Edison Investment Research

Gulf of Mexico - stepping up to the challenges

The full note is available here

The Gulf of Mexico benefits from a unique combination of factors that make it a particularly attractive region for major operators, with Shell, BP and Chevron holding substantial acreage. Companies operating in the area have access to potentially large resources together with the ability to hold large positions that gives them running room to grow, while the concentration of companies with interests in the region allows flexibility to farm in and out as necessary. The Gulf is close to a centre of excellence in a range of oilfield applications from seismic to drilling technologies, and also benefits from a well developed infrastructure. Together with the predictable fiscal regime and low tax rate of the US, this makes it a good place to replace reserves and grow production. The region is technically demanding which plays to the majors’ strengths, however US independents are also active in the region, with Cobalt and Anadarko holding key positions in the inboard Lower Tertiary.

Genel Interims

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.