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UPDATED 22/1/07

Valuation of Chaco Resources : 'Rule of Thumb' based on 550m shares and using 10% DCF on oil at $60/barrel is 1p on the sp for every 1m barrels (CHP's share) that is proved. Until oil reserves are proven the 1p/1m barrels will be discounted by the market.

Chaco Resources now has three exploration blocks in Colombia and three areas in Paraguay. The next year should see a steady news flow as it establishes the companys transformation from being an exploration company only to also becoming a significant oil production company. Set out below are some of the milestones which should produce announcements and have a positive effect on the share price. All reserves are quoted in recoverable oil assets.



Alea, Colombia :

25% interest in a field currently assessed at holding 38.1m barrels of light sweet crude oil. Drilling of the field by the operating partner, Ecopetrol, was programmed for 2006 to provide early cash flow, but a shortage of drilling rigs, then the rainy season and increased environmental requirements have caused a re-think and it is now expected that this block will be drilled in first half 2007.The proposal to drill a step out well as part of that drilling programme will also provide the opportunity to establish if the estimate of recoverable oil should be increased. (Some estimates suggest the field contains as much as 70m barrels.)

RNS : Updated w/c 30/4//07. Drilling contract should be imminent but actual drilling unlikely to take place second half 2007.



Puerto Lopez, Colombia :

54% Interest in a field containing light sweet crude oil.On 3.10.06 CHP announced that the original TEA area had been extended by the ANH to include further territory which it is expected will greatly increase the potential to find and exploit a structure which may contain as much oil as there is believed to be in Primavera, where Hardman and Co estimate that there is a potential value of 120p per CHP share.

RNS :Updated 22/1/07. Further seismic now obtained and decision not to proceed made because closures too small to be economic and drilling funds earmarked for this project now being retained for use on a more prospective block yet to be announced



Primavera west, Colombia :

55% interest. Two shallow drills in April turned out to be dry. Areas adjacent to this block contain oil (Cana Limon, also in the Mirador basin, the largest oilfield so far, 1.8b barrels) Chaco believe that the area in their block contains the thicker end of a wedge shaped oil-bearing sandstone structure; the area to the east in the neighbouring block has been estimated as containing 400m barrels and the El Miedo oilfield, 8 kms.away has 325m barrels. ANH Contract signed w/c 8/5/06 (1 week sooner than forecast). GED are drilling their neighbouring block in February 2007; two of their targets may contain oil deriving from Chaco's area so some earlier cash flow may result.

RNS : The drilling programme has now been completed but the company has yet to say whether the block will be explored further or abandonned.

New block announced in April known as Tigra in the Magdelana Basin. CHP has a 48.75% interest. Believed to be very promising but company is doing 3-d seismic over the next 18 months with drilling projected in the following 16 months. (Timescales seem to be set to allow a lot of room for delays or speeding up if progress is easier than anticipated)



Curupayty Block, Paraguay :

1.39m hectares in north, close to Bolivia. Two wells previously drilled and both showed oil.

RNS : Expect partnership with larger producer.



San Pedro Block, Paraguay :

1m hectares in south-east. Previous drilling showed oil.

RNS : Expect partnership with larger producer.



Parana Basin, Paraguay :

Canindeyu block covering 1,789,000 hectares. Bordering Brazil. Oil field on Brazilian side already drilled. Chaco also expect to find oil and, at a deeper level, considerable quantities of gas. Chaco has obtained valuable historic seismic for re-evaluation.

RNS : Presidential Decree received 2/11/06.. Petrobras has announced its intention to increase substantially its effort to exploit Paraguay's hydrocarbons and has announced a farm-in on CDS's adjacent block. Possibility that they or another major will do likewise with CHP



Corporate Activity :

CHP obtained an independent evaluation of their exploration assets by Hardman and Co., during July 2006.This is updated monthly. As Chaco Resources line up their assets ready for production they may attract a bid. There are also other actions that the mgt. could take to increase the Chaco's asset share subject to negotiation since the position of the Colombian state oil company, Ecopetrol, is believed to be under review. Other actions could be taken which would have the attraction in bringing more resources to bear on a quicker timeframe plus help streamline the management of their assets. De-merging the Colombian and Paraguayan assets at an appropriate time might hold out some advantages to shareholders at some stage.
Last Placing announced at 15.1p per share on 18/5/06.
Chairman and FD bought shares 8/06 and the Chairman recently exercised his option on further shares which would suggest that he regards the share price to be going north from here on.
Updated 22/1/07.




Here are some dates for your diary courtesy of KJKelly, who posts on ADVFN

1. Curupayty - complete reprocessing of seismic by end July 06
2. Curupayty - complete interpretation of seismic by end August 06
3. Curupayty - decide whether to proceed to drilling or proceed with a farmout campaign - end September 06
4. Platanillo - commence re-entry of Alea 1 early in 1st quarter 2007
5. Primavera - two structural targets will be selected from 10 potential targets for drilling commencing Feb. 2007.
6.Hardman updates should now happen monthly.

Just reading the report now - doesn't tell us much we didn't kow but does give a positive appraisal of Chaco and their ability to start producing early 07.

Also outlines the potential of the different blocks as well, which is interesting reading.

http://www.hardmanandco.com/Research/Chaco_July_2006.pdf

lizard thanks have down loaded will read .

Sharesure
I'm sure you have good reason to quote 1.20 for Primavera from page 22 of the report But look as hard as I can I cannot see that figure quoted,my guess is you have come to that figure by using a mix of figures.
could you enlighten me please
Peter

BKK2, It's page 22 under the heading Primavera block, you have to add the Prospects and leads together @ 35.25p and 85.23p under unrisked.

