| EnCore Oil PLC Successful Burgman Side-track Result

28th Mar '11 by Fangorn

30 comments 17972 reads

http://www.investegate.co.uk/article.aspx?id=201103281100017261D&fe=1

EnCore Oil plc (LSE: EO.) is pleased to announce that the Burgman side-track well 28/9-4z located on UKCS Central North Sea Block 28/9 has successfully encountered hydrocarbons in the targeted Lower Tay sandstone interval.

The well was drilled directionally with a hole angle up to 64 degrees to a Total Depth of 5,237 feet Measured Depth (M.D.). Initial analysis indicates net oil pay of 135 feet over a gross reservoir interval of 135 feet (M.D.), equivalent to 64 feet of net vertical oil pay over gross vertical interval of 64 feet True Vertical Thickness. Preliminary log analysis indicates an average porosity of 38%, significantly better than in the original Burgman well. Initial estimates suggest a likely STOOIP in the range of 80 - 120 mmbbls.

Interesting comments on the recent North Sea tax swoop as well....

News just out.

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marben100

28th Mar '11

Hi ee,

Are you really saying that an a newly discovered resource should be valued at $12/bbl before any production wells have been drilled

Yes, I think that's an adequately conservative figure. As I mentioned in #6 you're comparing apples and oranges. A significant proportion of Dana's reserves were gas (especially the recently purchased assets), whereas all the discoveries I've included in my core NAV are entirely oil. The logs and samples should give adequate information to a prospective purchaser on the likely productivity of the field (excellent, according to my understanding).

Whereas Dana's assets were spread out over a substantial number of developments, in various stages, from undeveloped to fully developed, Block 28/9 is likely to form a single development that is similar in scale to all of Dana's assets combined - bringing considerable economies of scale, as deucetoace mentioned. Further, my figure is more conservative than most analyst estimates (whereas the analyst estimates for Dana turned out to be much too conservative)..

Cheers,

Mark

PS A point that AB stressed is that (unsurprisingly) one of the main drivers of value is the number of potential buyers. Dana's portfolio was "difficult" (from buyers' points of view) and only attracted a single realistic buyer. OTOH, I believe block 28/9 is likely to attract plenty of interest, when appraisal is complete and it's "sale ready".

loglorry

Yes Mark and these are precisely the same reasons ee normally gives as to why Soco should attract a higher $ per barrel than the $10 often assumed. Also EO has quite a few losses that can be used against future production taxes to take into account. The oil price six months ago was also a lot lower than it is now although taxes have increased I'll admit.

I think 12-15 is fair to be honest - but time will tell.

Log

emptyend

Yes Mark and these are precisely the same reasons ee normally gives as to why Soco should attract a higher $ per barrel than the $10 often assumed.

Actually they aren't (and nobody has a $10 value either). It is a fair point that Encore have a chunky development asset in one place....but analysts (on SIA) sometimes quote such concentration as a risk.....AND it should be also remembered that Dana's portfolio contained similar developments at Western Isles (74 mn boe 2P gross, formerly Rinnes) and Arran (58mn boe 2P gross), albeit with the latter mainly gas.

Soco booked 2P reserves on TGT/CNV several years ago now - and have now drilled around 23 wells on the two fields. How many have Encore drilled so far? It takes some wells to prove up potential 2P.

Re Mark's point on the asset mix, 65% of Dana's 2P assets were oil (from the CPR report).

But I'm not going to convince you....and nor am I going to even try. Anyway - you are all perfectly entitled to believe whatever you wish about the appropriate valuations.....as you say, time will tell......

