What a great announcement for FAR yesterday with the option for new adjoining Djiffere block. Just doing some quick research and after a quick read it appears CAP Energy may have withdrawn from Djiffere due to liquidity problems leaving FAR the beneficiary with a massive 75% working interest - pretty time poor at present so stand to be corrected on that.
After reading the valuation numbers on the new block in the article below the vals on FAR's new acerage are pretty impressive and not sure if the market is aware of this yet. Given the close location to SNE-1 the odds of oil from the SNE-1 source kitchen migrating to Djiffere would be pretty good I'd have thought, especially if Bellatrix is full of black stuff . Maybe Ya can comment on this.
Also looks like African Petroleum may be drilling the "The Alhamdulilah prospect" in 2016 which overlaps into FAR's average. (Given FAR's huge Senegal discoveries at SNE 1 and FAN 1, AP shouldn't have a problem farming this drill out).
Lots of reading below and "OIL is GOOD" for FAR at present. Bring on the appraisals and nice that FAR now has a legitimate fall back with the Djiffere block (low cost drilling) and some well earned independence from CNE & COP which will undoubtedly give them a lot more bargaining power and capital down the track.
Nice work again CN.
Cheers
Plugged
PDYOR
Plenty of read-across from proximate activity
Cairn Energy: Senegal E&A campaign kicks off this summer
Cairn and its partners FAR and ConocoPhillips have recently submitted a development plan to the Senegal government for an appraisal and exploration programme commencing in mid-2015. The c $210m (gross) committed work programme includes:
a new 3D survey starting this summer covering the shallow-water, shelf-edge area in the Sangomar Offshore and Rufisque Offshore blocks. Seismic results on the Rufisque Offshore block in particular will be interesting to watch as it sits mainly on the shelf, directly adjacent to and north of Cap's Djiffere block (see map in Exhibit 7). The two blocks share similar structural features and evolution according to Cap. Four exploration wells were drilled by Esso on the Rufisque Offshore block in 1968-72. Three of these wells were drilled on the crest and flanks of the Rufisque Dome structural high, and had fair-to-good oil shows in the Tertiary and Cretaceous sections (sands and carbonates). Based on 2D seismic, Cairn has identified three leads on the Rufisque shelf and shelf edge, with estimated gross mean risked prospective resources of <50mmboe each in Cenomanian reservoirs and a GCoS of c 10%. We would expect these leads to be upgraded to prospects and GCoS to increase after the 3D seismic survey;
two firm appraisal wells on SNE to further de-risk the discovery. The precise locations of the wells are yet to be determined, and the operator could choose to drill either close to SNE-1 or on the flanks to evaluate other reservoir zones; and
one firm exploration well on the shelf edge in Q116. Two prospects have already been shortlisted as candidates for the first exploration well: Bellatrix (overlapping SNE's northern flank) and Sirius (10km north of SNE).
Following the committed work programme, Cairn could drill three contingent wells, including one appraisal well on FAN (which has less read-across to Djffere) and one or two exploration wells later in 2016.
Kosmos: 3D seismic results and drilling campaign
In addition to Cairn, there could also be read-across from Kosmos's exploration campaign in its Senegal deepwater acreage, although the play types there are likely to be more similar to Cairn's FAN deepwater find than to Cap's shallow-water prospects in Djiffere.
In Q414 Kosmos shot a 3D seismic survey in its two recently acquired Senegalese blocks: St. Louis Deep Offshore and Cayar Deep Offshore. The blocks are located in northern Senegal on the border with Mauritania, where Kosmos made the Tortue gas discovery (5-8-12tcf P10-P90) in April 2015. The $125m Tortue-1 well encountered gas in several reservoirs of Cenomanian and Albian age with excellent porosity and permeability in structural/stratigraphic traps. The Tortue prospect was chosen as its central location, on the Senegal-Mauritania maritime border, which allowed Kosmos to de-risk both the Mauritania and Senegal acreage. Although Tortue was a gas discovery, Kosmos believes there could be multiple source rocks in the area including in the oil window.
