PANCONTINENTAL OIL AND GAS NLIt’s Only the Beginning…But it...

PANCONTINENTAL OIL AND GAS NL
It’s Only the Beginning…
But it appears that people have already gone and lost their minds. Pancontinental Oil and Gas Ltd (“Pancontinental”, “PCL”, “Company”) has plugged and abandoned the Mbawa-1 exploration (as planned!) after finding 52m of net pay in porous, gas charged sands in the primary target but failing to find hydrocarbons in the secondary target. The well has been labelled non-commercial by Apache, according to a Bloomberg interview with the company’s in-country manager. Anything less than 5 trillion cubic feet of gas would be non-commercial at this location, by our estimate, so inferences about commerciality on a standalone basis are not relevant for the future potential of the region.
The upshot is that a first up discovery in virgin territory remains hugely significant and that additional discoveries are highly likely. The Joint Venture will have learned much from this well and will be remapping in order to high grade the many remaining prospects on the block. The timing of the next well is probably H1 2013, with PCL largely free carried. We expect clarification of the forward program over the coming weeks.
We had not assigned much volumetric potential to the deeper target but we have adjusted our estimate for the primary target and also decreased our estimate for L8. The impact is a reduction in price target from 51cps to 43cps. Our Buy recommendation remains and is high conviction, especially at current price levels.
Forward Program and Newsflow
Additional detail on the Mbawa well is likely to be released in the near future, such as porosity and potentially volumetric estimates. We may also know more about why the secondary target failed and whether the well was considered to be a valid test of this play. Once this is known, it is also likely that we will find out when the next well may be drilled in the permit. We estimate followup drilling could occur in H1 2013.
Farm-out of L6 remains highly likely due to the proof of a working petroleum system and we expect that a deal could be consummated in early 2013.
Drilling at L10A and L10B by BG is possible in early 2013 and is more likely now that gas has been discovered in good quality reservoir at Mbawa.
A potential re-rating of the Namibian acreage based on drilling at Chariot’s Nimrod Prospect has not occurred as the well was unsuccessful. The Chariot well is in a different basin that is geologically independent of PCL’s permit; however, sentiment has definitely been affected. Farm-out of PCL’s acreage is also possible in the near term, despite the result at Nimrod and additional drilling is planned by others offshore Namibia.
Wild Ride Should Become Less Bumpy
After the expected bounce in the near term, from what is most likely predominantly panic selling, we expect the roller coaster share price to level out and then begin its journey upwards as further drilling approaches. Our price target has been volatile over this period but is also expected to be more stable.
We retain our Buy recommendation with a revised price target of 43cps (prev 51cps)