much ado about nothing at roc oil

Company: Roc Oil Company Limited
Recommendation: Buy
Price at Review: $3.35
Current Price: $3.11
Change since review: -7.16%

Issue: 236
Date: 1 Nov 07

The Angolan program proves that wildcat oil drilling isn't like shooting fish in a barrel. But at least there's still a few more fish.

Over the last two weeks we’ve been trying to suppress our excitement resulting from Roc’s release on 18 October. It stated that an announcement on the Cevada-1 exploration well would be made as soon as approvals required by the Angolan government and national oil company Sonangol had been received. We’re glad we did temper our enthusiasm, because it turned out to be much ado about nothing. Cevada-1, and the concurrently drilled Soja-1, both revealed some oil but not enough to warrant further appraisal.

With hindsight, it’s easy to say that the market got too excited over the first announcement. Roc’s share price fell almost 60 cents on the day of the follow-up announcement, but that only brings it back close to our last mention on 30 Aug 07 (Buy – $3.29).

Two failures are disappointing, but it’s important not to lose perspective. This is wildcat oil drilling, not shooting fish in a barrel. The company has drilled three holes in Cabinda, all of which have produced some form of hydrocarbon, and one of which is reasonably likely to prove a large and developable heavy oil reserve (Massambala). The Simmons rig is now moving to the Trigo-1 target and will start drilling within the month. The Explorer rig, which is only able to drill shallower targets, is now sitting idle awaiting further instructions. Its next task might be appraisal drilling at Massambala.

Roc also released its third quarter production results, which were satisfactory. Production rose 13% over the prior quarter, to 881,209 barrels of oil equivalent. Sales were flat compared with last quarter though, at $60.8m, because the company hasn’t yet sold all the barrels it produced in the period. Development drilling continued at the Zhao Dong C & D fields in China, with three wells disappointing but another two exceeding all expectations. With the oil price trading above USD$90 a barrel, the current share price looks too cheap. With a little exploration luck over the next six months, it could prove cheaper still. BUY.