I would merely observe that the kind of mutual reinforcement of opinion that is now going on reminds me of the discussions that were had about SIA several years ago....and, as you know, we're still waiting for the fat lady to sing in that case, having endured some disappointments in the meantime.

ps...macrus makes a good point about the seismic being "unlocked". That could have a value, if true, and I see little reason to doubt that it is.

sirlurkalot

ee,

Part of the reason Dana went at a lower price than some felt was appropriate was that the company had annoyed the market by not providing enough information, thus meriting a discount rating. But let's not start all that up again. Encore is far more investor-friendly than Dana ever was. As an example, I think you suggested that Dana was similar to many companies in not giving field sizes, but surely you'd agree that Alan Booth is far more proactive in keeping investors informed on field sizes? "Initial estimates suggest a likely STOOIP in the range of 80 - 120 mmbbls." And Alan Booth, shock horror, actually does presentations in London!!

"Alan Booth is pretty scathing of the concept of $/bbl valuations"
I think everyone who's informed is pretty scathing of them, myself included in regularly stressing how approximate they are. Thing is, they're the best available to share investors large and small, so they're what we have to go on. I hope I regularly emphasise how important sentiment is in investing in the O&G industry which I agree has fairly vague valuation metrics. Industry buyers of course are able to get much more detailed info before trade sales take place, so of course industry figures would look down on how share investors work, but what else can we do? If they want us to use more sophisticated valuation models, shouldn't they be giving us more info?

surely you'd agree that Alan Booth is far more proactive in keeping investors informed on field sizes?

Oh yes - I absolutely would. Though of course the numbers given are just one opinion, not matters of incontrovertible fact at this point.

I would observe that it has yet to be proven whether his estimates are in fact more or less reliable than those issued by partner Premier, about which I note that Encore investors frequently complain and allege that PMO must have an ulterior motive for appearing to have lower figures.

Field sizes during exploration drilling are always a matter of opinion - and opinions can vary widely. IIRC loglorry and others have pointed to the apparent* difference of opinions over the recoverable resources at TGT (SIA's VN field), despite 15 wells having been drilled there!....and suggested that a deal will be impossible until those are resolved. Why should the situation be any different for EO, when they have drilled so few wells?

*I'm not sure that there ARE actual differences of substance, but people certainly believe there are

I won't contribute any more to this thread. There's no point. Everyone seems wholly convinced and is unworried by the risk of groupthink, so there's no need for any caution is there?

peterg

Hi Sir L,

I really don't think that argument holds water. Yes, Dana had a poor approach to investor relations, and it made many of us mad at times. However, I'm sure they didn't take the same approach in any discussions with KNOC, or any other potential aquirors, or that KNOC would for a moment let those sort of considerations influence their view of value.

Peter

davjo

Have to say I agree with ee's cautionary message. Seems to me that recent substantial director sales in the 140p's was a signal saying exactly the same thing. Nothing is certain!

Nevertheless, I'm still riding this one with one third of my original holding. Not sure if I'll hold until the end game materialises now. A new tax year beckons with a clean slate and different perspectives to be drawn. For sure though, I would not value any Catcher/Cladhan recoverable barrels at more than $10 at this point in time. Depends how the market pans out going forward but even $10 for undeveloped reserves could prove over-optimistic. The crucial point with Encore I think is managing to identify when the upside starts to vanish coinciding with the sp peaking from here on in. I'm sure I won't get the selling point exactly right but I'm likely to have a stab at it within the next 12 months.

doverbeach

29th Mar '11

Am told that this does not unlock much outside Catcher as the conditions are fairly specific.

Hopefully it extends to the surrounding blocks that Encore picked up in the last award round!

db

Oh c'mon ee. We all know every field is different but what else do we have to go on?

From Soco's 2010 Annual presentation we have 132m 2P booked and $260m in cash. So at $10/bbl this comes to £987m supporting a market cap of £1,300m and I think you are arguing that the market cap should be about £2,000m.

OK they have drilled a lot more wells and there is quite a bit of cost recovery in there but I can't see why your cost per barel take out price can be so much higher than EO? Soco have almost no other explo potential bar DRC which is looking like a bit of a dud and I don't think the market will pay much for it.

