Some management theories warn against putting all your eggs in one basket, while others strongly suggest that domination of your chosen market is just the ticket. Arc Energy has taken option two, and successfully secured its status as the key player in the Perth Basin – exposing itself to the fast-growing Western Australian gas market, and a hydrocarbon province that keeps revealing hidden secrets.
Over the past few years, Arc has orchestrated a wave of discoveries and deals, which have put its corporate foot on most of the infrastructure and tenement assets in a region which features historic gas and oil facilities, plus new onshore and offshore production resulting from a fresh interpretation of petroleum genesis and structural settings.
The benefits of being a specialist came through in the full-year results when high oil prices saw Arc generate record revenue of $106 million and operating cash flow of $74 million from the production of over 1.5 million barrels of oil equivalent, despite a temporary setback from the Jingemia oilfield.
“We’re undoubtedly being aided by the high world oil price,” said Arc’s managing director Eric Streitberg. “But we also now have a depth and diversity of capacity to handle short-lived problems like Jingemia.”
In fact, the shutdown of Jingemia was out of Arc’s control because the field had another operator, and was probably unnecessary because the cause was a delay in installing an artificial lift system. Whatever the reason for the loss of Jingemia production, the point being made by Streitberg was that Arc was able to ride out the lost output.
The key word in the Jingemia example is control. At Arc, Streitberg and his team have built a business in which control over infrastructure (pipelines and processing facilities) is critical. In the oil business that means holding the management reins as project operator rather than simply being an investor.
“Arc’s plan has been all about controlling upstream production in the Perth Basin,” Streitberg said.
“If you look at how we will evolve in the future it is by controlling infrastructure which gives us the production flexibility we require, by continuing to grow corporately, as seen in the latest deal with Voyager Energy, and through our association with Adelphi Energy.”
Arc’s merger with Voyager is really a takeover that will increase Arc’s onshore Perth Basin asset base while also giving the company stakes in offshore Perth Basin discoveries and prospects, including the Cliff Head oil field.
Adelphi is Arc’s ‘little brother’. A separate company in which Arc has a major stake, Adelphi gives Arc exposure to high reward prospects outside the Perth Basin. Adelphi has stakes in Timor Sea, Texas and Yemen blocks.
Investors have steadily warmed to the Arc story because of its expertise in the field, and from its deal-making capacity, which has seen a string of moves with companies such as Hardman, AWE, Petro Energy, and now Voyager and APT, all aimed at boosting Perth Basin control. From a 12-month share price low of 94c, the stock has more recently been trading above the $2 mark, a price that values the business at more than $400 million. This is a far cry from a few years ago when Arc was seen as a late arrival in a region of Australia that had been well and truly picked over – not to mention drilled out.
In those dark days the Arc share price almost slipped off the stock exchange quote sheet – that was until a string of fresh discoveries, plus the re-working of old gas fields, restored life.
Today, Arc controls a string of producing assets in an area around Dongara (site of WA’s original big gas discovery). The asset list looks like this:
* Production Licenses L1 and L2, 50% to Arc plus operator status, and containing the Hovea and Eremia oilfields and the Xyris gas field. During the June quarter the Hovea Production Facility produced at an average rate of 6298 barrels a day, and as at June 30 the facility had produced more than five million barrels of oil from both the Hovea and Eremia fields. Average production from Xyris in the June quarter was 4.89 terajoules a day. A series of wells are connected to the Xyris Gas Gathering System with Arc selling gas to a number of customers including the recently signed government utility Western Power.
* Dongara Gas Fields (also in L1/L2), 100% to Arc. This historic field continues to yield development targets after 40 years of production under different owners. In the June quarter the field produced at an average of 11.27TJ a day and is forecast to produce at a rate of over 9TJ a day for the current financial year.
* Jingemia Oilfield (L14 area), 44.14% to Arc. Operated by Origin Energy, with work-overs underway on Jingemia No. 1 and No. 4 wells. In the June quarter, Arc’s share of production averaged 641 barrels of oil a day. Recent development drilling should lead to a major increase in production in the last quarter of the year.
* Beharra Springs (L11), 33% to Arc. Another Origin operated asset that is producing at an average rate of 6.3TJ per day, and will be boosted when the Tarantula No. 1 well is tied in, in September 2005.
* Woodada (L4/L5), 100% to Arc. Producing at 2.25TJpd.
* Mt Horner (L7), 100% to Arc. Producing at just seven barrels a day.
In the June quarter, Arc’s net share of oil production was 347,746 barrels, and 1642TJ of gas – for the oil equivalent output of 616,377 barrels (6733 per day).
But of greater importance than the production figures, which led to an after tax profit of $41 million for the 2004-05 year, is the busy drilling campaign currently unfolding. Streitberg said at least 30 wells were scheduled over the next 12 months, with several following up a major three-dimensional seismic shoot.
In the area regarded as its backyard, there is much more to learn from the Denison 3D, including the drilling of prospects that stand out as being from one million barrel targets, up to some similar in size to Hovea/Jingemia, around 5-10 million barrels.
Gas is also a significant target for Arc, with the recently drilled Tarantula and Elegans wells adding to future production capacity and showing how the Perth Basin continues to reveal new hydrocarbon plays.
Having taken several steps to take in expanding its production base in the Perth Basin, Arc is starting to look further afield, according to Streitberg.
“We’re looking at two principal areas to manage our growth options,” he says.
“We want to step up exploration – though we are at a limit of what we can do operationally with a full-time drilling program and intensive 3D seismic surveys – and we now also want to increase our equity levels in the offshore blocks of the Perth Basin that we acquired through the Voyager merger.
“As well, we’re evaluating opportunities outside the Perth Basin, but sticking to our preference of large equity stakes and operatorship in areas that have good infrastructure. We now have the cash flow and balance sheet strength to accelerate the growth of the business.”
*This profile, first published in a different form in ResourceStocks, was commissioned by Arc Energy
Arc Energy …at a glance
HEAD OFFICE
Level 4, 679 Murray Street
West Perth, WA 6005
Ph: +61 8 9486 7333
Fax: +61 8 9486 7322
Email: arc@arcenergy.com.au
Web: www.arcenergy.com.au
DIRECTORS
David Griffiths (chairman), Mike Harding, Emma Stein, Alex Forcke, Eric Streitberg
MARKET CAPITALISATION
$404 million (at press time)
MAJOR SHAREHOLDERS
ANZ Nominees 9.04%
National Nominees 5.38%
JP Morgan Nominees 5.1%
