Source: gbbwa


Page 18 of 49

Fig. 26: WA Gas Production by Facility

Source: gbbwa

Fig. 27: WA Gas Consumption by Region

Source: gbbwa

The current pessimistic outlook for WA gas prices and Perth Basin gas (as

evidenced by the market valuations of both STX and WGO) is overdone in our

opinion.


Page 19 of 49

Fig. 28: WA Spot Gas Prices

Source: gasTrading

It does not consider the potential for ‘new’ demand to be created as a result of the

access to such a large volume of cheap onshore gas (see below from the AEMO on

what prices could stimulate new demand). Nor the potential for this Perth Basin gas

to displace (directly or indirectly) more expensive current or future offshore supplies.

Fig. 29: Gas price estimates that could result in changes in gas

consumption.

Source: AEMO and GMPs

Figure 30 shows the DMP’s forecast of future demand from 2009 versus what actual

demand occurred due to the lack of reasonably priced gas.

Current actual consumption is 600-700TJ/d lower than they had forecast, mostly

from the mining sector. While a proportion of this is likely explained by overly

optimistic assumptions on new projects etc. by the DMP, we still estimate (based on

diesel consumption growth by the mining sector etc. over the past decade that

realistically somewhere between 200-270TJ/d of potential demand was choked and

failed to materialise because of the lack of available supply.


Page 20 of 49

Fig. 30: Forecast supply and DMP natural gas consumption

(TJ/d)

Source: DMP 2009

Perth Basin gas is obviously, due to its potential low-cost nature and location, highly

competitive with alternative sources of supply (offshore LNG projects) in WA.

Perth Basin gas is the closest supply source for key GPG and R&C demand centres.

Fig. 31: Location of GPG and R&C Demand Nodes in WA

Source: Core Energy & Resources


Page 21 of 49

These two end markets are expected to see price increases for end users going

forward, as recently estimated by Core Energy and Resources.

Fig. 32: Power Generation by Source

Source: gbbwa

Fig. 33: Power Generation by Operator

Source: gbbwa

They estimated that wholesale delivered prices to generators in WA would increase

by almost A$2/GJ between 2021 and 2033, due to a strengthening link with LNG

netback prices.


Page 22 of 49

Fig. 34: WA GPG Gas Price Projections / Neutral Scenario /

A$/GJ real, 01/2018

Source: Core Energy & Resources. Note: Pinjar, Kwinana (all), Cockburn and Neeradup; and Wagerup

and Pinjarra follow same respective price paths.

The following is Core’s estimate of the movement in wholesale delivered prices to

major retail R&C demand nodes.

Fig. 35: R&C Delivered Price Retail Gas Price (WA) / A$/GJ real,

01/2018

Source: Core Energy & Resources

Perth Basin gas given its high well deliverability (from the Kingia especially) and

onshore location, will be a highly flexible source of supply. Easily scalable and

flexible to meet demand requirements.


Page 23 of 49

Fig. 36: West Erregulla development phases to meet demand

Source: WGO

Perth Basin is also close to gas infrastructure.

Fig. 37: Access to infrastructure

Source: WGO

Which currently has ample spare capacity.


Page 24 of 49

Fig. 38: Domestic Gas Production Facility Average Production

and Utilization

Source: gbbwa and EnergyQuest

Major gas pipelines traverse the Basin.

Fig. 39: Oil and Gas Potential Fairways

Source: DMP

Fig. 40: Gas Transmission Pipelines in WA

Source: gbbwa


Page 25 of 49

So, while the WA gas market is currently adequately supplied and will remain

competitive over the coming decade, Perth Basin gas has enormous advantages

over other potential sources of supply. It is low cost, close to market, with flexible

volumes.

Fig. 41: Perth Basin Gas Advantages

Source: STX

This provides it with a multitude of pathways to market.

Fig. 42: Pathways to commercialization

Source: STX

Tax change boosts competitiveness further

In mid-2019, the Treasury Laws Amendment (2019 Petroleum Resource Rent Tax

Reforms No. 1) Act 2019 repealed PRRT for onshore Oil and Gas developments.

This is a potentially significant boost for the Perth Basin gas developments, which

have low capital costs (and hence low potential PRRT tax credits). PRRT was

applied at a rate of 40% to a project’s taxable profit (project income less project

expenditure, project exploration expenditure and exploration expenditure

transferred in from other related PRRT projects. The state royalty is also credited

against PRRT).


Page 26 of 49

This means that the Perth Basin projects will now be subject to state royalty and

federal income tax only. The rate of royalty is normally set at 10% of the wellhead

value for a primary production licence and 12.5% of the wellhead value for a

secondary production licence. The wellhead value is derived by taking the gross

value of petroleum recovered, and deducting all costs incurred between a defined

valve on the Christmas tree and the point of sale. The effective royalty rate post

these deductions tends to be circa 8.5-9.0%.

