Santos's Jeruk oil field value halved

Santos's Jeruk oil field value halved

Bloomberg, Sydney

Santos Ltd., Australia's biggest natural gas producer, had the valuation of its Jeruk oil discovery in Indonesia halved by UBS AG after releasing "disappointing" preliminary results from a well at the field.

UBS cut its valuation of the field to 65 Australian cents a share from A$1.30 and said in an Aug. 11 report it may hold less oil than the Adelaide-based company's initial estimate of 170 million barrels. The firm also lowered its recommendation on Santos to "reduce 2" and cut its profit estimates.

Santos said in January the East Java oil find may be its largest ever and may contain more than the 170 million barrels estimated before any wells were drilled. Optimism about the size of the find, which UBS had earlier estimated may hold as much as 300 million barrels, has contributed to a 54 percent surge in Santos's share price over the last 12 months.

"We have reviewed our assumptions for Jeruk and now believe this field as considerable downside risk," Melbourne-based UBS analysts Gordon Ramsay and Max Brewster said in the report. "We now think Jeruk has increased risk to disappoint."

Shares in Santos, which owns 45 percent of Jeruk and is the operator, yesterday rose as much as 17 cents, or 1.5 percent, to A$11.38 on the Australian Stock Exchange. They traded at A$11.36 at 10:23 a.m. Sydney time. Crude oil in New York today reached a record $65.05 a barrel. UBS previously had a "neutral 2" recommendation on the stock.

Santos said July 28 that a test at the Jeruk-2ST4 well flowed a mix of oil and water at a rate of 1,300 barrels a day. An earlier test on a different section of the oil column wasn't completed because of operational problems. The results raise "concerns" about the quality of the oil reservoir, UBS said.

Singapore Petroleum Co. and Cue Energy Resources Ltd. have stakes in Jeruk.

UBS reduced its estimate of Santos's earnings in the year ending Dec. 31 by 9.1 percent to A$608.6 million (US$471 million) after reviewing the level of exploration expenditure the company may expense in its accounts after adopting new accounting standards. It cut its 2006 estimate by 16 percent and its 2007 estimate by 24 percent. It cut its 12-month share price target by 11 percent to A$9.89.