- Canning Basin highly prospective
- Buru a first mover
- Macquarie gets on board


By Eva Brocklehurst

Mid cap energy stock, Buru Energy ((BRU)), has entered Macquarie's sights as it strives to make a name in Western Australia's Canning Basin. Macquarie has initiated coverage on the stock with a $3 price target, offering 38% upside to the current share price. Buru has around 17 million acres in the onshore Canning Basin, in the north west of the state, which to date has only been lightly explored. The company has adopted a systematic approach to securing what it sees as the most prospective hydrocarbon acreage, providing it with a first mover advantage.

JP Morgan believes the Canning Basin is one of the most prospective in Australia. Buru Energy is its top ex-100 pick as a pure play in both oil and tight wet gas.The broker says Buru displays the greatest potential returns with upside to spot of 91%, hence a price target of $4.42 and Buy recommendation. Events on JP Morgan's 2013 watch list include extended production testing at Ungani, which is progressing towards a full field development, and flow testing of Ungani North-1 oil and gas columns, possibly by the end of the first half. Also, the Yulleroo-4 well is due to spud shortly and will test the thesis for the Yulleroo tight gas resource.

Over the last three years Buru has recorded discoveries at Ungani and Valhalla and secured a strategic funding partner in Mitsubishi. According to Macquarie, the company is targeting material production growth over the medium term, with a vision to supply around 20% of the Western Australian domestic gas market and almost its entire liquids demand. The broker is mindful that, given the isolation of the Canning Basin and limited existing infrastructure, commercialisation of gas resources will require Buru to develop its own route to market and this could dilute value through transport tariffs or the need to fund infrastructure.

With the Ungani trend only mapped on limited 2D seismic, considerable uncertainty also remains regarding recoverable volumes at both the Ungani oil field and untested prospects in the region. However, Macquarie sees upside potential for core Ungani reserves as a greater understanding of the structural boundaries is gained. Successful production tests from multiple wells will be required to confirm the commerciality of this play.

Buru is near the high end of the risk spectrum of mid-cap energy stocks under Macquarie's coverage. However, if the 20mmbbl upside case at Ungani (through a 3D seismic program) can be proven, Ungani North can be tied in as an additional discovery and further exploration success occurs at Yakka Munga and Jackaroo this year, the broker's Net Asset Value could rise by 27% to