Edison Investment Research

Kurdistan ~ payments coming

The singularly most important concern for investors in Kurdistan-based companies over recent times has been the ability of the contractors to get paid on a timely basis for their production, and to a lesser extent, to recover back payments owed. This has taken a further step forward today with the publication of a statement from the MNR.

Petroceltic ~ Creating value in Algeria through execution

Petroceltic (PCI) is an E&P with assets in Egypt, Bulgaria and Algeria,where it is developing its flagship gas project Ain Tsila. As producing fields in Egypt and Bulgaria decline and exploration is de-emphasised, the valuation proposition in PCI shifts steadily towards Algeria. The drilling contract for Ain Tsila was awarded in April and the project is on track to be sanctioned by end-2015 and start up in Q418. Ain Tsila is fully funded until Q216 thanks to Sonatrach’s carry. The June launch of a $175m secured bond is an important step towards securing financing for H216-2018 – further progress on this front would remove uncertainty. A RENAV of 154p/share (which should grow c 16% pa over time) indicates the stock is pricing in nothing for a possible second phase at Ain Tsila or exploration.

Cairn ~ Exposure to Senegal exploration, at lower risk

Cairn’s transformation over the last five years has given birth to a new full-cycle E&P company, with two projects under construction in the UK and a large exploration portfolio in the Atlantic Margin. The jewel in Cairn’s portfolio is Senegal, where it made one of the world’s largest offshore oil discoveries in 2014 (SNE). While the market will be closely watching Cairn’s Senegal drilling campaign starting in Q415, an even more material valuation lever for the stock is the outcome of the $1.6bn Indian tax dispute. In an environment where many independents are struggling to secure funding, Cairn is in the comfortable position of being fully funded until first oil from Catcher and Kraken in mid-2017. Cairn’s conservative strategy may reflect its mixed track record on past frontier exploration (outside Senegal) and M&A. Despite this, our RENAV of 216p/share offers reasonable upside at a much lower risk profile than many E&Ps.

Rockhopper ~ Building a full cycle, exploration-led E&P

We belatedly publish excerpts from our recent Rockhopper initiation

The full initiation is available here

Rockhopper (RKH) is midway through a four-well exploration and appraisal campaign to explore and understand the reservoirs in its licences, including the 400mmbbl Sea Lion development, shared with Premier Oil (PMO). RKH is fully funded for Phases 1a and 1b, from which further development can be financed. This forms the majority of RKH’s core value (144p/share), which is well above the current share price. Furthermore, our analysis indicates the value should increase markedly over time as first oil approaches. Beyond Sea Lion, the Isobel Deep discovery hints at another major discovery field, once fully explored and appraised. With pre-drill estimates of over 500mmbbl, it could more than double gross resources.

Wentworth Resources ~ company snapshot

Mkt Cap (£47.4m) Cash $5.5m (end 2014). Debt ($26m facility in place /~80% drawn)

Attendee; Katherine Roe.

In what appears to be a developing focus on Africa for our recent company snapshots, we were lucky enough to meet up with Katherine Roe last week. Katherine handles investor relations for Wentworth Resources, the East African gas company which is about to begin production and sales from their key Tanzanian gas development; Mnazi Bay.
Mnazi Bay, Wentworth 39.925% WI (exploration)/ Wentworth 31.94% WI (development and production).

Genel operations update ~ still waiting for export payments

Genel’s trading statement has been over-shadowed to some extent by the unexpected departure of its Chairman (Rodney Chase) with Tony Hayward stepping up to Chairman and Murat Özgül taking over as CEO. While Mr Hayward’s position as Chairman of Glencore always suggested that he eventually to step back from his CEO role at Genel, the timing seems a little surprising/sudden. He is replaced by Murat Özgül , who has been at Genel since 2008 and was formerly Chief Commercial Officer, so he knows the business extremely well. His capital markets experience is reasonably limited, but we expect he will be ably assisted by new CFO Ben Monaghan, whom we met a few weeks ago. Genel now has a new management team, but we do not expect any material change of strategy in coming months - it will remain Kurdistan, Kurdistan, Kurdistan.

Company Snapshot ~ Sterling Energy

Sterling Energy (SEY). Mkt Cap £35m. Cash £62.5m. Debt £Zero

Attendee; Eskil Jersing (CEO)

Last week we caught up with newly appointed CEO of Sterling energy, Eskil Jersing. Our initial interest in the company was sparked by a perceived valuation gap, as Sterling’s ~$100m (£62.5m) in cash appears markedly under-represented in its current market cap of £38.5m. Of this cash the group has ~$30m (~£19m) of commitments, a $22.7m (£14.19m) abandonment liability for the Chinguetti field in Mauritania, and a further $8m (£5m) of potential stage payments in Somaliland. Post these commitments the stock remains at a discount to cash, with no value ascribed to the current asset portfolio, or indeed, any ‘option value’ as management holds the cash to do deals in what most view as being a buyers’ market.

Company Snapshot ~ Solo Oil

This week we popped along to Jermyn Street to meet up with Neil Ritson, a lucky break for us as CEO of LGO Energy and chairman of Solo Oil he’s a busy man. Despite sharing management, the two groups offer distinctly differing strategies; whilst LGO focusses on mature field redevelopment in Trinidad, Solo Oil is largely focussed on the development of gas assets in Tanzania. What follows is our representation of the current picture at Solo, with LGO to follow in due course.

What’s the marginal cost of oil supply - $60/bbl or $80/bbl?

Much has been written lately about the falling marginal cost of crude supply, as breakeven costs for US shale continue to fall. Last week, Goldman Sachs cut its Brent oil price forecast to $65/bbl in 2016-18 and to just $55/bbl in 2020, well below consensus and the long-term forward curve. The bank argues that US shale breakeven costs have dropped by $20/bbl in a year thanks to structural efficiencies and productivity improvements. The global oil curve has become flatter and lower, and growth from US shale and OPEC is enough to meet demand growth to 2025, the bank argues.

Senegal appraisal looks to de-risk 2014 discovery success

Cairn’s Capital Markets Day this month focused on Senegal, providing some insight into its 2014 back to back independent discovery wells, FAN-1 and SNE-1. Here we look at the shelf edge discovery SNE-1 and point to the key uncertainties the company will need to address when it returns to drilling in the region at the end of 2015.