Kosmos conducted a large, modern 3D seismic survey in Q414 and is currently processing the data, although it already has the 'fast-track' deliverables. Results will be integrated with the Mauritania 3D survey, which has been calibrated with data from the Tortue-1 well. Once the new seismic is interpreted, Kosmos expects to see significant prospectivity in its northern Senegal acreage, with a diversity of plays and multiple leads involving Cenomanian and deeper Albian/Aptian targets. An exploration programme in Mauritania and Senegal for 2016 could be announced in the next few months.
African Petroleum: looking to drill in Senegal in 2016?
African Petroleum (APCL) owns interests in Senegal and the Gambia, which could provide some read-across. As highlighted in our initiation report (5 March 2015) and update note (23 March 2015), APCL holds large interests in four deepwater blocks surrounding the block containing the discoveries by Cairn at FAN-1 and SNE-1: the ROP (Rufisque Offshore Profond) and SOSP (Senegal Offshore Sud Profond) licences in Senegal, and Blocks A1 and A4 in the Gambia.
An independent audit by ERC Equipoise published in March 2015 indicated best estimate gross unrisked prospective resources of 1.4bnbbls across two or three prospects in the Senegalese blocks and 1.9bnbbls across six prospects in the Gambia. African Petroleum believes that shelfedge prospects similar to SNE could be present in its SOSP licence, while deepwater basin fans similar to that encountered in FAN-1 could be found in ROP. The company is currently committed to drill an exploration well in ROP by 2016 and is looking to farm out to help fund the drilling cost. Given its outboard location, African Petroleum's prospects may have more read-across to Cap's deepwater Block 5B than to the shallow-water Block 1 and Djiffere licence.
Other players
We also highlight private UK-based oil and mining company Elenilto, which owns an interest in the Senegal Offshore Sud Shallow Block (SOSSB), some 100km south of Cap's Djiffere block and immediately east of African Petroleum's SOSP block. An independent report by BeicipFranlab in 2014 estimated STOIIP potential of 1.9bnbbls based on reprocessed 2D seismic, of which 400-700mmbbls is in first priority leads. Around half of the leads are analogues to SNE-1 (shelf-edge plays) or to existing shallow-water salt dome discoveries Dome Flore/Dome Gea (Oryx Petroleum-operated) in the AGC zone and Sinapa Dome (Svenska-operated) in GuineaBissau. As of May 2014, Elenilto was planning to begin a 3D seismic survey in the following months; however, it is unclear whether the survey has started yet.
Oryx Petroleum (OXC) operates the AGC Shallow and AGC Central blocks with an 80% WI (AGC is the joint petroleum exploitation zone established by Senegal and Guinea-Bissau). The blocks are directly adjacent and north of Cap's shallow-water Block 1 in Guinea-Bissau. Oryx has identified three structures in AGC Shallow, of which two are drill-ready prospects, and plans to drill an exploration well in 2016. In the deepwater AGC Central block, Oryx has identified shelf-edge plays similar to SNE on seismic data, and expects to acquire new seismic data in 2016.
Svenska Petroleum operates Blocks 2, 4A and 5A in Guinea-Bissau, with FAR as its nonoperated partner. Block 2 contains the Sinapa discovery made by Premier Oil in 2004, estimated to contain 170mmbbls of STOIIP and 13.4mmbbls of 2C contingent resources. New 3D seismic data have identified a SNE 'look-alike' prospect called Atum. Svenska is currently negotiating a rig contract for its 2016 drilling campaign.
Management and shareholders: De-listing from ISDX
Cap's core management team brings an interesting mix of local business insights and longstanding operational experience in the oil and gas industry. We would expect the company to add more oil and gas expertise at senior management levels as it grows over time.
Lina Haidar (CEO) is a Lebanese and Nigerian citizen with an extensive portfolio of business interests and experience in West Africa. She founded OEP Nigeria, a provider of turnkey office, residential accommodation and housing development solutions in Nigeria. She is also sole director and 29% owner of Global Energy Trade (with fellow Cap director Alexander Haly owning the reciprocal 71%) and is the chairman of HARU Energy Nigeria.
Pierantonio Tassini (COO) is a petroleum engineer who has had a 42-year career with ENI. During his career he has held a variety of positions including, since 1996, senior commercial and technical roles in West Africa, in the management of upstream activities and representing ENI's interests at shareholder level in several large-scale LNG projects.
