Pancontinental Oil & Gas NL : Stock Analysis – Pancontinental Oil & Gas NL 2017

Written under AFSL: 259730

30 August 2017

Issue 31, Volume 14

Hot Links In this Issue By Peter Strachan

PCL

Strengthened and rejuvenated following acquisition of Bombora . . .

Market Moves WA gold royalty payments under a cloud Xanadu drilling imminent

Page 2

Drill holes of the week Three's a crowd? Not when it relates to drilling results . . .

Page 10

Pancontinental Oil & Gas Active 14 months of funded drilling

Drill holes of the week Millennium surprise

Apollo to the moon

Doray's Da Vinci is genius

Indices and Prices
All Ordinaries	5,747.90
Energy Index	9,283.90
Brent AU$/bbl	64.8559
AUS$/US$	0.7947
Live Gold/AU$	1,648.84
As at close 29 August 2017

1750

1700

1650

1600

1550

Mar-17

Apr-17

May-17

Jun-17

Aug-17

1500

Gold Live AU$

Market Moves

WA gold miners are likely to be slugged with an extra $12 per ounce on State royalties, lifting costs and reducing profits by about $8 per ounce after an offsetting deduction from profit before taxation.

Producers such as Northern Star (NST) and Doray Minerals (DRM), along with developers and exporters such as Gold Road (GOR) and Capricorn Metals (CMM) have been feeling market pressure on their share prices in the run up to WA's budget announcement. Since the State only gets back from the Federal treasury about 36% of the GST revenue it generates, WA's new Premier is in a desperate search for cost savings and additional revenue. Like all governments, they tax almost anything that moves, so the gold industry is an excellent target for a lift in royalty rate from 2.5% to 3.2%.

Jul-17

All Ordinaries

S&P ASX 200 Energy Index

Brent Crude Oil $AU/barrel AU$/US$

6,000

5,950

5,900

5,850

5,800

5,750

9,850

9,650

9,450

9,250

9,050

8,850

80 0.81

0.80

750.79

700.78

0.77

650.76

Mar-17

Apr-17

May-17

Jun-17

Jul-17

Aug-17

Mar-17

Apr-17

May-17

Jun-17

Jul-17

Aug-17

Mar-17

Apr-17

May-17

Jun-17

Jul-17

Aug-17

Mar-17

Apr-17

May-17

Jun-17

Jul-17

Aug-17

0.75

5,700	8,650	60	0.74
5,650	8,450	55	0.73

Drilling on the much anticipated Xanadu oil exploration well is due to get underway on 5 September. StockAnalysis has previously stated that an announced target of 160 million barrels of recoverable oil seems to be most unlikely. More conservatively, StockAnalysis values a discovery of 5 million barrels to be worth

13.5 cps to Triangle Energy's (TEG) 30% working interest, 1.3 cps to Whitebark Energy's (WBE) 15% interest and 0.5 cents per share to Norwest's (NWE) 25% retained interest.

Access to Triangle's nearby Arrowsmith oil processing facility would enable any discovery to be rapidly brought into production.

Pancontinental Oil & Gas NL

Capital Structure-PCL
No of shares	5,262	m.
Options	494.6	Av 0.5 cts
5,756
Share price	0.25	cts
Market Cap	$ 13	m
Cash (est)	$ 1.0	m.

Recommendation: Based on expectation of participation in three fully funded, high impact exploration and appraisal wells over the coming

14 months, Pancontinental Oil & Gas is a speculative buy.

StockAnalysis assesses a risked value of $64 million or 1.1 cent per share for the company's Californian and Namibian drill targets.

StockAnalysis estimates an upside valuation for success of $163 million or 2.7 cents per share at the company's currently drilling and upcoming high impact gas exploration and appraisal wells in California, which are due to be completed by the end of 2017. Each project area holds significant, follow-on exploration potential.

In Namibia, where Pancontinental is set to participate with a 30% free carried interest in drilling on a major oil exploration target during H2-2018, StockAnalysis estimates that discovery of 124 mmbbls would be worth over 3 cps to Pancontinental.

Summary

Pancontinental Oil & Gas has been strengthened and rejuvenated following its acquisition of Bombora Natural Energy Ltd. Injection of $2 million of new equity and the addition of two new technical Directors brings significant petroleum industry experience to the company along with the financial flexibility required to deliver on exploration promise.

