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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.

Chesneya, not correct there. Those trades are a roll over ie one of them is a sell and one a buy.

Quick view of the Hardman report:
Concludes that on the most conservative basis existing sp between 10.6p and 17p is supported by the current oil reserves.
The reserves they have taken into account are the minimum, eg Alea at 20m barrels; already there is confidence that this is 38m barrels and that it may rise further to 70m barrels. The same with PLO, 30m barrels when there is confidence that this will rise to over 100m barrels.
Report states that it takes no account of manifold upside potential. eg Primavera, where just one structure might add up to 120p per share (page 22)
No value placed on Paraguayan acreage yet although with the third block awarded (later this month?) Chaco will have 20% of the 240,000 sq. kms. which are believed to offer the best prospects of yielding oil and gas.
There should be plenty happening over the coming weeks for Hardman to update their figures on.

Later this month possibly two further Colombian blocks may be awarded out of the dozen additional ones they have been looking at. Grabbing territory before the competition wake up to how receptive the Colombian govt. is to foreign oil and gas explorers is a priority

if you haven't seen it yet:
http://www.oil-barrel.com/advisers/hardman/chaco170706.pdf

sorry - only got Level 1 and they are listed as sells!

all good stuff- have i read it correctly chp are looking to be awarded these blocks in paraguay this month july?.

lizard, they already have two but the third should be awarded this month. If it is I think that it will have the effect of doubling what they have and it is an acreage that fronts the border with Brazill where there is already a field in production.

cheers ss new to this stock but am keen!. i think s america has v encouraging potential!. already in goo.

Sharesure hi, what do you make of the reaction to the hardman report, seems to lots of sells although not large volumes.

Thanks Sharesure for your comments. Haven't read this in any detail yet.

pisces, muted and less than I would have thought, but it is early days; don't think the analysts will have looked it through yet. If by Xmas only Primavera is proved at 120p on the sp that will be something to be happy about but there are other oppotunities which will happen earlier so I would reckon on a steady climb in the sp from here is highly likely.
Re Trades, if you are using LI then it is showing some buys as sells, eg the 500,000 roll over earlier today. There should be press coverage in the next few days + ther are more news items which will require an RNS due out in the near future (just don't get me to predict when since that is inpossible with CHP!)

On first reading it does seem a fair assessment and supporting of current share price and move back up to the 18p level. Not much factored in for the upside potential and therefore ability to surprise on further news. Interesting that there hasn't been one trade since the release! The jury's out!

just found out from the other thread if true? that inst wont receive the report until tomorrow!.

sharesure i have not seen what you are talking about . surely we should all see it.

share sp still the same . what are you lot on about.thanks

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