Ewen Ainsworth (CFO) is a leading upstream professional, having worked in the industry for 27 years at various stages of the oil and gas life cycle. Previous roles include FD at Gulf Keystone and at Europa Oil & Gas. He has extensive experience in corporate finance and holds a qualification as a chartered accountant.
Guy Hustinx (NED) was appointed in July 2015, having worked for Frank's International NV, a global oil services company, for 29 years and is currently VP of the company's Middle East and Africa Division, based in Dubai. Cap's directors consider his extensive experience of the oil and gas industry, particularly in Africa, will be of particular use to the company as it progresses its interests in the Senegal Basin, West Africa.
Cap's directors own 80% of the equity listed on the ISDX Growth market, with only 20% in public hands and most of this held by high net worth individuals. The two main shareholders are Lina Haidar and Cap's non-executive director Alexander Haly, who also brings West Africa experience through his position as CEO of Petro Services, which provides and manages offshore support vessels to the oil and gas industry. Ms Haidar and Mr Haly hold 24% and 55% respectively.
Due to its small free float, liquidity in the stock is practically zero, which means that minor dealing activity can have a large impact on the company's share price. Year to date there has been only £5k of trading in Cap stock, and the share price has been flat at 115p/share since late June.
On 7 September, Cap announced that it was withdrawing from the ISDX Growth market. The company had hoped its listing would increase liquidity, enabling it to access development capital more effectively, increase its profile with customers, suppliers and potential acquisition targets, and have publicly traded shares that would be more attractive as consideration for potential acquisitions. However, in its announcement of 7 September, the company has concluded that due to difficulties in raising additional funding from a wider pool of investors and the sustained low oil price increasing the potential for capital constraints, it can no longer justify the costs of the listing.
Ordinarily, the company would be required to convene a general meeting to secure 75% of the votes cast for the de-listing to proceed. However, with directors and affiliates committed to the delisting holding 84.9% of the equity, it will now proceed on an uncontested basis giving 20 business days' notice. As such, the company will de-list from the ISDX Growth market on 2 October 2015.
Sensitivities: West Africa footprint
Cap brings an interesting mix of technological edge and local contacts that sets it apart from some of its junior E&P peers. However, the company still needs to negotiate a number of issues regarding its assets, which investors should take into consideration when considering their investment.
Country risk: Cap operates in a region affected by insecurity and food/water/health crises. Guinea-Bissau in particular has been politically unstable for many years, and the local infrastructure is poor. Having said this, fair presidential elections took place in the country last year, while Senegal is a stable democracy and one of West Africa's better-off nations. Although it is not our base case, it is not inconceivable that fiscal terms may be subject to revision.
Geological risk: Cairn's SNE and FAN discoveries offshore Senegal have partly de-risked Cap's acreage; however, they are not direct analogues. Cap currently has one drill-ready prospect in Senegal based on 2D seismic, but the company would need results from the full seismic interpretation and likely new 3D data to better define targets ahead of any exploratory drilling in 2017-18.
Technology risk: Cap's partner in both Guinea-Bissau and Senegal is TAOL, which has exclusive rights to the proprietary Virtual Drilling technology of SGX-listed Rex International. This technology is relatively untested (compared with conventional seismic interpretation), but has yielded very encouraging results to date for Rex and its partners.
Valuation: Still too early to ascribe a RENAV
Traditionally, we value oil companies with an asset-by-asset NAV derived from detailed DCF modelling. Our valuation includes production, development and contingent resources, while exploration is valued only if the company has a plan and resources to drill in the next 12-18 months. As Cap has no plans and funding to drill exploration wells in the next 12-18 months, we cannot give it a RENAV at this juncture.
Despite this, it is still useful to consider the unrisked valuation potential of Cap's acreage. Based on a DCF analysis reflecting Guinea-Bissau Production Sharing Contract (PSC) terms and our macro assumptions ($80/bbl oil and a 12.5% discount rate for junior frontier explorers), we estimate Cap's interests in Block 5B could be worth between $0.8 and $1.0/boe of developed resource for a field starting up in 2020-22. Block 1 finds could be easier and cheaper to develop (if enough resources are found), yielding a $4.1/bbl NPV for a 2020 start-up. Senegal PSC terms are more attractive, suggesting an NPV of $4.8/boe with a 2021 start-up date.
