Edison Investment Research

Reserves - better not blink or they could be gone

In a week of carnage among the UK listed E&P mid-caps, one of the more puzzling big fallers is Soco International. At the time of writing the stock is down nearly 40% from the start of the week as investors get to grips with a spectacular drop in 2P reserves, from 130mmboe to 41mmboe. However, this reeks of a potential over-reaction and a lack of understanding among much of the analyst community as to what reserves actually mean. We therefore think it is worth considering in this post what companies and independents auditors actually mean by the simple words “reserves”.

Omne trium perfectum

Everything comes in threes
This week was not a good one. It has seen three major announcements by well-known London-listed oilers, resulting in week-to-date share prices falls of 20% for Cairn, 38% for Soco and 12% for Afren.

Thoughts post Cairn FY14 results & India tax update

Since we posted our blog about Cairn’s results presentation, the company has released material news on the Cairn India tax situation. It confirmed that it has received from the Indian income tax department a draft assessment order quantifying the tax claim for the 2006-07 fiscal year at $1.6bn, plus any applicable interest and penalties. Cairn had not previously given guidance on the Indian tax assessment.

African Petroleum - Initiation

We initiate on African Petroleum (see link). Pure play E&Ps are not in favour of late as poor exploration results in recent years and the falling oil price has depressed sentiment. However, for investors willing to look through near-term oil prices and seek exposure to exploration risk, African Petroleum has ten offshore blocks with large working interest positions, many of which are very close to successful wells drilled in 2014 (not least SNE-1 and FAN-1 off Senegal, and Total off Côte d’Ivoire) - as seen below.

Finite storage capacity could call time on the financial demand currently supporting oil prices

Did you know the Baker Hughes rig count is falling? Of course you did, it’s the equivalent to talking about house prices in oil circles. Yet US production growth hasn’t so much as stuttered since the Saudi’s decided US shale should just settle down, why? We think readily available storage, both fixed and floating, is supporting spot oil prices beyond the fundamentals as traders profit from the ‘contango’ in the oil futures market, buying spot, adding to storage and selling forward ~ VLCC tanker rates have reached levels not seen since 2008 as traders build a flotilla of floating crude storage.

Five themes from oil majors’ 2015 updates

This post is an excerpt from the latest edition of our Catalytic Converter monthly (link), published on 25 February 2015.

As the Big Oil year-end 2014 reporting season draws to an end, we reflect on the main messages from the strategy updates.

Exploration Watch - Falklands

‘Exploration watch’ is a regular Edison publication focusing on upcoming exploration activity and the impact on notable E&Ps.

In this inaugural edition, we look at the upcoming campaign in the North Falklands Basin where the first well, Zebedee, is due to spud in March 2015. This campaign, targeting c 350-600mmbbl, is often referred to as ‘exploration’; however, it includes a significant element of low-risk exploration together with an appraisal opportunity, especially for those looking to expand on the existing Sea Lion footprint. With Sea Lion development FID expected in 2016, appraisal and low-risk exploration elements of the upcoming Zebedee, Chatham and Jayne East wells could all add high-value barrels to the existing 393mmboe of contingent resources identified to date. The biggest exploration targets, however, lie 40km to the south of Sea Lion where the Isobel/Elaine complex could be as big again as Sea Lion. The Falklands has seen no exploration drilling for over two years, so this campaign will be a welcome return for investors interested in what is still essentially a frontier region

What’s going on with Saudi’s rig count?

While all eyes are on US oil production stats, notably from shale, we take a brief look at Saudi oil production trends. Saudi’s rig count stayed broadly flat from 1997 to 2005 then increased sharply in the 2005-06 period. This can be explained by the expansion of Aramco’s oil capacity to 12mmbbl/d from 2006 to 2010, as well as a new focus on exploration.