Federal income tax is levied at 30% of gross income less allowable deductions.

Deductions include exploration costs, development cost depreciation, operating

costs, decommissioning costs, the royalty and PRRT.

EVENTS

Key events for WGO in 2020 include further appraisal on EP469 which will provide

additional information on the scale of the ultimate recoverable resource. Further 3D

on the block will also likely be shot with a view to firming up follow up drillable targets.

WGO retains the right to market their share of the gas independently and there could

be news flow in 2020 regarding potential future gas sales.

WGO hope to complete a native title agreement and farm-in for EPA-0127 in 2020.

The JV is (subject to funding) planning to spud a well at the Tesorillo prospect in

2020.

Fig. 43: WGO Events 2019-2020

Source: WGO and Hartleys

INDUSTRY EXPOSURE WGO is exclusively focused on gas exploration. Their main focus is on the Perth

Basin, were they have had a major conventional gas discovery at West Erregulla-2.

GEOGRAPHIC EXPOSURE WGO is currently focused on conventional gas exploration in WA and Spain.

Exploration in the North Perth Basin has been revitalised by three large gas

discoveries in the Kingia/High Cliff formation.

Other operators in the region include BPT, NWE, MIN, STX, KEY, TEG, PGY, Mitsui

and Jade Energy.

KEY SUPPLIERS & CUSTOMERS Exploring for oil and gas onshore in WA is not without its challenges. Native Title,

environmental, permitting and regulatory (e.g. moratorium on fracking) challenges

exist.

1H19 2H19 1H20 2020 circa 2022

West Erregulla-2

Beharra Springs Deep Success

Independent Resource certif ication

Lockyer Deep-1 w ell drilling EP 368

West Erregulla Appraisal Drilling EP 469

3D Seismic Survey EP 469

Gas marketing EP 469

Spud w ell Tesorillo

Complete native titile and farm-in EPA-0127

Initial Production EP 469


Page 27 of 49

Additional issues in the basin can be the lack of equipment and qualified personnel.

These issues are, however, becoming less of a challenge as drilling activity picks

up and rigs, people and equipment are more readily available in the basin (and at a

more reasonable price).

Once discovered, challenges still exist for oil and gas onshore WA. It can be costly

to process, transport and export oil due to the lack of available infrastructure and

distance from fields to market. However, this has partially been the result of the

relatively small size of oil discoveries in the past.

The WA gas market is also reasonably well supplied with relatively few large

customers dominating the market. As a result, prices are relatively low in a national

context. It can therefore prove a challenge to sell discovered gas in WA in large

volumes and at an acceptable price.

MANAGEMENT, DIRECTORS AND

MAJOR SHAREHOLDERS

WGO have a highly experienced management team with significant ‘skin in the

game’ (equity holding) - Dennis Donald (Co-Founder & MD) 19.9%, Duncan

MacNiven (Co-Founder and Executive Director) 19.9%, Greg Columbus (Non-

executive Chairman 4.8%), Owain Franks (Executive Director) 3.0%, Mark Routh

(Non-executive Director) 2.3%, David Biggs (Non-executive Director) <1% and

David Casey (CEO of Australia and APAC) 1.2%.

Fig. 44: Management Shareholdings as at 21 November 2019

Source: WGO

The Board and Senior management have extensive experience in both the oil and

gas sector and operating in Western Australia.

Greg Columbus (Chairman)

Greg has 15 years’ experience as managing director and main board Director for

Clarke Energy Limited. Prior to Clarke, Greg was the executive General Manger for

AMEC Plc in ANZ for 12 years. In total, Greg has over 30 years business experience

in delivering large complex Oil & Gas projects.

Dennis Donald (Group CEO and MD)


Page 28 of 49

Co-founder of WGO. Dennis began his Oil and Gas career with Shell in the North

Sea in the early 1970’s. He set up a specialist drilling consultancy, Leading Edge

Advantage in 1998 with Duncan MacNiven as legal counsel growing it into a global

brand within 10 years.

Duncan MacNiven (Executive Director)

Co-founder of WGO. Between 1990 and 2002, Duncan worked as outsourced oil

and gas counsel for Pentex Energy and Sibir Energy. In addition to Leading Edge

Advantage, Duncan’s business partnership with Dennis has overseen the

successful sales of Alba Resources to Nautical Petroleum and The Downhole

Consumables Business.

Owain Franks (Executive Director - Finance, Strategy & Delivery)

Owain has been a director of Warrego since 2011, most recently being its Corporate

Development Director and Special Adviser to the Board. Owain was previously a

senior partner in PwC in the UK for 21 years and a former Senior Adviser to the

Board of Dana Petroleum plc and principal adviser to Canamens Energy Limited.