Former CEO Barry Rushworth and Finance Director Ernest Myers maintain continuity and protect the company's exploration interests in Africa.

David Kennedy	Non-Executive Chairman
John Begg	Executive Director & CEO
Marie Malaxos	Non-Executive Director
Ernest Myers	Non-Executive Director
Barry Rushworth	Non-Executive Director

Bombora's assets brought additional technical management to the company along with high impact exposure to material gas prospects in the Northern Sacramento Basin as well as some lower profile Perth Basin gas project interest.

 Pancontinental has a 10% WI at the Dempsey 1-15 well which is currently drilling ahead towards a depth of ~3,200 metres, targeting up to 1 Tcf of gas in a 4-way dip structure. Four gas filled sand units with original pressures have been discovered above 1,650 metres and further strong gas shows have been seen as the well passes 2,000 metres as it drills on to test at least five deeper sand units, with potential to hold between 100 and 300 Bcf of recoverable gas each.

 During the December '17 quarter, Pancontinental will commence a farming programme to earn an effective 13.3% interest at the Tulainyo gas discovery. The company will participate in the Tulainyo-2 appraisal well which will twin a nearby discovery hole to a depth of ~1,700 metres. The Tulainyo structure has potential to yield over 2.5 Tcf of gas from up-thrust sediments in an anticline structure.

 By the end of CY 2017 the operator of Namibian permit PEL-37 will select one of four defined prospects for drilling, where total estimated Prospective Resources amount to over 900 mmbbls. Pancontinental will be free carried through drilling on a target of over 100 mmbbls of oil, which is likely to be undertaken during H2 '18. The recent farm-in to the licence by Indian oil company ONGC Videsh provides technical endorsement for the Block and will speed drilling activity in 2018.

 StockAnalysis estimates a ris ked value of $47 million for Pancontinental's interests in three upcoming exploration and appraisal programmes and finds a value for discovery of ~$317 million, both of which compare favourably with the company's current market capitalisation of $13 million.

The company has over 5.2 billion shares on issue, creating some market inertia at a price of just 0.25 cents per share. Expected technical success will require additional funding, which could be achieved by monetising some assets.

Valuation

Risked exploration valuation matrix

WI			Target				Success		POS	Cost	Risked
Prospect	%	%	Gas	Oil	ISV A$		Value	PCL	%	$m	Value
rtn			Bcf	mmbbl	Gas	Oil	$m	cts/shr	$m.
Dempsey	10%	10%	300	0	$ 0.89	$ 12	$ 27	0.44	25%	2.0	5
Dempsey shallow	10%	10%	3	0	$ 0.89	$ 12	$ 0	0.00	90%	0.0	0
Dempsey upside	10%	10%	800	0	$ 0.89	$ 12	$ 71	1.17	12%	2.5	6
Dempsey Trend one	10%	10%	500	0	$ 0.89	$ 12	$ 44	0.73	12%	4.5	1
Dempsey Trend	10%	5%	2,000	0	$ 0.89	$ 12	$ 89	1.46	12%	0.0	11
Alvares	15%	15%	560	0	$ 0.89	$ 12	$ 74	1.23	25%	1	17
Risked Sacramanto	10%	5%	1,500	1	$ 0.89	$ 12	$ 67	1.11	6%	3	1
Tulainyo	13.3%	13.3%	510	1	$ 0.89	$ 12	$ 62	1.02	35%	4	18
Tulainyo upside	13.3%	6.7%	1,990	1	$ 0.89	$ 13	$118	1.95	14%	6	11
Cormorant EL-37	30%	30%	-	124	$ 1.14	$ 6	$223	3.68	22%	25	24
Namibia EL-37	30%	9%	-	750	$ 1.14	$ 8	$540	8.91	4%	15	7
Kenya	20%	4%	100	100	$ 1.14	$ 6	$ 29	0.47	12%	3	0

Source: Strachan Corporate: ISV = Insitu value per Mcf or bbl

StockAnalysis breaks down each exploration project into separate components, choosing an achievable, initial target Resource with known and unknown final working interests on subsequent up-side. Retained (rtn) working interests are assigned after assumptions on further farm-out to fund decisions and insitu values for oil and gas are estimated based on location, fiscal terms and expected reservoir qualities.

