Dominion Petroleum - High Risk Oil & Gas Exploration

The Background
East Africa is becoming something of a magnet for oil companies seeking exciting oil exploration prospects.  It’s become an extremely hot area ever since Tullow and Heritage Oil’s big successes along the Albertine Rift in Uganda which is shaping up to be East Africa’s largest resource.  An astonishing 27 of 28 wells drilled in the region have struck oil, and Heritage have illustrated the scale of the prize on offer by announcing a deal to sell their interests to ENI for approximately $1.5bn.

Sub Saharan East and Central Africa are extremely under-explored with only a 9% proportion of total wells across Africa being drilled in the regions [ref] http://www.dominionpetroleum.com/uploads/MicrosoftPowerPointFistEnergyDPLNovember2009.pdf [/ref] .  South of Sudan there are only 2 producing complexes - one in Tanzania and one in central Mozambique, which is something of a statistical anomaly.  Tullow’s world class Lake Albert resource that’s in development is adding Uganda to the list.

Dominion was one of the first companies to enter Uganda, and snapped up the Block 4B licences 400km to Tullow’s south in 2007.  Sharing geological similarities to Tullow’s Lake Albert resource, and being part of the same Albertine Rift,  Dominion’s prospects around Lake Edward are potentially very significant with talk of billion barrel potential.  Dominion is the second largest acreage holder after Tullow in the Albertine Rift holding 1.06 million acres.

Dominion is aiming to drill it’s first well in Block 4B in the first half of 2010 in a year that’s lining up to be the most active in the company’s history. Dominion will participate in between 2 and 5 drills across Uganda and Tanzania over the next 12 months.

The History
It’s been a checkered couple of years for Dominion with a dry well plugged in Tanzania, a legal wrangle with their former finance director settled for $2.5m and a period spent skating on financial thin ice before the company received $10m in new funding from a hedge fund that should see them through to the farm out negotiations for Block 4B.

The funding came from BlueGold Global Fund LLP [ref] http://www.bluegoldcap.com/ [/ref] , run by the ex-Vitol traders Dennis Crema and Pierre Andurand.  BlueGold has been one of the best performing hedge funds in London over the last couple of years rising by a staggering 210% in 2008 in a year when other hedge funds were dropping like flies. [ref] http://ftalphaville.ft.com/blog/2009/01/13/51077/bluegold-coins-it/ [/ref] .   Historically BlueGold invested primarily in oil and derivatives, but with $1.3bn now under management they are diversifying 10% of the assets into upstream equities.  Dominion is BlueGold’s first primary equity investment and the first in which they have taken an active position on the board with a non-executive seat taken by Crema.

Most recently the company has been through a shake up of the board, appointing Andrew Cochrane as CEO with the aim of strengthening the company’s financial position in the wake of the BlueGold investment. Mr Cochrane was a founder and Business Development Director at FTSE 250 listed Salamander Energy PLC, and he brings a wealth of scale experience to the company.

So Dominion is attracting savvy speculators and risk tolerant directors - which is the kind of profile needed for investors in the company as this is through and through a wild cat exploration company focused entirely at the earliest stage of the E&P cycle. If drilling is successful, the resource will still need to be brought to market, and the infrastructure is still not in place for even Tullow’s operations in the north which is to be brought to production in early 2010.  There’s talk of a pipeline to be developed from Lake Albert to Mombassa, but that won’t be before 2014.

Dominion will need to invite many partners on board in order to fulfil their financial and operational obligations - and the rumour recently reported in the Wall Street Journal is that Exxon may participate [ref] http://online.wsj.com/article/BT-CO-20091202-704222.html [/ref] .  These kinds of partners certainly validate the potential scale of the Lake Edward Resource but nothing is confirmed as yet.

