valuation 25c gmp 17/1/13

Latest valuation
Otto Energy Ltd.7 (OEL) BUY
Last: $0.11 Target: $0.25

Update for the December 2012 Quarterly
OEL reports production of 153kbbls, sales revenue of $12.3m.
The Galoc oil field performed in line with expectations with net production of
153kbbls down 4.1% due to natural field decline and averaged a gross 5,044bopd
for the period. Of note was the 99% production uptime achieved, despite severe
weather conditions, as a result of the upgraded mooring system. Sales were up
significantly to 232kbbls with 2 liftings during the period, however proceeds from
Cargo 28 will be received in the Mar Q. OEL finished the period with cash of
US$19.3m after exploration and development expenditure of US$2.77m and
US$4.56m, respectively. Production is forecast to decline until late 2013 to
~4,000bopd before the Phase II development boosts the rate to +12,000bopd.
Galoc Phase II preparations progressing, drilling expected to commence in
the June Q
Following FID for Phase II development of the Galoc field, significant progress has
been made with award of a number of key contracts, receipt of long leads items and
the execution of a binding agreement with BNP Paribas for a $37.4m facility to meet
~60% of OEL’s share of the development costs. The development will consist of the
drilling of an additional 2 subsea wells which will be tied back to the existing FPSO
Rubicon Intrepid, which should boost production from a then 4,000bopd to
+12,000bopd and assist in recovery of the remaining 16mmbbls of 2P reserves.
OEL is targeting a timely development with drilling and installation in the June Q and
Sep Q 2013 and 1st oil in 2H 2013. OEL is seeking JV approval to drill the 8mmbbls
Galoc North prospect following the development wells, testing unrisked upside of
$0.04/sh.
Matured exploration portfolio, Duhat-2 drill-ready for mid 2013 spud
In addition to the 3 x well campaign at Galoc, OEL has significantly de-risked the
Duhat-2 well for drilling in mid-2013 following the acquisition of 2D seismic. The
seismic resulted in a revised prospective resource estimate of 23mmbbls for which
we estimate unrisked upside of $0.13/sh. While timing remains uncertain, BHP is
reportedly continuing its efforts to secure a rig to drill the Cinco-1 prospect in SC 55
in Sep Q 2013.Other progress of note included the completion of airborne gravity
and magnetic surveys over its 2 onshore Tanzanian PSA’s.
We maintain our BUY recommendation with a price target of $0.25/sh.
OEL presents an asset backed and well managed producer which is underpinned by
strong cash flows from Galoc and leveraged to a busy program through 2013 which
includes the Galoc Phase II expansion (Jun Q), the Duhat-2 exploration well (mid-
2013), Galoc North (Sep Q) and its free carry through the high impact Cinco-1 well
(Sep Q). With Galoc underpinning $0.11/sh we see limited downside and ‘free’
leverage to a busy 12-month exploration program.
Scott Simpson
[email protected]
+61 8 6141 6320
PRODUCTION IN LINE WITH EXPECTATIONS, UPTIME OF 99% ACHIEVED DESPITE POOR WEATHER
The Galoc oil field performed in line with expectations with net production of 153kbbls, down 4.1% due to natural field decline (~20% annually) and averaged a gross 5,044bopd for the period. Of note was the 99% production uptime achieved despite severe weather conditions caused by Typhoon Bopha, courtesy of the recently upgraded FPSO mooring and riser system. Sales were up significantly to 232kbbls from 2 liftings (Cargo 28 - 353kbbls, Cargo 29 – 352kbbls) during the period, however proceeds from Cargo 28 were received in January. As a result, revenue was down marginally to $12.3m. OEL finished the period with cash of US$19.3m after exploration and development expenditure of US$2.77m and US$4.56m, respectively. Major capex items included development expenditure at Galoc Phase II ($4.56m) and seismic acquisition in SC 51 ($2.73m). Next quarter should see development expenditure of ~$15m for Phase II works as the rig is mobilized for drilling. With the additional Cargo 29 sales revenue, OEL will unlikely draw down on its $37m debt facility until the Jun Q. Production is forecast to decline until late 2013 to ~4,000bopd before the Phase II development boosts the rate to +12,000bopd.
GALOC PHASE II PREPARATION WORKS PROGRESSING FOR A JUNE Q DRILLING PROGRAM (33% WI)
Following FID for the Galoc Phase II project in September, preparation for the offshore phase has progressed well, with key contracts awarded for the drilling scope (Diamond Offshore – Ocean Patriot drilling rig); offshore construction works (DOF Subsea– Skandia Hercules DSV); and supply of trees and well heads (Dril-Quip). Key items have been delivered ahead of project mobilisation, with the rig expected to arrive sometime in the Jun Q, with date dependent on previous commitments.
A key highlight for the Q was the execution of a binding agreement with BNP Paribas to provide a US$37.4m project financing agreement. The facility represents ~60% of OEL’s net US$62m share of the US$188m Phase II development costs with the remainder to be met from existing cash flows. The facility will be secured at a project level and has a 3-year term, expiring on the 31st of December 2015. First drawdown will be in the Jun Q 2013 and principal repayments commence 12 months later in Q1 2014, while there are no penalties for additional prepayment. The specific interest rate has not been disclosed but reported as a ‘competitive rate above LIBOR’
The Phase II development should see the drilling of 2 development wells, which will be tied back to the existing FPSO Rubicon. The project offshore scope is expected to be completed in the June Q and Sep Q 2013, with production from the additional wells online some time in 2H 2013. Once online the wells should boost production from ~4000bopd in late 2013 to +12,000bopd. Recent activity has seen the finalization of the 3D seismic interpretation and subsequent well design. Detailed modeling of the reservoir was completed, providing explanation as to why the vast majority of production is currently from 1 well (Galoc-4) and importantly, aided in the optimal design/proposed placement of the Galoc-5 and Galoc-6 wells. On the back of the detailed technical work and Phase II commitment, reserves were upgraded for the field to 16mmbbls of 2P reserves, with ~50% attributable to the Phase II development. OEL’s net contractor entitlement reserves are 4.4mmbbls.
