Investors warm to Amity�s Turkish delights: part 1

A pleasing mix of positives is helping change market sentiment towards emerging gas producer Amity Oil.
Investors warm to Amity’s Turkish delights: part 1 Investors warm to Amity’s Turkish delights: part 1 Investors warm to Amity’s Turkish delights: part 1 Investors warm to Amity’s Turkish delights: part 1 Investors warm to Amity’s Turkish delights: part 1

Cash in the bank, zero debt, rising gas production, a 10-well drilling program for 2003 and more targets being generated -- what else does a petroleum explorer want? In a word, recognition. In the case of Amity Oil, that recognition is as much deserved as it is overdue. No Australian oil and gas explorer has a prospective growth profile to rival Amity. The only problem is that much of the company’s future lies in Turkey, a country unfamiliar to Australian investors.

Dispelling Turkish uncertainties is a slow-moving assignment for Amity’s management. But, as the fog of a foreign location, language and law is lifted, so too is the share price. Over the past four months Amity has been a star performer, more than doubling from a low of 39c on October 22 to around 90c in May, almost certainly on the way back to the 12-month high of $1.08, and then up to the all time high of $1.60 set in 1996.

Fuelling the sharp share price recovery is the first indication that some investors are developing a comfort level with the company and the country, and are starting to appreciate the cash, both the $16 million in the bank, and the forecast of future sales revenue of up to $33 million next financial year.

“We are certainly starting to deliver on what we promised,” said Amity chairman, Tony Barton. “But, it is requiring a careful education process, and that hasn’t always been easy. We’ve had some internal issues to work through, and Turkey is an unknown to Australians. But anyone who looked carefully would see that we have made remarkable progress in a very short time.”

He’s right. Amity’s Turkish adventure is relatively new, and much has been achieved. The company did not enter the country until early 2000 when it was granted its first exploration licence in the Thrace Basin of western (or European) Turkey. By October 2000, a few months after starting work, the Gocerler (pronounced Go-chell-er) gasfield had been discovered in a permit held on a 50:50 basis with Turkish Petroleum Corporation (TPAO), an energy arm of the Turkish Government. First commercial gas was produced from Gocerler in early 2002, just 16 months from the discovery date.

The speed of development says much. First, that it is easy to find and develop oil and gas in Turkey, a country with excellent geology for hydrocarbon discoveries but largely ignored by the oil majors. Second, that the government is more than friendly, it is positively encouraging exploration and development. Third, that gas in Turkey attracts premium pricing. At about US$4.70 per thousand cubic feet, the price is close to three-times the price in Australia, a comment on the thirst of a market which is 70 million strong, heavily industrialised, fast-growing, keen to join the European Union, and heavily reliant on imported gas.

“Revenue is flowing strongly from Gocerler,” said Barton. “We’re currently producing at around 12 million cubic feet a day, increasing to 18mcf/day early February, whilst installing additional permanent capacity to lift to 30 million by the end of March. With the exploration work underway in the Gocerler region there is every chance of production continuing to rise for several years.”

As a guide to the business-side of Gocerler, Barton used this example in a December 31 note to shareholders. “At an average production rate of 10mcf/day, Amity’s estimated 12-month earnings (before interest, tax, depreciation, amortisation and further exploration expenses) would be in the order of $8 million,” Barton wrote. In fact, production is forecast to average 18mcf/day in the first half of 2003, and rise much higher as new wells, including the 1450m-deep Gocerler No.4 and No.5, test the potential of the field which may be one of several look-alike structures along a trend stretching east of Istanbul and well serviced by gas pipelines and other infrastructure.

Forecasting future sales, profits and dividends is all but impossible for a company in the early stages of developing a gasfield and on the verge of discovering more. It is a moveable feast, almost on a daily basis. However, as a guide, the Melbourne stockbroking firm of Burdett Buckeridge Young took a stab last year in predicting that Amity would move from a loss of $6.8 million in the year ended June 30, 2002, to a net profit of $6.7 million this year, and then up to $12.8 million in 2003/04, and $15.5 million in 2004/05.

It is the combination of geology, industrial demand for gas, high prices, and government encouragement which is underpinning Amity’s work in Turkey, which has spread out from the original Thrace Basin permits to include interests in permits in four other sedimentary basins in central and southern Turkey. The first 2D seismic has just been shot in the Adana-Iskenderan Basin and preliminary studies are underway on the Antalya, Haymana-Polatli and Cankiri Basins. But those areas, and Amity’s remaining exploration assets in Australia are playing second fiddle to what is happening around Gocerler and in the wider Thrace Basin. This is Amity’s engine-room, and the area shaping as the company-maker.

More in Part 2.