What we currently do not know is the resource size of any individual drill target and when these resources would be developed. If we simplistically used the same NPV/bbl for the entirety of Guinea-Bissau prospective resources (6.2bnbbls) this would equate to $1.7bn unrisked, of which 84% is in Block 5B. Likewise in Senegal, using our $4.8/boe NPV for the whole 587mmbbls of prospective resources would suggest a $1.2bn unrisked valuation. Needless to say, even in the most successful outcome only a handful of the prospects would be developed, and a time value of money element has to be introduced since a portfolio of discoveries would be brought onstream over an extended time period. The bigger the resource base, the more spaced out the development would be - for instance, a five-year delay to our tentative start-up dates would roughly halve our calculated NPVs/barrel.
To get around the time value of money issue, in Exhibit 10 we also illustrate the potential valuation of a single 300mbbl prospect in each licence, close to the size of Cairn's SNE discovery (330mmbbls 2C). Such a prospect would be worth c $75-300m unrisked in Guinea-Bissau and around $630m unrisked in Senegal. Cap's current share price appears to price in less than 6% of a scenario where a 300mmboe discovery was made in each block.
Comparative valuation for pure-play exploration plays
With more than 1.9bnbbls of net P50 recoverable prospective resources in its three licences, Cap trades on a very low EV/bbl multiple of less than $0.03/boe, making peer comparisons exceedingly difficult. One way to look at equity market valuations of exploration plays is to study company valuations the day before a well result is announced. Our database, composed largely of Londonlisted E&Ps, goes back to 2011 and is fairly noisy; so it is unsurprising that the limited data suggest significant variation pre-drill. Investors are willing to pay up to around $4.5/unrisked net boe, although many are priced below $1/boe. We also observe that the largest resource bases are not achieving commensurately high per-barrel values. However, based on the Antelope prospect or a 300mmbbl Block 5B indicative target, this would equate to c $97-365m, based on Cap's current working interest, which will be diluted.
Another way to look at exploration value is to study block values implied by farm-out deals. Generally speaking, the oil and gas industry ascribes considerably more value to assets in farm-out deals than equity markets, with the stock market discount anywhere from 50% to 80% of values paid by industry. Our deal database suggests gross block values post-seismic in a range of $100m to $450m. Applying these values to Cap's three blocks indicates EV valuations of c $95m to $430m.
Financials: De-listing from ISDX
As of end-2014 Cap had £3,000 in cash on its balance sheet along with £1.08m of director short term loans. Assuming these are rolled over, we estimate that around £3-4m will be required over 2015, primarily to fund working capital, finish the interpretation of the 3D seismic survey in Block 5B and possibly to fund a 3D survey in Senegal's Djiffere block. We expect this funding to come from director loans.
As previously discussed, Cap announced on 7 September 2015 that it was de-listing from the ISDX Growth market, although short-term funding arrangements are likely to be similar to before, having been funded to date through directors and high net worth individuals introduced by the directors. Longer term, Cap will require funding to support drilling activities, although its first drill commitments are not until 2018 in Senegal. To meet these cash calls, the company will likely look for farm-in partners, and we would expect a data room process to begin once the results of the Guinea Bissau Block 5B 3D results are available.
In the event of a farm-out, Cap would ideally attract an experienced offshore operator, and get a full cost carry on one or several exploration wells. Cap would likely seek reimbursement of past costs, which are in the order of a few million dollars net to the company. In our opinion, it would make sense for Cap to formally launch a farm-out process once the 3D seismic data interpretation in Block 5B is complete, so as to maximise industry interest in the asset. While the E&P farm-out market has been subdued since mid-2014, the materiality of Cap's prospects in the heart of West Africa's current exploration hotspot could generate interest among large independents and majors alike.
Ultimately, the company may also seek a more senior equity listing such as on AIM, and this was something the company was previously planning to do during H214 or 2015. However, given turbulent market conditions for small-cap E&Ps and reduced investor interest in the sector, it is not unsurprising that an AIM listing was delayed, and there can be no certainty about when the company will seek a new listing once it has completed its de-listing from the ISDX Growth market.
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