re: Ann: Nido Secures Dragon Oil as Farmin Pa...
It could have been a great announcement – a farm-out to a well funded farminee for a virtual free carry – but my first reaction to this was unprintable. It is all well and good if we end up at 20% but in the meantime this deal has served up a risk that we will end up with just a 10% WI in the most interesting prospect we’ve seen for a long while.
I can see what has probably happened (Dragon playing hard ball for a minimum of 40% whilst PNOC were not able to commit), but given that this was a deal that did not have to happen it is disappointing that we find ourselves waiting on a decision from the Philippines Government as to whether we can buy back a stake we did not need to sell.
On the face of it I would think that NDO and PNOC-EC have had some substantial discussion around this agreement and that PNOC are amenable to NDO clawing back 10%. Clues to this are mentions of Philippine Government approvals to “allow” PNOC-EC to divest and Dragon Oil having the right to become Operator (currently held by PNOC with NDO as technical operator in this phase). Furthermore, other reports indicate that Dragon have the option to pick up a further 10% from PNOC for a total 50% WI http://www.proactiveinvestors.co.uk/companies/news/64901/dragon-oil-adds-offshore-philippines-exploration-through-farm-in-deal-64901.html http://www.oilvoice.com/n/Dragon_Oil_sign_farmin_agreement_with_Nido_Petroleum_Philippines_Limited/ada798d7c1e8.aspx#gsc.tab=0
One would hope that PNOC are reasonably interested in carrying through with this, but if so why did we not farm-out 30% (conditional or otherwise) and facilitate a deal between Dragon and PNOC for the remaining 20% rather than dumping this uncertainty on the market.
Assuming the cash freed up goes to lifting the Indo equity my Monte Carlo sim shows a decent lift in potential discovery at the more probable end of possible outcomes and, not surprisingly, a reduced cost of discovery. That comes at the cost of giving up the blue sky.
Positives A well funded JV partner (we seem to be collecting a few of these - KUFPEC, Lundin and now Dragon). Cash freed up for other opportunities – be that 20% Indo or elsewhere. A reduced WI ahead of the next phase (carrying a two well commitment if my memory serves right).
Negatives A risk that NDO ends up with just 10% where we really should hold 20%. Time pressure to extract a decision from the Philippines government ahead of drilling. Uncertainty taking the heat out of any sp run up heading towards drilling.
It could have been a great announcement, but it has fallen short imo… I'll still rate it a buy on the likelihood that we will end up at 20% but would have preferred to avoid the uncertainty.
NDO Price at posting:
3.5¢ Sentiment: Buy Disclosure: Held
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