Mark Routh (Non-executive Director)

Mark was Chairman of the Board of Warrego Energy Ltd since October 2010 and

moved to be a non-executive director upon the merger with Petrel Energy. Mark

served as the Chief Executive Officer of AIM listed Independent Oil and Gas Plc

from August 2011 until February 2018 and served as its Chairman from February

2018 until December 2018. He was the Founder and Managing Director of CH4

Energy Ltd from 2002 until 2006, when it was acquired by Venture Production plc.

He served 10 years with Hess in the UK, 6 years with BP in the UK and 5 years with

Schlumberger in South East Asia and the UK.

David Biggs (Non-executive Director)

David was CEO and Managing Director of AWE Limited (AWE.asx). Prior to AWE,

Mr Biggs spent 3 years as CEO of Cue Energy Limited, and before that, almost 20

years with BHP Billiton Petroleum.

Ian Kirkham (CFO and Company Secretary)

Formerly Chief Financial Officer and Company Secretary for Eastern Star Gas

Limited (ESG.asx), the subject of a $924m takeover by Santos Limited (STO.asx).

David Casey (CEO – Australia and Asia Pacific)

Former MD of PRL. Prior to that was MD of Eastern Star Gas Limited and from 2001

to 2005 David was executive director and chief operating officer at Molopo Energy.

Peter Veenhof (EVP – Joint Ventures, Uruguay and Spain)

Peter joined Shell in 1985. In 1998 Peter joined Clyde Petroleum, working on New

Ventures and Exploration. In 2001 Peter became the Exploration Manager for

Conoco and subsequently Wintershall Noordzee and was responsible for a high-

activity portfolio across the UK, NL, Germany and Denmark. In June 2007 he joined

Dyas as New Ventures Manager and became Commercial Manager in 2008 and

CEO in 2009.


Page 29 of 49

RECOMMENDATION & RISKS

INVESTMENT THESIS & RECOMMENDATION WGO has a 50% stake in a World Class onshore gas discovery in the Perth Basin.

The EP469 license also contains a number of follow up leads and prospects, further

3D seismic will likely be required to refine them. WGO seems to have less acreage

in the core of the Kingia/High Cliff play than partner STX (who acquired their position

from UIL), but the frontier Coolcalalaya Sub-basin does seem to offer longer term

potential. WGO’s assets in Spain have potential, near term the key catalyst here will

be whether the Tesorillo prospect is funded and drilled in 2020.

Despite the scale of the discovery (over 500bcf net to WGO in the high quality Kingia

sandstone alone), the market continues to value it highly conservatively (current

WGO market cap is circa $150m) at 20-30c/GJ. This is a sizeable discount to the

approximate 60c/GJ we estimate Mitsui paid for AWE’s stake in Waitsia (a valuation

which we also view as low).

Fig. 45: Valuation of Waitsia vs. West Erregulla

Source: STX

Even at a 60c/GJ acquisition cost, the gas from a Waitsia or West Erregulla style

discovery could be delivered to Perth for circa $3/GJ or the North West for sub

$4/GJ. So, gas valued at this level in the ground or below by the equity market will

undoubtedly attract acquisition interest from a host of WA’s downstream gas users.

WGO has discovered close to 700PJ of gas and is one of only a handful of

companies with acreage exposed to the exciting Kingia/High Cliff play. As such there

is the potential for it to be involved in M&A as other players jostle to gain exposure

to what is fast becoming a World class play.


Page 30 of 49

Fig. 46: Delivered gas prices from West Erregulla

Source: Hartleys

We have modelled our own range of potential future development options. Our base

case assumes production of over 900PJ of gas (gross), with a peak production rate

of 200TJ/d. Assuming an average realised gas price of $5/GJ over the life of the

project, it would still generate close to A$900m of free cash flow net to WGO.

Fig. 47: West Erregulla potential production profile

Source: Hartleys

The value of WGO’s discovery is obviously highly dependent on when, how and at

what price they sell the gas.

Based on a range of scenarios we have run; it is clear that the equity market is

currently valuing the gas using some extremely conservative assumptions.


Page 31 of 49

Fig. 48: Valuation range at differing realized gas prices

Source: Hartleys

This, combined with the obvious appeal of the gas to larger downstream players

(and hence the potential for M&A involving WGO) underpins our positive view on

WGO. There will also be a number of further catalysts in 2020-21 including new

seismic identifying further follow up leads and prospects, the potential for additional

high impact exploration in WA or Spain and progress on securing first gas sales.

Fig. 49: Timetable of Events

\

Source: Hartleys and WGO.

Based primarily on our risked value for EP469 (minus corporate costs) we derive a

12-month forward valuation and target price of 35c per share. Given the upside to

our value, which includes a highly risked value for exploration and only the legacy

PRL value for Spain, and the expected continued positive Kingia/High Cliff news

flow in the basin we initiate coverage of WGO with a Speculative Buy rating.

Fig. 50: Valuation and Price Target

\

Source: Hartleys and WGO.