The Assets
Uganda - Lake Edward / Block 4B
Most of the interest in Dominion is around the Lake Edward Prospect which has similarities to the geology of Tullow’s Lake Albert development to the north.  An airborne gravity and magnetic survey from August 2008 showed thick sedimentary formations which may be oil generating.  Satellite radar imaging has suggested the presence of oil seeps on Lake Edward  indicating that oil is migrating through the basin and the seismic surveys completed show that there’s enough specific structuration to form traps. The Competent Person’s Report was carried out by Energy Resources Consultants Ltd - the same consultants that Tullow used in Lake Albert.  4 prospects and 11 leads have been identified, the largest of which is comparable to the Lake Albert Buffalo/Giraffe Discovery in Block 1 which is reported to contain 400m+ recoverable barrels. [ref] http://www.dominionpetroleum.com/uganda.asp [/ref]

The ERC report shows mean unrisked oil in place across the 4 prospects in Block 4B of 1,715 million barrels, with mean net recoverable resources of 359 Million barrels risked net to Dominion.  The largest prospect shows a mean recoverable unrisked resource of 124mmbbls.   Another 11 leads will require further seismic survey but the suggestion is that they may offer a combined unrisked 782mmbbl.  [ref] http://www.dominionpetroleum.com/uploads/DominionBlock4BReportFinal170609.pdf [/ref]

One starts to ask whether this a potential billion barrel resource?  ERC have given the probability of a working hydrocarbon system in the area of 45%, and the Lake Albert drilling success rate has been extremely high, but one must remember that drilling success in Africa stands in the region of 20% so early stage statistics like these should be met with a healthy skepticism.

Dominion is bound by the terms of the PSC agreement to drill one well before July 2011, but with the rumours of Exxon being brought in as a partner, one has to presume that the first well will be in H1 2010. The prospects being considered can be reached with an onshore rig and shouldn’t be expensive -  the depth required being approximately 2000m.  According to CEO Andrew Cochrane, the first well should cost in the region of $10m with the second well incremental $5m - Dominion holds a 95% interest in these prospects.

Congo - Lake Edward / Block 5
Lake Edward is split down the middle by the border of Uganda and the Democratic Republic of Congo.  Block 4B is the Eastern Ugandan side of the Lake Edward prospect, whereas Block 5 is the Western DRC side of the lake.   Block 5 is also a licence partially held by Dominion, but it was awarded somewhat controversially and is still awaiting presidential ratification.   The aerial surveys conducted in 2008 have shown the presence of a high in the center of the basin and the large extent of the thick sedimentary basin. [ref] http://www.dominionpetroleum.com/congo.asp [/ref] Further seismic analysis is planned.

There is the risk that Tullow’s appeal for their rights over Block 5 to be reinstated will be upheld, but currently Dominion is a 46.75% partner in the Block 5 area, with SOCO International having a 38.25% stake and the rest being taken by the state owned COHYDRO.   If successful, the Ugandan drilling due in 2010 will serve to further de-risk the DRC interests adding to it’s proportionate valuation.

Tanzania - Onshore and Offshore
Dominion have several licences in onshore Tanzania - Mandawa, Kisangire, Lukuliro, Selous and an offshore interest in Block 7 East of Dar es Salaam.  After seismic surveys in Mandawa where they hold a 50% stake, they drilled a well in October 2008 at Mihambia-1. 45 days rig time and $13m later the well was plugged and abandoned after the rocks were found to be poorly developed and water bearing.  Disappointing news, but a new well is planned in 2010 and newsflow can be expected.  The estimated unrisked onshore resource is of the order of 750m boe. [ref] http://www.dominionpetroleum.com/onshore-tanzania.asp [/ref]

Kisangire was farmed out to Heritage Oil in April 2008 & Dominion now takes a free 45% carry on this resource with Heritage committed to the seismics acquired in early 2009 and 2 wells planned in 2010.  Selous is on hold due to environmental constraints due to the game reserve in the region.

