| DEO NEWS - Free Carried Drilling In 2012

30th Jun '11 by AnonymousUser858

2 comments 2145 reads

At work on my coffee break so no time for a detailed post

DEO has put out an RNS this afternoon - see http://www.investegate.co.uk/Article.aspx?id=201106301400014775J

"The Perth Licence co-venturers in Block 15/21a, DEO Petroleum UK Limited, Faroe Petroleum UK Limited, Maersk Oil UK Limited and Atlantic Petroleum UK Limited (together the "Perth Group") are pleased to announce that they have reached commercial agreement with the Block 15/21g co-venturers, EnCore Oil plc, Nautical Petroleum plc and Serica Energy (UK) Limited (together the "15/21g Group"), on the amalgamation of a sub area of 15/21a with Block 15/21g to create a single conjoined area (the "Amalgamated Area"). ...."

DEO has 12.62% of the new amalgamated block

"....The parties have also confirmed a firm well commitment to DECC on the Spaniards prospect to assess whether it is a continuation of the updip Gamma discovery which flowed at 2,660 bopd from the Upper Jurassic Galley sands. The Spaniards well is expected to be drilled in the second half of 2012 and will satisfy the licence and fallow commitments. The Spaniards well is to be funded 100% by the 15/21g Group on a dry hole basis. It is agreed that the costs of any second well will be borne 42.8% by the Perth Group and 57.2% by the 15/21g Group again on a dry hole basis...."

That means that DEO get exposure to the first drilling at zero cost to them. The well is to be drilled in 2012

It doesn't say so, but I'm guessing that if oil is discovered it will be exported via the hub that DEO are establishing at Perth. That will

a) generate tariff income from partners
b) reduce the unit costs for Perth production

This is all good news. It lends weight to the view I expressed yesterday that the valuation of DEO presents lots of opportunities for incremental value to be generated over and above Perth core.

gotta go - more anon

T

Unlock with Email

Unlock with Google

Already have an account?
Login here

AnonymousUser858

30th Jun '11

PS - The focus of DEO's business to-date has been the development of the Perth structure which has already had 3 or 4 wells drilled into it and is a proven and appraised discovery.

Gamma is a nearby structure which is in the same block as Perth but which is a separate and discrete structure. An exploration well drilled some years ago flowed oil at a respectable rate. It is believed by DEO management to be part of a structure which crosses over into block 15/21g where it is identified with the prospect known as Spaniards by the partners who hold 15/21g.

Any value attributable to Gamma will be incremental to the previous valuations which are based purely on Perth. That being said, if Gamma were to be brought into production via the Perth hub, it would contribute to the costs of that hub and thereby render Perth more profitable.

T

1st Jul '11

I'm frustrated. Just for once, I want to do a comprehensive review of the investment case, like grown-up investors such as Marben and SirL, instead of making a non-transparent Gladwell/Blink style judgement like I normally do but today's announcement means that things are starting to move, so I feel I may not get time to wait. I'm being pushed into doing things piecemeal. Very irritating. Blinking annoying. :~)))

Accepting the limitations of the situation, I'm sitting here trying to quantify what this latest news means in terms of the value added to DEO by the deal announced today.

First point to make is that neither Edison nor First Energy included anything at all for Gamma in their valuations. Both based their valuations on Perth Core plus Perth North. Both took as a base case the export route based on a tie back to Tartan. Both included the FPSO alternative as an upside possibility.

Edison calculated RENAV = 66.5p (1/6/11)
First Energy calculated RENAV = 78p (30/11/10) - before Osbourne's recent surprise attack on N Sea taxation rules.
So a striking degree of convergence in these two figures.

According to Edison's latest report dated 1/6/11, DEO estimate Gamma at 20-30 million bbls recoverable. They also estimated that Gamma/Spaniards was distributed more or less equally across the 2 underlying blocks. That implies the total size of the amalgamated G/S is about 50 mm bbls. DEO gets 12.6%. So DEO gets 6.3 mm bbls as their share of the amalgamated G/S.

Going back to the Perth valuation, DEO's share of Perth represents between 8.7 mm bbls and 13.4 mm bbls depending on whether you include Perth Core only or throw in Perth North, and depending also whether you include the additional recovery upside enabled by the FPSO.

The first conclusion I draw is that the 6.3 mm bbls represented by Gamma/Spaniard is very material compared to the existing 8.7-13.4 represented by Perth. In fact it represents an increase of between 50% and 75% in the underlying resource/reserve base on which valuation is based.

So if we accept the 66p from Edison, then today's news could be seen as adding 33p or more.

Of course there are some nuances. The tartan tie-back option would only provide a capacity for 6k bopd. So could not readily accommodate Gamma/Spaniards until Perth depletion is well advanced. The alternative FPSO option removes that constraint. To my mind that simply means that the FPSO option has just become considerably more attractive than it was before. And that in turn means that the enhanced recovery made possible at Perth by that option has just become more lilkely. Which mean that the valuation upside identified by both Edison and First Energy is more likely to be realised.

And remember Gamma is just one of a list of local discoveries that are waiting to be brought into the putative
Perth Hub.

So rough and ready back of a fag packet valuation for DEO has, I think, just gone from 66p to about 100p

Let's not get carried away. Spaniards has to get drilled and the result has to be what we expect. That's not a foregone conclusion. But the COS has to be pretty favourable given the amount of work and drilling already done.

And remember that DEO gets a free carry on next year's well. So the potential value added comes at zero cost.

I'm quietly pleased.

Question is am I properly weighted? My holding is about 5% or so. Do I feel lucky?

I think I might well do.

T

DEO NEWS - free carried drilling in 2012

Unlock the rest of this article with a 14 day trial

About the Author

AnonymousUser858

2 comments

Unlock the metrics for all these stocks and more...

Unlock the metrics for all these stocks and more...