ADX Energy (ASX: ADX): Welchau is about oil rather than gas: perhaps smaller but higher value boe

• Welchau is now interpreted as a light oil rather than a gas condensate discovery based on detailed analysis of samples recovered from the well and other well data. While this means that the energy equivalent hydrocarbon volumes may be smaller than the original pre-drill estimates, onshore oil can be more valuable than gas to a small company due to the ability to produce and progressively develop a field without having to first prove up sufficient reserves to underwrite a pipeline and secure a gas contract.
• Welchau is estimated to hold 90-95% oil and the production from Welchau-1 could be trucked to a point of sale or to ADX’s existing 3,000 bbl/d Anshof facility for processing when stable flows can be established.
• Welchau is now estimated to hold low, best and high case prospective resource estimates of 12 mmboe. 46 mmboe and 217 mmboe with a mean case estimate of 85 mmboe. This compares with 35-272 mmboe (minimum to maximum) with a best case of 134 mmboe estimated before drilling. The results of the well testing (due to commence in October) will narrow that range. It should be noted that the Welchau well was still encountering hydrocarbon shows down to the current well TD so deeper potential exists.
• The probabilistic estimation of Welchau prospective resources was based on a range of (1) oil-water contact depths (estimated by ADX) and (2) fracture porosity from well data as well as statistical data for comparable reservoirs. The resources estimates assume no contribution from matrix production which offers upside. Welchau is now interpreted not to be connected with Molln.
• We reiterate our target price of A$0.75/sh that reflects the lower volume estimates, offset by the higher value per boe.

Next steps at Welchau-1
Welchau-1 will be tested from October to March. The key reservoirs are Steinalm and Relfing, holding ~80% of the resources. In each test the well may be acidised to optimise well performance. In case of success and with appropriate permitting, ADX could either produce from Welchau-1 as a longer-term producer, extend it by 500–1000 m to assess deeper exploration potential or drill a horizontal sidetrack to assess the production and reserves potential of a high angle well designed to optimize recovery from fractures.

Valuation
Our new ReNAV is A$0.74/sh. Our starting point for the value of a bbl of oil at Welchau is the same as for Anshof. We are then assuming a three-year lag with a 10% discount rate, resulting in a value of US$8.5/boe; which is higher than our previous estimate of ~US$4/boe.