I realise you have thrown your toys out of the pram and don't want to comment on this thread anymore but if you can just manage one more post why should Soco 2P be valued per barrel so much more highly than Encore? We all realise that field types, cost recovery, gas/oil, extra explo play a large part but I can't see your argument to be honest.

Log

"the [potential EO resource] numbers given are just one opinion, not matters of incontrovertible fact at this point"
"it has yet to be proven whether his estimates are in fact more or less reliable than those issued by partner Premier"
These are IMO perfectly fair cautionary points. However AB is more orientated towards a near-term sale than Premier, so surely that means his estimates are more likely to be tempered by the threat of reality. What's the point AB pretending now with unrealistically high numbers if he'll probably be going over the asset details with a buyer within a year? Encore will be selling assets/the company to the industry sooner than issuing fresh equity, so why bluff the numbers now?

ee,
I may perhaps have missed something, but since the demise of Dana have you "gone public" with any new companies in which you own shares?

"Dana had a poor approach to investor relations, and it made many of us mad at times. However, I'm sure they didn't take the same approach in any discussions with KNOC"
My point is that maybe Dana's assets were in reality worth at least a par rating to the sector, or more, but since Tom Cross hardly communicated with investors, KNOC, even if fully informed, correctly thought they could get a low-ball bid price accepted. Its a bit of a sad situation Dana might perhaps have got itself into if it gives chapter and verse to KNOC, who maybe realise the assets are great, but since the then current owners of them hadn't been given the persuasive info before the momentum to sell was too great, the latter were happy to sell at a low-ball price.

This Dana stuff is interesting but historic and off-topic here, so shall we end the Dana angle to discussions?

"why should Soco 2P be valued per barrel so much more highly than Encore?"
Considering political risk, which host country is more likely unexpectedly to raise tax rates on production?

"why should Soco 2P be valued per barrel so much more highly than Encore?"
Considering political risk, which host country is more likely unexpectedly to raise tax rates on production?

I'd have said UK was more stable until a week ago but after the Ozzy tax raid I'd say political risk in Vietnam is much higher now. I can't see the UK raising production taxes in the NS much from here but maybe Vn and other countries might start to think theirs is too low now? To be honest I have no idea what the tax take is in Vietnam presently (I should know of course).

Log

thebuffoon

Considering political risk, which host country is more likely to raise tax rates on production?

You've made this point previously; but in fact, having just had a tax increase at $100 plus oil, I'd say it was Vietnam!

As ever, Davjo makes some good points. One thing I would like to raise is the issue of free shares in Encore 2. Surely this has to be factored in before selling?

Buffy

djpreston

I realise you have thrown your toys out of the pram and don't want to comment on this thread anymore but if you can just manage one more post why should Soco 2P be valued per barrel so much more highly than Encore? We all realise that field types, cost recovery, gas/oil, extra explo play a large part but I can't see your argument to be honest.

Log

I dont really see the need for childish (IMO) snipes here.

As to why shoudl it be valued more highly - more advanced development play with imminent production with essentially all costs sunk into the project (TGT) therefore surely/logically worth more to a buyer at this point than a discovery well with costs to come?

ee,
I may perhaps have missed something, but since the demise of Dana have you "gone public" with any new companies in which you own shares?

SirL - No, I dont think that he has to be honest but thats his own business and given the sniping he has attracted I wouldnt blame him for not being willing to do so. I dont think I would in his position.

As to the rest of the thread, well, different people have different ideas on values, opinions are just that, opinions. Some can be empirically proved others cant different companies and consultants use different models and different parameters. Personally I do think that $10/bbl isnt too unreasonable in the current climate (well, till last week anyway) maybe $8-$9 woudl be more conservative now. Then again, given the rise in the POO perhaps $10 is fair but then again, it depends on how any potential acquirer would work the numbers - are they prepared to pay up in the current high price market or do they see the POO as being temporarily high and thus more likely to base their M&A figures on a "normal" POO of say $80-$85? Lots of questions and factors.....

