Analysis of Ophir's assets
I have recently made a small investment in Ophir Energy (LON:OPHR) , thanks to @WShak1 alerting me to the price drop following the placing by early investors Och-Ziff and Mittal. As it turned out, this was shortly followed by a large rights issue, which I shall be happy to take up.
Ophir has been on my radar for a while, as a highly successful explorer, with some interesting assets. That price drop presented an opportunity to enter at what appeared to me to be an attractive price.
The rights issue prospectus (341pp) has provided me with an excellent source of information on the company, so I've been ploughing through that. Key information on Ophir's assets is presented on pp96-129.
I have digested this into a spreadsheet that investors may find useful (click for a readable version!):
The spreadsheet shows "official" 2C contingent recoverable resources for each block or group of blocks, and unrisked in-place management estimates of block potential (both on a net to Ophir basis). It also shows when drilling or other activity is expected for each.
With over 4.5tcf of discovered recoverable resource already; a massive lead inventory (totalling over 18bn boe), as the spreadsheet shows; and around a $1bn of cash following the rights issue, Ophir looks like an interesting company to follow - though speculative.
There should be short-term interest, with DST results on two wells due shortly and two new wells due in Tanzania's Blocks 1, 3 and/or 4 in the coming quarter (Apr-Jun). Ophir's fund raising and resulting strong balance sheet strengthens its negotiating position for the many farm-downs that the prospectus indicates Ophir is aiming for.
I look forward to newsflow with interest.
Mark
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26 comments
In case anyone missed this - or it's been posted elsewhere. Date 25th June.
just seen it myself.
"Ophir Energy ‘stronger than ever’ despite share price fall"
8 min video with Ceo Nick Cooper at Oil Council
http://www.proactiveinvestors.co.uk/companies/stocktube/2896/ophir-energy-stronger-than-ever-despite-share-price-fall-2896.html
Mark, any updates on this? Seen your tweet about picking up a few more...
Mark, any updates on this?
Ophir's latest presentation is on their website here:
http://www.ophir-energy.com/media/68600/investor-presentation-june-2014.pdf
Slide 6 (p7) shows the key information I'd previously included in my spreadsheet. As you can see, we now have two rigs running (one in east Africa, one in west Africa), so plenty more wells this year.
ISTM that the market is grossly undervaluing the company: it has around $1.5bn in cash and Tanzanian assets with a proven market value of around $1bn post-tax (demonstrated by Pavilion deal). That works out at 244p/share (fully diluted), just for those assets. Now have look at slides 22-28: the company has a substantial demonstrated resource in equatorial Guinea. This resource will be tested with low-risk drilling this summer. Slide 28 shows the route to monetisation of the asset, with partial monetisation expected this year, after drilling. The market is attributing no value to this asset. At the AGM, Nick Cooper indicated that its value (with Ophir currently holding an 80% interest) may be similar to that of Ophir's Tanzania block 1,3,4 assets.
...and then the remaining wells this year offer considerable "free" optionality to investors, on top of the proven assets.
Cheers,
Mark
Re #16 above: looks like like my guess of 20% taxation on the Pavilion deal is about right, according to this article.
Not sure, though, that the minister has considered that the tax is on the capital gain, not the gross sale amount. ;0) Ophir will have made a considerable investment into the blocks, which can surely be deducted?
H/T to "Philanderer" on ADVFN for highlighting the article.
Cheers,
Mark
Thanks for the clarification, ee.
To clarify from my side. By "attractiveness" I did not simply mean geological attractiveness, but all the factors you also mention. Achieving a deal such as this one, on good terms, is clearly not a straightforward process, hence credit to management for doing do. Another factor, is also likely to be the financial position of the farming out party/vendor. The better that position, the more they can afford to resist unfavourable offered terms & the less able farminees will be able to "squeeze" them. Alan Booth of Encore stressed this to me, before Encore was eventually sold.