The report comes across very well for the future but you need to read it closely to extract the detail from it. The valuation would seem to be the bare minimum and as Sharesure has said with newsflow to come at anytime, this is not the time to be out.

Thanks Stewart,that makes sense.

Having just completed a speed-read of the excellent Hardman Report, its worthwhile summarising their best and worst cases for a valuation of Chaco Resources.

In summary their valuation for the six resources and exploration areas are as follows:

Pence per Share
Fully Risked - Worst Case
COLUMBIA
Alea 4.1p
Puerto Lopez 1.4p
Primavera 5.1p
PARAGUAY
Curupayty nil
San Pedro nil
Canindeyu nil
TOTAL 10.6p

Pence per Share
Unrisked - Best Case
COLUMBIA
Alea 15.3p
Puerto Lopez 14.2p
Primavera 120.5p
PARAGUAY
Curupayty nil
San Pedro nil
Canindeyu nil
TOTAL 150p

To interpret this valuation, we have to understand that this is an economic valuation and not a business valuation. By this I mean that Hardman have taken objectively the data on actual and prospective oil resources and applied economic criteria for a valuation of the company. This is not a business valuation that one might apply to derive a market value for the company.

For example, they have said they have been very conservative. This is excellent as their approach confirms, what we suspected, that Chacos management has also been conservative. Chacos management have been very open and clear about the business and its prospects. My goodness in todays business world this is worth a lot and, in particular, a premium on the share price.

So what does it all mean? Well the base case for Chacos economic valuation is 10.6p per share, fully risked. We can view this as money in the bank this is saying that the downside at 10.6p is zero. On top of this we have a potential for the management of Chaco to increase the economic valuation for Chaco to 150p per share! Wow! Hardman will keep us informed on Chacos progress towards this potential.

OK, in a financial nutshell this was how I read Hardman.

My thoughts then turned to answering the question: What is then a fair market valuation (as distinct from economic valuation) for Chaco? Or put it another way, why did the institutions fight over themselves (my exaggeration) to pay 15p per share in the recent placing?

I think the best way to get at an approximate market valuation of Chaco is to keep it simple. Lets take the economic valuation as our base.

Pence per Share
Fully Risked - Worst Case

Economic valuation 10.6p
Minimal valuation for Paraguay (1) 3.5p
Premium for management (2) 1.4p
MARKET VALUATION 15.5p

Pence per Share
Unrisked - Best Case

Economic valuation 150p
Minimal valuation for Paraguay (1) 3.5p
Premium for management (2) 14.2p
MARKET VALUATION 167.7p


1.Paraguay valuation - 19m divided by 534m shares in issue. Conservatively this is three times the valuation of CDS Oil & Gas as Chaco has three times the acreage, approximately.

2. Premium for management lets say, conservatively, management is worth one more Columbian acreage acquisition equivalent to Puerto Oeste. (If management read this please accept my very grovelling apology. In truth I believe you are worth as much as the entire Best Case market valuation. I have not forgotten that my shares were worth 1p in a cash shell in early 2004 and that you have created great value since then with enormous potential. Apologies over!)

So in summary we could argue that institutions have bought into Chaco at a worst case very conservative market valuation.

As shareholders we have, at a share price of 12.75p, a share that has a virtually zero downside risk on an economic valuation basis. It also has a potential market valuation of 167p if all goes well. Im not saying that the market will not choose to value Chaco at less than this price in the future. But I am saying that in reality a medium/longer term shareholder does have enormous upside potential conservatively valued at 167p. In reality I expect much more than this but I am not counting on it. And best of all is that the timescale is so short. We should begin to receive further information on progress and drilling within the next six months. There are enough risks in this world today but this investment seems to tick all the right boxes.

Best regards,
KJ

Can't believe the Hardman report's recovery factor for Primavera is 25%. When other deals are completed and CHP have revenue streams Primavera can be propperly exploited. My guess is this block is the cream of the company but we'll only know for sure once revenue streams are in place. The report does say that its 5.1/pence per share is heavily discounted (Has to be buy some 80%) due to risk. Only risk is revenue streams which once deals are struck on other blocks will be vastly reduced. I get the impression from reading the report CHP will be expected to further raise capital by placings, anyone else get this feel?

exp, its the same problem as SER, thats why its up for sale.. to get full SP price for its shareholders, directors are old there and want to retire.

I always thought it was the shareholders decision and I'm far from retirement!!

KJK, thanks for your post over on here too.

explosive, 'no' to the capital raising question since Alea should be providing a solid revenue stream by the time Primavera needs more development cash.
As for Primavera being the 'cream of the company' - I think that we will find that the Paraguayan blocks will outstrip Colombia by a good margin when a JV gets put in place.

Thanks Sharesure, lets hope there are no problems or delays with Alea. Regarding Paraguay, I take it your confident CHP will be awarded the other blocks with no problems.

What if they are awarded new blocks in Colombia, with current cash needed for obligations in previous blocks might they possibly need new cash in place to honour new commitments?
Not that I'd mind, hopefully management will rest easy tonight knowing I don't...LOL.

Great report by the way, shows we are going in the right direction....

i think chp are awaiting for the paraguay blocks confirmation this month.

lizard. that should have an effect on the sp, as CHP is so well underpinned at the current price, based on current assets.

KJ - thanks for analysis on both threads

CS

KJ, excellent summary for those of us not yet read the report, holding these long-term. Thanks.

a decent solid report. i would think interest will be progressive after this information drops on a few pi's mats and inst desks.

I bloody well hope so as it's done sweet FA to the share price at present.

KD.

I wish I could afford to buy more at this price.

AND ME AND I DID. -its one to buy and leave alone for a few years. the risks are there like all small cap oil stocks. but potential massive.