1H19 2H19 1H20 2020 circa 2022

West Erregulla-2

Beharra Springs Deep Success

Independent Resource certif ication

Lockyer Deep-1 w ell drilling EP 368

West Erregulla Appraisal Drilling EP 469

3D Seismic Survey EP 469

Gas marketing EP 469

Spud w ell Tesorillo

Complete native titile and farm-in EPA-0127

Initial Production EP 469


Page 32 of 49

We believe successful small cap E&P companies have a combination of a

focused, well thought out strategy combined with the competitive advantages

to pursue it and the right management (with incentives aligned with

shareholders) in place to implement it.

Strategy

It is our opinion that smaller resource companies are likely to be more successful if

they have a strategy focused on one particular area or play type. WGO historically

was very narrowly focused on exploring in the North Perth Basin and in one license

in particular. The reverse takeover of PRL has diversified the portfolio, but it remains

predominantly an onshore conventional gas exploration (and soon to be

development) company.

Competitive Advantage

WGO has a long history of operating in the North Perth Basin and has access to

modern seismic data. The Directors and management have extensive experience in

oil and gas exploration and in the Perth Basin.

Management & Alignment

WGO’s Board and management team has been strengthened further in the past

year. Management also have extensive skin in the game as shown earlier, further

aligning their interests with other shareholders.

Overall, we rate WGO well above ‘Average’ (versus our coverage universe) on our

indicative measures of performance. The focused strategy on conventional gas

exploration and the Perth Basin is a positive in our opinion as is the management

teams relevant experience and shareholder alignment.

RISKS WGO like all junior oil and gas explorers is a risky investment. They are likely to drill

further appraisal wells and shoot 3D seismic on EP 469 in 2020 and this will require

funding.

WGO is not a producer and therefore will continue to require third party capital to

pursue its exploration and new venture opportunities (e.g. Spain).

WGO operates in an industry with high regulatory, land access, fiscal and sovereign

risks.

The value of their West Erregulla-2 discovery remains subject to its development

timetable and local gas prices in WA.

Maintaining partner alignment remains important.


Page 33 of 49

Fig. 51: Key assumptions and risks for valuation

Assumption Risk of not realising

assumption

Downside risk to share price if assumption is

incorrect Comment

West Erregulla-2 Development Timetable

High High Our valuation for WGO is largely made up of WGO’s 50% stake in the West Erregulla-2

discovery. This valuation is highly dependent on the eventual development timetable,

production profile and realised gas prices. We believe our assumptions are realistic given our understanding of the WA gas market, but the

range of possible outcomes is wide. In the event that WGO fails to secure gas sales, it is likely to become a takeover target. We also include a highly risked value for future WA

exploration in our 12-month forward valuation, which may prove highly conservative in the

medium given the prospectivity of their acreage.

Funding Risk Medium High Our valuation assumes that the company

raises a further $10m late in 2020. WGO looks like it is well funded for the near term.

However, 2 appraisal wells and further 3D in EP 469 could cost $15-20m (net), which would

require additional funding.

Country Risk Medium High Western Australia ranks favourably versus many other oil and gas producing regions. However, it does have risks, particularly

around land access, native title and environmental approvals. These have

prevented or delayed development/exploration activities in the past. Risks in Spain seem to be

similar.

Supplier and Partner Risk Medium Medium The ability to access equipment and qualified people in WA has on occasion been a

challenge and relatively costly. However, post the recent Kingia successes, rig slots now seem to be available and well costs are

actually likely to fall with an increase in activity. WGO is partially reliant on STX as operator of

EP469 and Prospex Oil and Gas plc (PXOG.lse) for funding of the Tesorillo Project.

JV misalignment remains a risk.

Commodity Price Risk High High The value of any discovery is obviously subject to oil and/or gas prices. Currently the market

seems to be pessimistic on the outlook for WA gas prices, diminishing the value ascribed to

any discovery made.

Conclusion We believe that our $/GJ valuation of the West Erregulla-2 discovery is reasonable (a $5/GJ overall realised

gas price and first sales in late 2021) and our future exploration values are highly risked.



Page 34 of 49

SIMPLE S.W.O.T. TABLE Strengths 50% stake in a world class onshore discovery, with

over 500bcf of net reserves in the high quality Kingia reservoir. Large acreage position exposed to the Kingia/High Cliff play in the North Perth Basin with further leads and prospects in EP469. Extensive experience in the Basin. High quality management team.

Weaknesses Further funding likely required. Reliance on partners Reliance on much larger off takers for gas sales. Key person risk.

Opportunities Ability to sell gas at a much higher value than currently ascribed by the market. Acreage remains underexplored. M&A and consolidation potential in a very exciting play fairway.

Threats Sovereign and regulatory risk. Further weakness in WA gas market. Inability to secure partner alignment. Access to rigs and equipment on good terms.



Page 35 of 49

APPENDIX The Search for the Kingia/High Cliff – It is bigger and goes deeper

than even we thought (and we were bullish!).

