🕐14.02.11 - 01:54 Uhr
Kairiki Energy - Sentinel Group Research Note - 10.02.11
10 February 2011
Oil & Gas Exploration Flash Note 10 February 2011
Gindara exploration well -- Drilling planned for ~May 2011
Event Summary
A speculative situation exists in two ASX listed junior oil and gas
companies ahead of the drilling of the Gindara-1 exploration well in
offshore Philippines.
We regard Gindara-1 as one of the select few major exploration wells this
year capable of attracting significant ASX investor and industry interest.
It is targeting a very large structure in a proven hydrocarbon basin with
oil heavyweight Shell as partner.
We note investors are often rewarded for getting set early in such
speculative plays but the success of such a strategy also depends on no
unforeseen delays and share market conditions remaining supportive of
speculative investment.
The well is currently anticipated to spud in ~May 2011.
ASX Participants: Nido Petroleum (NDO) 33% and Kariki Energy (KIK) 22%.
Gindara prospect
The Gindara prospect is located in Service Contract 54 Block B (SC 54B) in
the NW Palawan Basin, Philippines.
The NW Palawan Basin is considered to be the Philippines premier producing
basin.
It contains the giant Shell operated Malampaya gas/liquids field
(est.
3.8 TCF gas reserves), the largest discovery made in the Philippines
to date.
The Gindara prospect is situated about 50km south and along trend
from Malampaya.
The Gindara prospect is a very large, 3D seismically defined, simple
four-way closure at the Top Nido Limestone reservoir objective with an
areal extent of 28 km2, a vertical closure of over 300m and is well located
to receive hydrocarbon charge from the Palawan Trough (a proven hydrocarbon
source rock kitchen).
The Gindara prospect has estimated mean potential of 634 mmbo (in place) at
the Nido Limestone level (same reservoir as Malampaya) making it a
substantial exploration target.
A large oil discovery could potentially
justify standalone development.
A gas discovery could potentially be monetized through the Malampaya
production facilities, subject to commercial agreement.
The Gindara-1 exploration well should take approximately 30 days to reach
total depth of around 3,200m.
If the well is successful, and depending on
the size and type of discovery, a future appraisal program prior to a
decision to develop would be necessary and could comprise several wells
including production testing.
Such results would then enable the booking of
reserves, an important component in demonstrating project value to
potential buyers.
Shell Farm-in Agreement
In October 2010, NDO and KIK entered into an agreement with Shell
Philippines Exploration B.V.
(a subsidiary of the Royal Dutch Shell Group)
for Shell to earn a 45% interest in Service Contract 54 Block B (SC 54B)
by:
Contributing 75% of the Gindara-1 exploration well cost up to a maximum
well cost of US$24m;
Paying US$2.5m towards past seismic costs; and
Paying its pro-rata share of the 2010 and 2011 Work Programme and Budget
from the date of signing.
Under the terms of the deal, NDO will remain Operator of SC 54B for the
drilling of the Gindara-1 exploration well.
On completion of Shells farm-in NDO and KIK will have respective 33% and
22% participating interests in SC 54B.
Analysis & Discussion
We make the following assumptions to assist us with quantifying the
potential impact a commercial oil discovery may have on NDO and KIKs share
prices:
1.
Mean Target Size: 634 mmbo in place (Nido Limestone target only)
2.
Oil Recovery Factor: 40%
3.
In-situ oil value: US$10/bbl
4.
No changes to the capital structure of NDO and KIK.
5.
Capital structures are fully diluted for expected in-the-money options
(upon success).
Our unrisked values (ie.
the theoretical discovery value per share based on
the outlined assumptions) supports the view that both companies offer
excellent leverage to exploration success at Gindara (NDO ~6x current share
price and KIK ~9-10x current share price at time of this publication).
In the event of a wet gas discovery, we estimate a hypothetical 1 TCF +
liquids discovery could be worth approximately half of the above oil case
unrisked values (note the actual value would depend on how wet the gas
is).
We understand Operator NDO rates the Gindara prospect has having a ~40%
chance of containing hydrocarbons which is very high for an exploration
well.
Shells farm-in and technical endorsement adds further credibility,
in that it views Gindara as being a material opportunity for itself (ie.
potential size and associated risk).
We do however remind investors that oil and gas exploration is a high risk
activity and many more dry wells are drilled than commercial discoveries
made.
Therefore while the drilling of Gindara-1 is clearly a very exciting
event for NDO and KIK that has the potential to add significant shareholder
value and transform the outlook for both companies, investors are reminded
to consider their risk tolerance as the well approaches and may choose to
lighten their shareholding (partially or fully).
Investment Risks
NDO and KIK are considered to be speculative companies.
Our speculative
interest in these companies is based on their exposure to the upcoming high
profile Gindara-1 exploration well and not with their other assets or other
activities.
Risks to investing in these companies include but are not limited to:
exploration risk; normal share market risk; oil price; ongoing funding;
drilling rig delays and possible drilling cost over runs.
We note that NDO and KIK have both recently raised significant amounts of
capital to cover the costs associated with the evaluation and subsequent
abandonment of the Tindalo oil production operation in adjoining, Service
Contract 54A (unrelated to the upcoming drilling of the Gindara-1
exploration well).
In addition, both companies have outstanding convertible
notes (debt) which need to be repaid, converted to equity or restructured
which may require the support of note holders.
The possibility of future
capital raisings cannot be ruled out.
Analyst: Adam Conigliaro
Email:
Tel: + 61 8 9225 0000
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For more information please contact:
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Tel: 61 (8) 9388 6711
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Professional Public Relations
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