Andrew Cochrane, the new CEO, was convinced to come on board by the potential of not only the Ugandan assets, but also his interest in the Block 7 offshore assets East of Dar. Dominion took 4350km of 2D seismic data in late 2007 and have plans to acquire 500km2 of 3D seismic data in 2010.  They will need a farm-in partner in this moderate deep water resource -   of the 5 prospects mapped, one is potentially a multi-hundred million resource, but these are offshore areas requiring significant investment from a major.  Shell and Petrobras amongst others are some of the owners of the surrounding deep water licences - so there is no shortage of potential partners in the vicinity, but Dominion’s stake will clearly be a minority one by the time any of these are drilled and proven.  The offshore site will be potentially ‘derisked’ by Anadarko’s Windjammer drill in Q12010. There’s currently no well commitment.
[ref] http://www.dominionpetroleum.com/offshore-tanzania.asp [/ref]

Outlook
Dominion looks likely to continue in it’s current strategy of gathering early stage seismic data across prospects to convince more established partners to come in and drill the exploration wells.  Not having the in-house financial resources to carry through their development plans - there will either need to be significant dilution through equity placings with institutions (such as the BlueGold deal) or farm-outs to majors.

The company’s guidance is that between 2 and 5 wells will be drilled in the next 12 months. At least one is likely in Lake Edward pending news of a farm-in partner; Heritage is committed to drilling in Kisangire with at least 1 well this year; A further well is planned in the Mandawa PSA area (according the the interim 2009 report); Block 7 offshore is also likely to generate news of a farm-in partner if the planned 2010 3D seismics are conducted successfully.


Financials
Current cash was bolstered by the BlueGold deal, and is supposed to carry them through to the end of the financial year.  Edison (August ‘09) [ref] http://www.edisoninvestmentresearch.co.uk/search/results/e4c8ae5b2d44cc657c2d91ae4e21b731/ [/ref] estimate a net expenditure of $30m across the 5 planned wells. A successful farm-out should give free carry on the first of it’s commitment wells in Block 4B uganda, while they are carried in Kisangire.  Edison are presuming that a shortfall will be raised either through further equity raises or farm outs.

Valuation
A recent management presentation at the First Energy Conference [ref] http://www.dominionpetroleum.com/uploads/MicrosoftPowerPointFistEnergyDPLNovember2009.pdf [/ref] showed a comparable valuation of Heritage Oil’s ongoing sale of their Lake Albert assets to ENI for $1.5bn to Dominion’s as yet unproven heavily (90%) risked resource estimate of 255mmboe in Lake Edward.  Giving a >20% discount to the $5.7 dollars per barrel received by Heritage  for the terms of the Block 4B production licence, the valuation of the resource could be 9.215p per share - implying a market cap of £90m.

Heritage Oil are in the midst of selling their Lake Albert stake to ENI for $1.5bn at a valuation of $5.70 per barrel.  A recent management presentation by Dominion shows the P90 (90% risked) resource estimate of 255mmboe for their Lake Edward assets.  According to the presentation available on the First Energy webcast -  a 20% discount (for the terms of the production sharing licence in Block 4B) to the Heritage valuation gives a present value of 9.125p for the Lake Edward asset.

I’m not going to indulge in any fanciful numbers here, but I will note that on the basis of that comparative valuation all the Tanzanian onshore and offshore assets and Block 5 licence in Congo are thrown in for nothing at the current price.

Edison Investment Research was valuing the Uganda and Tanzania prospects on a risked EMV basis of 13p (98p unrisked) as of mid 2009... although it is worth noting that they were valuing Dominion at 45p in mid 2008 - clearly the dry well and oil price fall have taken their toll. [ref] http://www.edisoninvestmentresearch.co.uk/search/results/e4c8ae5b2d44cc657c2d91ae4e21b731/ [/ref]

Please note that I have no stake in the company at the moment and no affiliation with the company.  I’d appreciate some feedback from some of the wiser souls on this site as to the wisdom of Dominion as an investment considering this is an early stage wild cat exploration company certainly not for widows and orphans etc.  If anyone can see any holes in the numbers or oversights, please let me know and help fill in the picture.