Joined: 05 Aug 2006
Posts: 176View user's profile
Wed May 19, 2010 7:12 pm Reply with quote
Oil shares: finding the next Rockhopper
Created:18 May 2010Written by:Martin Li
It's the stuff of investment dreams. Shares in Rockhopper Exploration soared sixfold after it announced it had made an oil discovery with its Sea Lion well in the North Falkland basin. This kind of transformational find is precisely what you buy oil exploration shares for, even if Rockhopper hasn't yet commented on likely oil volumes.
That spike alone has propelled Rockhopper into the top tier of oil and gas companies on the Alternative Investment Market, and analysts have already opined - based on early indications of good reservoir quality and pre-drill resource estimates for the Sea Lion prospect - that Rockhopper's shares could be worth three times the current 217p price.
So the Rockhopper story isn't over yet. But clearly, anyone buying the shares now is not getting in on the ground floor. The good news for investors is that several other oil and gas companies have just embarked on exploration programmes that could transform their fortunes too. Several more are due to start drilling imminently.
Exploration is of course far from being a one-way bet, and the chances of drilling failure outweigh those of success. A general industry rule of thumb is that one in six wells will deliver a material result. But judicious management teams can improve on those odds, with careful technical evaluation a wide spread of exploration eggs over several prospective baskets, and strong partners to fund exploration and so minimise the impact of a dry well, or 'duster'. Here are our top picks for imminent exploration newsflow:
Serica Energy (SQZ)
Having refocused its attention on exploration after bringing into production the Kambuna gas/condensate field in Indonesia, Serica Energy has just started drilling the Conan prospect in the East Irish Sea, targeting over 100m barrels of oil equivalent (mboe). This will be followed in July by the Oates prospect that will target some 78mboe.
Faroe Petroleum (FPM)
Faroe Petroleum is entering the most exciting period in its history. After three recent discoveries, it has just started drilling the Maria prospect, its second significant Norwegian well. This will be followed by three wells this summer in the deepwater Atlantic Margin - Anne Marie, Cardhu and Lagavulin - that rank amongst the most prospective in its portfolio.
Salamander Energy (SMDR)
Asia-focused Salamander Energy is also looking forward to an exciting summer. It plans to drill a total of 12 exploration wells this year, including three very substantial prospects - Angklung in Indonesia and Rock Lobster and Tiger Prawn in Vietnam - over June and July. Angklung alone is targeting over 125mboe and will be the first prospect to be drilled in an area estimated to hold potential resources of over 500mboe.
Falkland Oil & Gas (FOGL)
Back in the Falkland Islands, attention now switches to the South Falkland basin, where Falkland Oil & Gas (FOGL) and its partner BHP Billiton will be next to drill a well. The oil targets in the southern basin are significantly larger than those in the north, although no wells have ever been drilled in the south - which heightens the exploration risks - and most southern prospects lie in considerably deeper water than those in the north. The rig used by Desire Petroleum and Rockhopper in the north has the capability to drill one of FOGL's shallowest prospects, Toroa, with operations due to start before the end of May.
The bulk of FOGL's drilling campaign will require a specialist deepwater rig or drillship, which the partners have so far struggled to find. But it's possible that BP's strife might have sufficiently dampened deepwater drilling activity in the Gulf of Mexico to free up such a rig to let FOGL and BHP begin their deepwater campaign before the end of the year, creating further opportunities for drilling excitement.
Company Share price Risked exploration upside*
Serica Energy (SQZ) 93p 132p
Faroe Petroleum (FPM) 127p 117p
Falkland Oil & Gas (FOGL) 176p 400p
Salamander Energy (SMDR) 233p 112p
*Analyst estimates of the value of resources being targeted by near-term exploration drilling, risked to reflect the likelihood of success
At the same time as Rockhopper has been basking in exploration glory, BP has faced a desperate struggle to stem the thousands of barrels of oil gushing each day from its stricken well on the bed of the Gulf of Mexico. It finally seems to have exerted some control over the leak by siphoning oil and gas from the broken pipe through a tube to a drillship on the surface. This is only a temporary solution, however, while BP develops plans to "top kill" the well by injecting heavy fluids to stem the hydrocarbon flow before sealing the well with cement. This may be combined with a "junk shot" to inject at high pressure a variety of materials such as parts of tyres and golf balls to stop the upward flow. BP's permanent solution is to drill a relief well, although this is likely to take until the end of July.
BP's shares have slid from 655p before the incident to 535p in the face of unknown clean-up liabilities. However, analysts at Mirabaud Securities note that since 20 April around $67bn (£46bn) of combined market value has been knocked off the five companies involved in the spill (BP, Anadarko Petroleum, Mitsui and key service providers Halliburton and Transocean). The analysts point out that the collective underperformance of these companies relative to the MSCI World Energy Index is equivalent to $33bn, which is significantly higher than even the most pessimistic cost estimates. This suggests that the market may have overreacted, particularly given more encouraging recent updates from BP, and created a buying opportunity.