Asset	Value	Risked	Success	Comment
	$m	cts/shr
Cash (est Sep '17)	1	0.0	0.0
Option exercise	2	0.0	0.0	Not ITM
Corporate	(5)	(0.1)	(0.1)	NPV
Est new equity	2	0 .0	0 .0	at market
Sub-total	0	0.0	0.0
Risked Imminent Exploration
Dempsey	5	0.1	0.4	10% of 300 Bcf
Tulainyo	18	0.3	1.0	13.3% of 510 Bcf
Alvares	17	0.3	1.2	15% of 560 Bcf
PEL-37	24	0 .4	3 .7	30% of 124 mmbbls
Sub-total	64	1 .1	6 .4
Regional exploration upside
California	29	0.5	6.4	farmed down
Namibia	7	0.1	8.9	9% retained
Kenya	0	0.0	0.5	No value
Perth Basin	1	0 .0	0 .2	nominal
1 01	1 .7	2 2 .4
Source: Strachan Corporate

Modelling by StockAnalysis of Californian gas with an initial production of 5 mmcuft per day and the current Californian gas price of US$3.4/mmBtu, indicates an after tax value of US70 cents per Gj of gas insitu, or A$0.89/Gj. Longer term, StockAnalysis believes that US gas prices will rise as exports of LNG ramp up, but gas production fails to keep pace. On this basis, StockAnalysis concludes that A$0.89/Gj will prove to be conservative and a value of A$1/Gj is likely to seem conservative within a

two year timeframe.

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For the purposes of valuation, StockAnalysis adds $2 million of additional equity at the current market price and dilutes for the exercise of options that are currently out of the money.

Imminent exploration programmes are estimated to hold a risked value of $64 million or

1.1 cent per share with success at Dempsey, Tulainyo, Alvares and PEL-37 estimated to hold an upside valuation of $392 million or 6.4 cents per share on a diluted basis.

Gas sands intersected above 2,000 m at Dempsey . . . reduces financial risk

Large gas targets

Reinterpretation of data outlines possible gas

Additional risked value is added for more distant exploration targets on all project areas.

Sacramento Basin - Earning 10% - 15%

The company has farmed-in on the Dempsey trend in the Northern Sacramento Basin, earning a 10% WI on the Dempsey 1-15 well by contributing $2.1 million to drilling costs.

Operator Sacgasco estimates potential for discovery of ~1 Tcf in several horizons at depths between 1,600 and 3,200 metres at the Dempsey prospect. Drilling to date at this target has identified several shallow gas bearing sands where strong gas shows while drilling, combined with recent electric logging of the upper section of the well indicates potential for recoverable gas.

Pancontinental has contributed ~20% of estimated dry-hole drilling costs at Dempsey and will contribute at is 10% working interest towards completion and testing costs. Additionally, Pancontinental has earned a 10-15% interest in follow-up Dempsey trend prospects on a heads-up basis. The Dempsey 1-15 well has an expected dry-hole cost of US$3.8 million. Drilling is likely to run through until early September.

At the Alvares prospect, where the operator Sacgasco estimates a ~1.6 Tcf target, Pancontinental can earn up to a 15% working interest and the company can earn an effective 13.3% interest at the Tulainyo gas discovery by funding appraisal drilling.

Forgotten Sacramento Basin

It is often said that the best place to find petroleum is where it has already been discovered. Very often, large fields lie hidden for decades before a change in geological interpretation, technology or pure luck results in a new and massive discovery in an area that had previously been thought to have been well picked over and explored.

An excellent example is the recent discovery of a very large gas field at Waitsia in the Perth Basin by AWE and Origin Energy, more than 50 years after the first gas was found in this Basin. Here, reinterpretation of geological and geophysical data, plus new technology and a lot of luck, led to what is now looking like a field of over 700 Bcf of gas, right next to a transport pipeline!

The Sacramento Basin sits inland from San Francisco and runs northwards towards Oregon State. The basin has produced over 11 Tcf of gas from prolific sandstone reservoirs, mostly exploited from the centre of the Basin.

In recent times the industry has focused on oil production from the south of the State and there has been very little exploration in the region since the mid 1980's.

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