Moreover, achieving such terms shows that the acreage is attractive (not just geologically) to "the trade": a much more knowledgeable group than the stock market/analysts.
Some of my most successful natural resources investments have been in smaller companies that are partnered with majors. Though no guarantee of success, it's a good positive indicator, in my experience.
Regards,
Mark
I'm not going to enter a protracted debate on this point, but the evidence doesn't (AFAIAA) exist to give management particular credit for achieving the farmout. Those outside the process simply cannot know all the circumstances - and, in particular, it might be more a case of "keen buyer" rather than "canny seller". There is no shortage of companies searching around for opportunities.
That is, of course, clearly true. But, since you've raised it, whilst Ophir Energy (LON:OPHR) plainly have a large amount of cash available they also have a pretty substantial pipeline of commitments....hence they clearly seem to be actively seeking to manage their portfolio with relinquishments and farm-outs. The trick is always to stay ahead of the curve in that process - and obviously today's deal is a step forward.
And just on that point, I would also observe that the important thing with partners is that they should have as much of a shared agenda with each other as possible - including financing capability.
For example, big companies tend to come with big company overheads and working practices (as in any other business) so, as an investor in a small partner, you know that a big company operator won't be especially price-sensitive and that the costs of any particular activity will be (much?) higher. Of course there may sometimes be the quid pro quo that they have more street cred or better access to equipment or more "favours in the bank" - but sometimes the opposite can be true! But a small company working with a big company operator knows that costs will be dictated by the big company.
It is also the case that big companies will also have a much bigger range of opportunities - and will frequently adopt capital rationing to decide which of those opportunities to pursue. For example Ophir Energy (LON:OPHR) recently relinquished acreage in Madagascar and paid money to do so, thus apparently creating difficulties for its minority partner. Such withdrawals and relinquishments say a great deal about the relative priorities of the bigger company, but they say relatively little about the prospectivity of the acreage - or the ultimate upside. There are few better examples (showing that big companies make mistakes) than Shell's withdrawal from the very same Indian acreage that provided the growth platform and company-making opportunity for Cairn Energy (LON:CNE)
The RNS I linked to in my earler post has been replaced by this one.
Chief differences I can see (based on my post, as the arlier version of the RNS has been removed) are:
a) that OMV will unconditionally pay the costs of two further wells (rather than those wells being conditional)
b) Further conditional promotes are payable in the event of success with certain wells.
Mark
I am not referring to any particular situation, but I must take issue with the over-simplification of your thought that:
On cue, Ophir delivers some excellent news this morning. Farm-down achieved of blocks in Gabon to OMV, including:
All in exchange for 30% or less non-operated shares in the blocks concerned. "Promoted share" means a share that is disprortionately high, relative to the proportion of the block being farmed out.
This has important positive implications for Ophir's future:
a) A furthur increase in Ophir's cash pile on repayment oif the past costs
b) A big reduction in Ophir's future expenditure on the Gabonese exploration campaign, meaning shaeholders' cash can be stretched considerably further, before dilution becomes a risk.
The Ntsina block alone has prospective, unrisked resources of over 2bn bbls oil (I don't have figures for the other blocks). Ophir will retain 40% of Ntsina.
As a note with wider implications, this illustrates that major partners can be found on favourable terms for sufficiently attractive acreage. Conversely, I take the view that where explorers struggle to farm our their acreage, that acreage may not be as attractive as it is touted to be. So it is worth being sceptical of companies in that situation. (e.g. Aminex (LON:AEX) , Providence Resources (LON:PVR) ).. In the case of Nighthawk Energy (LON:HAWK) it had previously struggled to find partners, but has now successfully done so (though on a small scale). That is another factor that improves its attractiveness to me.
Credit to Ophir's management for securing such favourable terms and preserving shareholder value before drilling risky wells. They do, however, need to sucure similar deals on various other blocks (e.g. Kenyan ones), where they are sole risked or have high shares at present. I was a little disappointed that the well currently being drilled in Tanzania block 7 is being drilled on an 80% basis.