"the issue of free shares in Encore 2. "
Eh? If Encore shareholders are given shares in Encore 2 which have some value, who is giving them that value? George Osbourne? Tom Cross? Warren Buffett? The psychic octopus that predicted football results?

"No, I dont think that he has to be honest but thats his own business and given the sniping he has attracted I wouldnt blame him"

Perfectly fair enough, that's what I usually do, I just wondered if there had been anything I'd missed.

"the issue of free shares in Encore 2. "

This might be a bit tricky. I cant see it being done as a dividend due to the lack of distrib reserves. Maybe a placing of the shares?

This comment is under review

Eh? If Encore shareholders are given shares in Encore 2 which have some value, who is giving them that value? George Osbourne? Tom Cross? Warren Buffett? The psychic octopus that predicted football results?

Don't understand your point there, SirL. I have allowed nothing in my core NAV for the assets that those shares represent. The general view is that the market is not allocating any value to those assets (Spaniards, Tudor Rose, Buffalo etc) either.

Of course, theoretically, if Encore issued those shares today then, just as with any other form of dividend, the value of the "Encore I" shares should reduce by the value that the market assigns to Encore II. But, as I'm sure I don't need to tell you (especially in the light of your dividend trading strategy ;0)), it isn't as simple as that.

A key factor (which you have also mentioned in relation to other businesses) is that Encore is not currently adequately funded to explore those assets. I think you would agree that assets with funding to explore them have considerably more market value than assets with no clear means of progressing them. AIUI the plan is to accompany the spin off of those explo assets with a fund raising for "Encore II" (thus avoiding dilution of Encore I) - hence creating a viable stand-alone business, which I believe the market is likely to value considerably more highly than the sum of the current value assigned to those assets in Encore's market cap (negligible, IMO) + the cash raised.

Hence, I belive that such a manoeuvre would add shareholder value - which I have made no allowance for in my NAV estimates, so if it happens it's a bonus AFAIAC.

...and yes, can we get back to discussing the posts, rather than the posters and/or their supposed motivations, please? I, for one, welcome the debate and divergence of views. Ultimately the assets will be worth what they are worth (and I still think $10/bbl is too low for Block 28/9). Like Davjo, I am in the happy position of having already sold the vast bulk of my original holding and banked profits a multiple of my original investment, to control my risk, so I can afford to be sanguine about my current holding. If I felt that there was a significant degree of "froth" in the SP, I would reduce further but don't think that's the case at the current SP - and would likely add if the price sunk towards my lower estimate of core value, without any adverse changes.

Regards,

I realise you have thrown your toys out of the pram and don't want to comment on this thread anymore but if you can just manage one more post why should Soco 2P be valued per barrel so much more highly than Encore?

Putting aside your snide comment directed at ee :-

a) Opex $5-$8 vs $15-$25 bbl
b) Tax 50% vs 62%
c) API 39-41 vs 24-31 (equal to $5-$10/bbl difference in crude price realisations?)
d) VN development is significantly cheaper than N.Sea.

On the face of it, Soco would appear to have a pre-tax $20/bbl netback advantage...with the gap widening post tax if Osborne's latest tax hike sticks. And that's before taking account of Soco's booked reserves already being produced with the remainder in advanced stage of development vs Encore still working through explo.

Hope that encourages you to do your homework in future rather than wading in shooting from the hip without knowing what you are talking about.

30th Mar '11

Thanks davjo great post - big thumbs up to you.

Log

Mark Simpson

I cant see it being done as a dividend due to the lack of distrib reserves.

Surely they could just get some of the £38m share premium funds re-classified as distributable reserves? I think they would only have to find the nominal value of the new shares and since they are debt free and distributing shares as a dividend in specie together with a capital raising on the new equity then I can't see a court objecting to the re-classification - The law is to protect lenders and creditors and Encore has no significant amounts of either.

In short I reckon they can structure a deal in whatever way they think is best for shareholders.

EnCore Oil PLC Successful Burgman Side-track Result

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