We have written extensively over the past couple of years on the potential of the

Kingia/High Cliff Play in the Perth Basin (such as ‘In search of the Kingia/High Cliff

Sandstone’ (19 May 2017) and ‘Change of CEO as Kingia/High Cliff ‘Play’ Heats Up’

(25 July 2017)). The discovery of high-quality reservoir in the Kingia and High Cliff

Sandstones (KHC) at Waitsia revitalised interest in the challenging Perth Basin

(historically just 20 commercial oil and gas fields from circa 360 wells drilled).

Fig. 52: Perth Basin – Discovered Reserves

Source: AWE

Exploration results over the past 60 years in the Perth Basin overall were

disappointing. Despite good to excellent source rocks, since the 1950s over 350

onshore and offshore wells have resulted in just circa 20 commercial oil and gas

discoveries (and most are small and only one offshore).

There are four main petroleum systems in the basin:

1. Permian (e.g. Cliff Head, Whicher Range)

2. Triassic (e.g. Dongara, Erregulla, Mount Horner, and Yardarino)

3. Jurassic (e.g. Walyering)

4. Cretaceous (e.g. offshore Gage Roads-1 non-commercial oil discovery)

The Permian (Late and Early) Plays represent the vast majority of commercial

discoveries in the Basin. The Late Permian dominated up until the late 2000’s with

recent successes more focused on the Early Permian reservoirs. According to work

undertaken by Murphy Oil the average pool size for the Late Permian is 9mmboe

and 33mmboe for the Early Permian. This increased prospect size is one of the

reasons for the renewed interest in exploration in the Basin in recent years.

Given the quality source rocks widespread throughout the Basin, a high proportion

of wells drilled (particularly targeting the Permian reservoirs) encounter

hydrocarbons.


Page 36 of 49

The Late Permian historical ‘technical’ discovery rate is circa 37%. However, as

shown earlier, commercial discoveries have proven much more elusive. Extensive

faulting and uplifting has occurred in the Basin, which has resulted in poor quality

reservoirs and poor trap mechanisms.

Based on a study by Murphy Oil, within the Late Permian play trap failure is the most

common reason for an exploration well failure (48% of the time), reservoir was not

effectively developed in 24% of wells, charge was missing in 16% and non-trap

related seal failure caused 12% of failures. Even when adequate reservoir and

trapping were present, a number of factors including the extensive faulting

throughout the basin resulted in the relatively small pool sizes flagged earlier. Given

the remoteness of the Perth Basin and resulting high costs, this has been another

factor in the low rate of ‘commercial’ success.

Since the late 2000’s the focus of explorers has shifted from the Late to Early

Permian Plays. This is partially the result of the potential for larger discovery sizes.

However, the ‘technical’ success rate in the deeper Early Permian targets has been

a much lower 17%. The causes for failure are varied, but most of the dry holes have

been drilled off structure (highlighting the requirement for 3D seismic, which again

can be punitively expensive in the Basin). The majority of wells also lacked effective

reservoir (poor permeability and/or porosity) and breached traps.

In summary the Perth Basin has always been a very tempting target for exploration

(driven by excellent source rocks) but with some very significant technical and

financial challenges.

Industry interest in the Northern portion of the Basin was revitalised by AWE’s

800PJ+ Waitsia discovery in the Kingia / High Cliff Sandstone.

The Senecio-3 discovery well was drilled in 2013. The Waitsia-1 and Waitsia-2

appraisal wells were drilled in 2015 and the Waitsia-3 and Waitsia-4 wells were

drilled in 2017.

Fig. 53: Permo-Triassic Petroleum System and Plays at Senecio -3

Source: STX Corporate Presentation


Page 37 of 49

Testing of all four wells confirmed the highly productive KHC reservoir. The Waitsia-

4 well tested at an average rate of 89.6Mmscf/d from a 50m interval.

Following the Waitsia-3 and Waitsia-4 results, gross 2P Reserves were increased

by 80% to 820PJ in December 2017. These deeper zones tested (i.e. KHC sands)

in the Waitsia discovery well (Senecio-3) were previously generally discounted by

the industry in the mistaken belief that reservoir quality would be universally poor

below 3000m.

However, the KHC sands in the Waitsia wells exhibited porosity of greater than 11%

and permeability of 10-100+mD. The Waitsia-4 well flowed at an extremely high

90mmscf/d.

Mitsui subsequently acquired AWE’s stake in Waitsia and Beach Energy (BPT)

acquired ORG’s stake through their acquisition of Lattice. These deals likely delayed

follow up exploration by the JV in the Basin until 2019.

On the terraces the existing 3D data is generally of poor quality, with deeper

horizons poorly imaged due to coastal limestones. This has likely also led to a

slowdown in follow up exploration activity. As you shift further East, the quality of 3D

does improve. However, generally the Kingia/High Cliff also becomes deeper.