Cheers,
Mark
Firstly, apologies for not having updated the spreadsheet in the thread header - just been too busy lately.
I have been asked on Twitter to set out my estimate of core NAV. Here is my latest thinking, following the announcement of the deal with Pavilion:
That results in a total core NAV of $2,750m = £1,686m vs £1,840m market cap.
So, not quite true that market cap. < core NAV (I hadn't been conservative enough with tax - but hopefully I've allowed too much for that now). Apologies for that.
One could be critical that significant amounts of cash are shortly going to be spent on exploration - but we'd have to be very unlucky if none of that paid off! There is no allowance for future prospects (e.g. block 7 being drilled now). There is also some 2tcf net of 2C gas offshore Equatorial Guineau (after 5 successful wells), which I have made no allowance for (which somewhat offsets cash absorption by explo. activities). Risk/reward looks pretty good to me - with excellent prospects of an NAV increase as drilling proceeds and we learn what the actual cost is.
Most importantly, the company is not likely to need to raise any more cash for quite some time.
Cheers,
Mark
Mark
Any read across to Aex assets? Thanks!
Dbfromgb
Well, clearly there is - but remember that these are ultra-large scale, resources, proven by quite a few wells. KN-1 is too small to be of interest to a major and only one succesful well has been drilled onshore at Ruvuma.
I remain out of Aminex, until and unless it can announce a deal that secures the company's future and permits a continuation of its exploration programme.
db
No direct read across but it might be more interesting to monitor good old Wentworth over the coming month.
They are due to report a CPR on Mozambique (where Anadarko are looking for oil onshore).
Also they are due to announce a Gas Sales Agreement in respect of Mnazi Bay (Tanz) so that would be a good steer for AEX.
Mark as pointed out by my good Canadian pal this link http://vhhl.ae/projects.html suggests quite a bit less than 50Tcf more like 25? So really paying $2.64bn for 2.5Tcf net?
Nah. ;0)
Checkout the Anadarko link I provided. The 25tcf is for Prosperidade only (actually 17-30+tcf). In addditon to that, there is also the Golfinho/Atum complex with another 15-35tcf.
So, total for Area 1 is 32-65tcf+ recoverable - hence 50tcf ballpark.
I agree that this is relevant to Niko - but more than anything show the craziness of Indian politics. Referring to the original Reuters article:
It is just patently obvious that offering a tariff that provides an acceptable return to investors such as Niko would help relieve the supply shortage and reduce the cost of imports (India has a balance of payments crisis too, at present)... but it seems that the politicians are too bullheaded to confirm the tariffs which we had been led to believe had been agreed.
BP & Reliance can afford to play hardball and sit this out (which they must do). Unfortunately Niko doesn't have the luxury of time. Hence, I'm glad I reduced my position significantly when the shares were around $9. Not tempted to re-enter, so far.
Cheers,
Mark
Hi Mark some read-across to Niko too since they have ~1Tcf of reserves local to India so no LNG costs so must be worth more than IONG are willing to pay at around $500m / Tcf. IONG could have bought out Niko's share of D6 instead?
Log
We have a new data point for the valuation of Ophir's Tanzanian assets: http://www.reuters.com/article/2013/08/26/anadarko-ongc-mozambique-idUSL2N0GQ0M120130826
The Area 1 block concerned is estimated to contain ITRO 50tcf of recoverable gas. So 10% of that is not dissimilar in scale to Ophir's Tanzanian discoveries (net).
Cheers,
Mark
Mark,
Following the extension of the Deep Sea Metro-1 Drillship contract for another 18 months, Ophir has now updated its Tanzania drilling schedule. Slide 6 of this latest Presentation (June 6th) provides the details:
http://www.ophir-energy.com/media/58916/agm_presentation_6_june_2013_final.pdf
Order of play:
Block 4 (40%): Ngisi-1 explo well spud 6 weeks ago, currently drilling, targeting 1.3TCF.
