Overview: Sun Resources NL (“Sun Resources”, “Sun”, “the Company”) is an Australian energy company focused on oil and gas exploration in the Gulf of Mexico, USA. Its principal asset is a 50% interest in the Bowsprit Project (“the Project”), which consists of two granted petroleum leases covering 4.6km2 of shallow transitional waters of Louisiana. The Project is estimated to host contingent resources of 0.76million barrels (2C gross), and unrisked prospective resources of an additional 1.72 million barrels (Best; gross). Since initiating coverage in May 2018, Sun has advanced the appraisal of the Bowsprit Project and launched a share purchase plan (ends 21 Dec 2018).
Catalysts: Sun Resources has progressed the development of the Bowsprit project and commenced surveying and permitting of the first well ahead of imminent drilling activities. Following the recently commissioned 3D geological modelling, the Company has increased its internal Prospective Resource volume estimate. Appraisal drilling is now targeted for Q2 2019 and designed to demonstrate the potentially robust economics of the project. Finding the optimum funding method via farm-in or JV could be a major value driver.
Hurdles: Sun Resources remains reliant on external capital to expedite commercial field development. While placement and SPP are expected to cover near-term overheads, there is a risk that further funding may be needed to prepare Bowsprit for the upcoming appraisal drilling. Demonstrating commercial oil production carries technical risk and there is no guarantee it can be achieved at a reasonable cost. As the conceptual base case operating life of Bowsprit is limited to 5-6 years, Sun Resources may need to acquire other assets in order to sustain a longer-term production profile.
Investment View: Sun Resources offers speculative exposure to international oil markets. We are attracted to the development potential of the Bowsprit Project, the track record of its management team, and the pathway to near-term, profitable oil production. With appraisal drilling scheduled for Q2 2019, management will now advance the program to secure project financing with a recently upgraded internal Resource estimate. Funding remains a key risk but could also be a major value driver if delivered at favourable terms to shareholders. Wise-owl’s valuation of $0.012/share represents a premium of 300 percent to recent trade and we resume coverage with a ‘speculative buy’ recommendation.
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