BONTAN CORP INC BNTNF

RE: News out on sale of iol.

[ajootian]

Not sure why they chose to put the news out on Friday afternoon, vs. waiting for Monday morning. This is blockbuster news folks, that miniscule interest they had in the PNG play was not gonna move the stock. Now these guys are a pure play in LA gas exploration, and with US natty prices primed to bust out to new highs the timing could not be better. This first well is gunning for 20 - 30 BCF of reserves. I don't know what the the mineral owner's royalty is on Bontan's acreage but let's say its 20%. This would mean that Bontan has a 39.2% (i.e. 49% x 80%) NRI in any reserves discovered in the lease. Using the midpoint of the predrill targeted reserves, this would mean they are taking a shot at discovering about 10 BCF of reserves net to Bontan's interest, just in the first well to be drilled. With current gas prices being as high as they are, gas in the ground in LA is being valued at around $2.50/mcf. So this says Bontan could potentially discover reserves worth around $25 M just in this first well. Not a bad return for their $2.7 M investment, wouldn't you say? Of course, not all wells discover gas, so we need to discount the above for this risk. This well is being drilled on 3D seismic data. 3D seismic has been found to be very reliable in LA, and a very conservative expectation of success for an exploration well drilled on 3D seismic data would be 50%. So if we discount the potential $25 M of reserve value by half we get a present value of Bontan of $12.5 M or around a buck a share. But the shortfall created by the above analysis is that it ignores the the degree to which the prospectivity of the remaining reserves in Bontan's acreage would increase in the event a gas discovery is made by this first well there. The acreage has potential reserves of 150 -- 200 BCF gross, or 59 -- 78 BCF net to Bontan's interest (using my 20% estimate of the mineral owner's royalty). If the first well discovers the first 10 BCF of gas (net to Bontan) from this lease, this would leave a minimum of another 50 BCF of potential gas to be discovered, having a value of $125 M or about $10/share for Bontan. Folks will be putting some value on these potential reserves, even before the drill bit hits the ground on this first well. How much, I don't dare predict, but in any event it should be an interesting ride for Bontan fans as this story unfolds over the next few months.