Block 1 (40%): Mkizi-1 explo well (Jodari satellite), targeting 0.5TCF
Block 4 (40%): Pweza discovery - appraisal and DST.
Block 1 (40%): 1C explo well (outboard basin floor fan prospect), targeting 18.7TCF. Est spud September.
Block 7 (80%): Mlinzi-1 explo well (cretaceous channel prospect), targeting 25.6TCF. Est spud November.
Ophir now estimates discovered recoverable resources on Blocks 1,3,4 at 13.6TCF, following successful DSTs at Jodari and Mzia fields.
Cash in hand at 30th April was $891m. With Mlinzi-1 slated for spud in November, Ophir ought to be announcing its farm-down transaction for the 2 Tanzania and 2 Kenya Blocks pretty soon in order for it to complete in time. Drilling a cretaceous target (deeper, longer time) holding 80% isn't desirable. As you say, $1bn doesn't go far in deepwater drilling.
Thanks for that, Chris. Unfortunately, couldn't make Ophir's AGM, so will study the presentation and update my spreadsheet accordingly.
Another positive update this morning: the current drillship has been re-contracted, bringing several wells forward. I have updated the timetable shown in the asset inventory linked in the header to reflect this.
Next news we need to hear (besides drilling results from Ngisi) is farmout, especially in relation to Tanzania Block 7. With 80% ownership by Ophir at present and a well now scheduled for Q4 this year, I wouldn't want the company to blow a big chunk of its cash on that prospect, on a sole-risk basis.
Lots of drilling news to come over the remainder of 2013!
Cheers,
Mark
Just announced: http://www.investegate.co.uk/ophir-energy-plc--ophr-/rns/notification-of-board-changes/201304260856413262D/
Alan Booth to join Ophir's Board as an NED. Nice!
Mark
I have updated the timetable in the asset inventory linked in my original article to reflect the update that Ophir have issued this morning. The update is mixed, but I regard it as overall positive.
The only negative is that only one well will be drilled in Block 4 this quarter, instead of two previously planned. Positives:
Cheers,
Mark
Yep I think Bowleven looks cheaper on a price per contingent bbl and much more chance of some liquids there too. I know not really comparing like with like though. Also there is a lot of gas in Kurdistan which could get unlocked quite quickly via a Turkish pipeline. That could put a lot of pressure on European gas prices and thus pressure on LNG. India D6 gas price agreements could unlock a lot more there too. I think gas has a very bright future as coal and nuclear replacement but I'm not sure at what price.
Log
The big question here is why the rights issue. vs farm down?
Och-Ziff and Mittal obviously sold prior to rights to raise funds so they could take up rights issue.
They could have just wanted to keep high % interest as they have great belief in assets but more likely they couldn't convince a major to farm-in on reasonable terms. If the latter then one wonders why not? Obviously the value is in unlocking the huge prospective resources but if third party thought they were this good they'd have farm-ed in like a shot and OPHR would have avoided dilution. Can't be that dilution route was preferred by OZ and Mittal because they would have put more money in.
Looks like an excellent company but all comes down to how much they can prove up through appraisal drills so next few wells are key.
Log
Studying the prospect inventory, it is clear that they need to do both! $1bn doesn't go very far drilling all that acreage on a sole (or main) risk basis.
It appears that the company doesn't want to farm down Blocks 1, 3 and 4 further at this stage - which seems sensible, given the degree of derisking that has already taken place. However, block 7, East Pande, the Kenyan blocks, Block R (EG) and several others all need farming down before drilling.
One reason that I wouldn't take too large a position is the one I alluded to in this article. Whilst LNG prices appear sound in the near/mid-term there is more uncertainty longer-term, which makes undeveloped gas assets in particular very hard to value. In that respect, it is interesting that the Block R development can possibly be done in a "brownfield" manner, expanding an existing LNG plant.
Would help matters if some of the potential oil prospects actually materialise!
Cheers,
Mark