The additional 3Dsesimic has also provided an enhanced view of the area to the immediate north of the field which is estimated to contain some ~8mmbbsl of appraisal upside and 8mmbbls associated with the Galoc North prospect. OEL is currently seeking JV approval to drill the Galoc North prospect immediately following the 2 x development wells. Located to the immediate north of the field, a discovery could be readily tied back to maintain flush production and significantly enhance the project economics. We estimate unrisked upside for the prospect of $0.04/sh.
Scott Simpson
[email protected]
+61 8 6141 6320
Galoc Development Wells and Northern Galoc Prospectivity
Source: OEL
2D SEISMIC ACQUISITION PROVIDES ENHANCED VIEW FOR DRILL-READY DUHAT-2 (80% WI)
During the Dec Q OEL completed the acquisition of 150km of 2D seismic across the Duhat structure,
onshore Leyte in the Philippines. The new 2D resulted in an enhanced view, with previous mid-case oil in
place estimates of 76mmbbls revised to a prospective mean recoverable resource of 23mmbbls. The
seismic will also allow for optimal placement of the Duhat-2 well, a follow-up to Duhat-1 which was drilled in
2011. The Duhat-1 well was abandoned at 350m TD due to high pressures, after drilling through a thick
sealing formation, with oil and gas shows also observed. OEL plans to drill the Duhat-2 well in mid-2013,
drilled to 1000m and targeting the reservoir sands at 500-800m. With oil and gas shows observed in the
previous well and live oil also observed in shot-holes during the recent seismic acquisition, there is evidence
of a working hydrocarbon system. Together with evidence of a seal in the Duhat-1 well, reservoir quality
remains the key risk. Early analysis of the seismic also shows potential for follow-up prospects.
OEL previously announced it has secured an additional 40% WI in SC51 North Block from Swan Oil & Gas
for A$1.25m, taking its interest to 80%. Under the terms of OEL’s farm-in, it will pay 100% of the upcoming
Duhat-2 exploration well (estimated at US$5.5m) to earn its interest and will take no part in the South Block
following its decision to exit in February 2011. The acquisition of additional interest in SC51 provides a more
material potential impact from the low cost test of a revised 23mmbbls prospective resource for which we
estimate unrisked upside of $0.13/sh. Its onshore location makes for ready commercialisation.
Scott Simpson
[email protected]
+61 8 6141 6320
SC51 Seismic Mapping and Onshore Leyte Location
Source: OEL
MATURED PROSPECTS FOR DRILLING AND POTENTIAL FARMOUT IN SC69 (79%WI)
During the Dec Q OEL continued technical work following the completion of 3D seismic interpretation.
The work has confirmed the presence of 3 attractive prospects at Lampos, Lampos South and
Managau East. A 9-month extension of the present term will allow for completion of these works,
preparations for drilling and a likely farm-out of interest in the permit prior to drilling.
AWAITING NOTIFICATION FROM BHP ON THE DRILLING OF CINCO-1 (33.18%WI)
OEL is awaiting notification of a drill date from BHP for the Cinco-1 well. The well is required to be
drilled by 5th of August 2013, following the award of an extension to the original terms. The extension
was approved to allow for BHP to secure a suitable ultra deep-water rig with shallow high pressure
capabilities, to drill the Cinco-1 prospect and to also allow time for suitable post-drill analysis to be
conducted prior to the commitment to any subsequent sub-phase. The well was delayed from a drilling slot
early in 2012 as a result of BHP terminating the contract for the Transocean Deepwater Expedition rig when
it failed to pass key acceptance tests. BHP is continuing its efforts to secure a suitable rig and there is no
specific date proposed for the well at this stage.
BHP is earning a 60% interest in the permit by funding the acquisition of 3D seismic (completed) and the
drilling of 2 deepwater exploration wells. The first well to be drilled is the Cinco-1 prospect, targeting a mean
prospective resource of 2.1tcf and 74mmbbls of condensate. Following drilling of Cinco-1 BHP may elect to
fund a second well to secure its 60% interest or fall back to a 30% interest. The 3D seismic survey identified
a large number of additional prospects and leads across the permit with total unrisked mean prospective
resources estimated at 19tcf of gas and 670mmbbls of condensate in the Nido carbonate formation alone.
The Hawkeye prospect is another key target and provides additional prospectivity with an estimated
670mmbbls of mean prospective oil and its prospectivity is largely geologically independent from the
result at Cinco.
Scott Simpson
[email protected]
+61 8 6141 6320
INITIAL EXPLORATION WORKS COMPLETED IN TANZANIA (50%WI)
OEL has now completed its initial commitment works for the Kilosa-Kilombero and Pangani PSA’s
onshore Tanzania following the recent completion of airborne gravity and magnetic surveys across both
permits. The information has been tied in with field work, reportedly confirming the presence of a
sedimentary basin in Kilosa-Kilombero and possibly in Pangani. The JV is currently reviewing a
decision to enter a 2nd term, which would require the acquisition of 2D seismic over a period of 12-
months. The phased agreement then allows for a decision to enter a 3rd term requiring an exploration
well.
Kilosa-Kilombero and Pangani PSA’s, SC 55 Prospects
Source: OEL
Scott Simpson
[email protected]
+61 8 6141 6320
MAINTAIN BUY RECOMMENDATION WITH A PRICE TARGET OF $0.25/SH
We maintain our BUY recommendation