Fig. 54: Poor 3D over crest of Waitsia



Page 38 of 49

Background on the Kingia / High Cliff Sandstone

The High Cliff Sandstone is an Early Permian sequence of interbedded sandstone,

conglomerate and minor siltstone.

It has been suggested in the past that the High Cliff Sandstone be redefined as a

member unit of the Irwin River Coal Measures, as the contact can be gradational

and the units difficult to distinguish (Le Blanc Smith & Mory 1995; Mory & Iasky

1996).

The High Cliff Sandstone was probably deposited in a delta front environment with

shallow marine, lower deltaic and beach ridge elements (Playford et al. 1976; Baxter

& Lipple 1985; Mory 1995; Mory & Iasky 1996).

The depositional centre for the High Cliff Sandstone appears to be located on the

Allanooka Terrace and Bookara Shelf (Mory & Iasky 1996), and it is thickest upon

the Allanooka Terrace, where the historical maximum intersection of 150m was in

the Mount Horner-1 well (Mory & Iasky 1996). The formation thins to the west onto

the Greenough Shelf and Dongara Terrace.

The High Cliff Sandstone is present across the northern Perth Basin, extending from

the Irwin Terrace west to the Greenough Shelf and Beagle Ridge. It also extends

north on the Coolcalalaya Terrace (van de Graaff et al. 1980) and is present at depth

within the Dandaragan Trough.

The overlying Kingia Sandstone has in the main the same characteristics as the

High Cliff Sandstone. In some locations, it may simply be the top of the High Cliff

Sandstone, in others separated by a narrow shale deposit (the Bit Basher).

Fig. 55: Kingia and High Cliff Sandstone

Source: AWE Corporate Presentation

The Kingia/High Cliff Sandstone was a secondary target for AWE with Senecio-3.

The industry perception was the Early Permian High Cliff Sandstone would not

present good reservoir characteristics at depth.


Page 39 of 49

Waitsia proved that the Kingia/High Cliff deposited on the Northern Perth Terraces

retained excellent porosity down to at least circa 3,500m at this location. The Kingia

Sandstone while water wet deeper at Irwin-1 still showed good reservoir

characteristics.

The following chart shows the porosity versus present day depth based on log

interpretation of the Kingia and High Cliff reservoirs from wells in the Waitsia Field

and surrounding areas.

Post Waitsia and pre-West Erregulla-2, we held the view that the reservoir quality in

the High Cliff would be retained down to 3,500m and perhaps a bit deeper for the

Kingia. This was based on the data available to us at that time.

The Senecio-3 well hit the Kingia Sandstone at 3,153mTVDRT and the High Cliff

Sandstone at 3,192mTVDRT. The Irwin-1 well was drilled to a total depth of 4,049m.

Based on the view that adequate Kingia/High Cliff porosity would be retained only

above 4,000m, would mean that a large portion of the North Perth Basin in the

Dandaragan Trough etc. would likely be too deep to have retained good porosity.

Fig. 56: Porosity versus present-day depth

Source: AWE


Page 40 of 49

Fig. 57: Depth Map Top Kingia Horizon

Source: AWE Corporate Presentation

So back in 2017 we concluded, that based on the information and well results to

date, the good quality Kingia/High Cliff Sandstone might be restricted to the

Terraces of the North Perth Basin.

Fig. 58: Basin Terraces and Troughs

Source: NWE


Page 41 of 49

Another key question for us (and the industry) back in 2017 was whether the Waitsia

discovery was a one-off or part of a broader Kingia/High Cliff Play? We strongly

concluded that it was not a one off and further commercial Kingia/High Cliff

discoveries would be made. The key question then became where?

The Kingia/High Cliff sandstones had been tested previously before Waitsia without

success as outlined by AWE. ‘Exploration for older Permian objectives principally

targeted the High Cliff Sandstone (including the more recently defined Kingia

Sandstone) with more than 20 wells intersecting the formation but without

commercial success. Many of these penetrations had some intervals with good

reservoir quality, and some have flowed hydrocarbons (e.g. Hovea–2), but all occur

at depths less than 3,000 m (Ferdinando et al, 2007). Most of these wells were drilled

on the Beagle Ridge where top seal, cross-fault seal and access to charge are

assessed to be problematic for Early Permian objectives. It was generally assumed

that equivalent sandstones in the deeper parts of the basin would be tight and

therefore not viable as conventional exploration targets.’

An example was the Mountain Bridge-1 well drilled in 1993 just 1km north of the

Arrowsmith accumulation.

Fig. 59: Mountain Bridge 1 well location

Source: Green Rock Energy Ltd


Page 42 of 49

The following is an extract from ‘Geothermal Prospectivity of the Mountain Bridge

Area, North Perth Basin, Australia’, Mark Ballesteros, Green Rock Energy Ltd.

