Norwest Energy NL: Perth Basin Unconventional Gas Focus

Perth Basin unconventional gas early mover
Norwest Energy NL, (NWE.AX) is among the early movers taking on the unconventional potential of the northern Perth Basin in Western Australia. Early results have been encouraging and point to a potentially substantial unconventional gas resource. The next 12-18 months will be critical as appraisal results from its Arrowsmith-2 discovery are analysed and a horizontal, multi-stage fracked pilot well is drilled to test Arrowsmith’s commercial viability. There is clear scope for substantial upside if Arrowsmith can be demonstrated as viable, towards an eventual full shale and/or tight gas development across the breadth of Norwest’s Perth Basin acreage.

Perth Basin unconventional gas focus
Norwest’s Perth Basin acreage represents a significant foothold in a potentially substantial unconventional gas region in a market context blessed by an enviable network of above-ground infrastructure and LNG-based gas pricing. With multiple operators having demonstrated the presence of stacked tight gas formations along the length of the Perth Basin belt, it is looking increasingly possible that the region could become Australia’s next major development play.

Arrowsmith as beachhead to full development
Norwest is leading the appraisal of the Arrowsmith-2 discovery. The next 12-18 months will be critical while a workover of Arrowsmith-2 is undertaken before the end of CY13, flow data is collected, commercial viability is analysed and a likely horizontal pilot well with multi-stage frac is drilled in the second half of next year. If commerciality can be established, the ultimate prize Norwest is chasing is full development of an Arrowsmith tight gas field comprising perhaps more than 80 wells and 300bcf of produced gas.

Valuation: Much still to unfold as Perth Basin de-risks
Our analysis includes DCF modelling of a potential full-scale development of an Arrowsmith tight gas field. From this, our risked valuation of 3.0c/share is at a substantial premium to the current share price. If Norwest is able to advance Arrowsmith in parallel with other local operators (principally AWE), value attribution to the remainder of Norwest’s Perth Basin will lift as the region is de-risked. Recent share price volatility appears likely to continue until the situation at Arrowsmith gains clarity. What is clear is that Norwest does not currently have the balance sheet capacity to fully fund its 2014 exploration work programme, nor a field development scenario. We expect capital strategy to be a major focus for the company over the next few months, and we would expect a capital raise to be likely before the end of Norwest’s FY14.

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