‘The well was drilled in 1993 to a total depth of 3416m. It penetrated 738m of

Permian sediments prior to encountering granitic basement at 3385m. The results

indicated very poor to nil matrix porosities in the lithologies penetrated below 2600m,

with the exception of the Early Permian High Cliff Sandstone’.

Fig. 60: Mountain Bridge-1 Logs


‘Analysis of a conventional core cut through the High Cliff Sandstone (3211.3-

3228.8m) showed poor intergranular porosity (1-8%) with negligible permeability

(average 0.01 mD) but the development of intersecting conjugate open fractures

and a brecciated zone at 3224.4m that resulted in good fracture porosity and

permeability (Sagasco, 1993). Importantly, an open hole drill stem test (DST 2a) run

over the interval 3185m-3235m flowed gas-cut water at an estimated rate of 2000-

3000 bpd with 200-250 Mcfd of gas, thus confirming the presence of significant

permeability associated with the fracture system.

For further reading on this subject we would suggest – ‘Sedimentology and

Diagenesis of Potential Permian Reservoir Sandstones, North Perth Basin, Western

Australia’. Jeff Burgess B.Sc. November 1993. Plus, ‘Illite/smectite clays preserving

porosity at depth in Lower Permian reservoirs, northern Perth Basin’, Darren

Ferdinando, January 2007.


Page 43 of 49

Fig. 61: Seismic line through the Mountain Bridge-1 well


So back in 2017, having reviewed historical well data, depth charts, company and

acreage releases etc. we very roughly drew on the following map (in yellow) the

‘onshore’ area we believed was most likely prospective for the Kingia/High Cliff Play,

our Kingia/High Cliff ‘Kookaburra’.


Page 44 of 49

Fig. 62: 2017 - Location of Kingia/High Cliff Sandstone at

suitable depths

Source: UIL Corporate Presentation and Hartleys Research, 2017


Page 45 of 49

We were too conservative. West Erregulla-2 proved that the good

quality reservoir goes much deeper, materially extending the

play fairway

We did start to question whether the Kingia/High Cliff play could go deeper when

AWE and ORG were awarded the EP320 license on a five-year term in 2016. Post

the success at Waitsia, this license was obviously believed to be prospective for the

Kingia/High Cliff. This JV had committed to shoot 100km2 of 3D seismic on the

license. The location of the Trieste 3D Seismic survey when announced also did

intrigue us. It was located right on the Eastern boundary of the license, overflowing

into UIL’s (now STX’s) acreage to the East. Along with the announcement that the

JV (now BPT and Mitsui) would drill the Beharra Springs Deep well (Kingia at depths

greater than 4,000m) strongly suggested that the technical teams that discovered

Waitsia might believe that the reservoir quality will not be an issue at these deeper

depths.

Fig. 63: Location of Trieste 3D Seismic and Beharra Springs

Deep

Source: BPT Corporate Presentation


Page 46 of 49

The subsequent success at Beharra Springs Deep and West Erregulla-2 at a depth

of 5,200m obviously proved them right. So how has the good reservoir quality been

retained at such depths?

AWE has presented previously that good quality Kingia / High Cliff reservoir is

diagenetically controlled. See ‘Waitsia – A new onshore gas resource for Western

Australia’. Suzanne Hunt, GM WA Assets and Engineering, DMIRS Petroleum Day

15th September 2017.

For further reading on this subject we would suggest –

Assessing the diagenesis of northern Perth Basin Permian sandstone reservoirs

using HyLogger spectral data’, WA DMP.

http://dmp.wa.gov.au/Documents/Petroleum/REC-OA-108D.pdf

The potential retention of good quality reservoir at depth in the North Perth basin is

obviously not unique. We recommend the following articles on the subject – notable

exceptions are the Norphlet sandstones of Gulf of Mexico and Garn sandstones of

Kristin field, Norway, where the reservoir quality is preserved with high burial depths.

For instance, the Norphlet sandstone has a burial depth deeper than 6,000m and

temperature up to 215 °C with porosity greater than 20%, whereas the Garn

sandstone has a burial depth between 4,500m and 5,000 m with porosity values

ranging from 18% to 20%.

https://www.sciencedirect.com/science/article/pii/S2405656116300852

https://link.springer.com/chapter/10.1007/978-1-4613-8988-0_10

The presence of clay coatings holds the key.

Fig. 64: High Perm. Vs Low Perm. Sandstone Comparison

Source: AWE

https://www.sciencedirect.com/science/article/pii/S2405656116300852

https://link.springer.com/chapter/10.1007/978-1-4613-8988-0_10


Page 47 of 49

Clays (containing illite and chlorite which are antidiagenetic in nature) deposited at

the time of burial have the potential to preserve porosity at depth. A chlorite clay

coating can protect the quartz grains from diagenesis and maintains porosity during

burial. The clay coating prevents quartz overgrowths from filling and reducing

intergranular porosity during diagenesis.

Fig. 65: Clay Coating can maintain porosity


Even prior to Waitsia, cores taken from the High Cliff Sandstones had shown the

addition of clays and resulting porosity preservation (Corybas-1 well, Ferdinando

2007, see earlier).

Fig. 66: Kingia / High Cliff Depositional Environment


In conclusion, we were correct back in 2017 to assume that further deep

Kingia/High Cliff discoveries would be made. But our assumption that they

would be restricted to 4,000m or less was simply too conservative. The


Page 48 of 49

prospective proven play fairway now (as shown earlier in Figure 16 and below)

is even more extensive and more discoveries will almost certainly follow.

Fig. 67: CURRENT - The Kingia / High Cliff Play

Source: UIL and Hartleys. Licenses continue to change hands. So, for example, UIL is now STX, AWE

now Mitsui, Empire now Mineral Resources etc. For an up to date record of the license holders follow

these links;

https://pgr.dmp.wa.gov.au/PGR/Titles/DisplayTitle.aspx?d=XDNv1x6VxXQyGRsORwN86azNxdVRtolD

bEiD9r1IvYU%3D, http://www.dmp.wa.gov.au/Documents/Petroleum/PD-SBD-GEO-102D.pdf

Page 49 of 49

HARTLEYS CORPORATE DIRECTORY Research Trent Barnett Head of Research +61 8 9268 3052

Mike Millikan Resources Analyst +61 8 9268 2805

John Macdonald Resources Analyst +61 8 9268 3020

Paul Howard Resources Analyst +61 8 9268 3045

Aiden Bradley Research Analyst +61 8 9268 2876

Oliver Stevens Research Analyst +61 8 9268 2879

Michael Scantlebury Associate Analyst +61 8 9268 2837

Janine Bell Research Assistant +61 8 9268 2831

Corporate Finance Dale Bryan Director & Head of

Corp Fin.

+61 8 9268 2829

Richard Simpson Director +61 8 9268 2824

Ben Crossing Director +61 8 9268 3047

Ben Wale Director +61 8 9268 3055

Stephen Kite Director +61 8 9268 3050

Scott Weir Director +61 8 9268 2821

Scott Stephens Associate Director +61 8 9268 2819

Rhys Simpson Associate Director +61 8 9268 2851

Michael Brown Executive +61 8 9268 2822

Registered Office

Level 6, 141 St Georges Tce Postal Address:

Perth WA 6000 GPO Box 2777

Australia Perth WA 6001

PH:+61 8 9268 2888 FX: +61 8 9268 2800

www.hartleys.com.au [email protected]

Note: personal email addresses of company employees are structured

in the following manner: [email protected]

Hartleys Recommendation Categories

Buy Share price appreciation anticipated.

Accumulate Share price appreciation anticipated but the risk/reward is

not as attractive as a “Buy”. Alternatively, for the share

price to rise it may be contingent on the outcome of an

uncertain or distant event. Analyst will often indicate a

price level at which it may become a “Buy”.

Neutral Take no action. Upside & downside risk/reward is evenly

balanced.

Reduce /

Take profits

It is anticipated to be unlikely that there will be gains over

the investment time horizon but there is a possibility of

some price weakness over that period.

Sell Significant price depreciation anticipated.

No Rating No recommendation.

Speculative

Buy

Share price could be volatile. While it is anticipated that,

on a risk/reward basis, an investment is attractive, there

is at least one identifiable risk that has a meaningful

possibility of occurring, which, if it did occur, could lead to

significant share price reduction. Consequently, the

investment is considered high risk.

Institutional Sales Carrick Ryan +61 8 9268 2864

Justin Stewart +61 8 9268 3062

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Shane Lehmann +61 8 9268 2897

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David Michael +61 8 9268 2835

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Chris Munro +61 8 9268 2858

Michael Munro +61 8 9268 2820

Ian Parker +61 8 9268 2810

Matthew Parker +61 8 9268 2826

Charlie Ransom

(CEO)

+61 8 9268 2868

Heath Ryan +61 8 9268 3053

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Disclaimer/Disclosure

The author of this publication, Hartleys Limited ABN 33 104 195 057 (“Hartleys”), its Directors and their Associates from time to time may hold

shares in the security/securities mentioned in this Research document and therefore may benefit from any increase in the price of those securities.

Hartleys and its Advisers may earn brokerage, fees, commissions, other benefits or advantages as a result of a transaction arising from any advice

mentioned in publications to clients.

Any financial product advice contained in this document is unsolicited general information only. Do not act on this advice without first consulting

your investment adviser to determine whether the advice is appropriate for your investment objectives, financial situation and particular needs.

Hartleys believes that any information or advice (including any financial product advice) contained in this document is accurate when issued.

Hartleys however, does not warrant its accuracy or reliability. Hartleys, its officers, agents and employees exclude all liability whatsoever, in

negligence or otherwise, for any loss or damage relating to this document to the full extent permitted by law.