Edison Investment Research

UK shale gas - Cuadrilla reports gas to surface

In our view, first shale gas to surface at Preston New Road is encouraging and supports results from the 2011, Preese-Hall 1 vertical well were gas was successfully flowed to surface from the Bowland shale. To date, Cuadrilla has only hydraulically fractured a small section of shale surrounding the first of two horizontal wells; gas flows on completion of the planned multi-frac are expected in early 2019 and should be significantly higher than those from current flow-back.

As discussed in Edison’s probabilistic analysis of UK shale potential, we believe that based on current knowledge, and assuming a supportive political/regulatory framework, there is a 67% chance of commercial success for UK shale (NPV15>0). We note that forward summer and winter average gas prices have risen materially since publication of our UK shale valuation, driven by declining domestic production, absence of long-term storage, rising oil prices and higher gas transportation costs.

Diversified Gas & Oil acquisition of Core Appalachia Holding Co

Diversified Gas and Oil has announced the acquisition of Core Appalachia Holding Co (Core) for a consideration of $183m comprised of $130m in cash (funded through the assumption of $93m of Core debt and $40m DGO debt drawdown) and 35m new shares issued at £1.15. The deal is expected to be immediately accretive to cash flow and earnings with synergies with DGOs existing Appalachian asset base. Net working interest production is expected to increase 19% to 71,000boed and 1P reserves +25% to 493mmboe. DGO expects immediate to near term synergies of $5-10m pa. The deal is priced at 72% of management estimated PV10 of $255m and is in line with the EQT acquisition on this metric. Assuming we were to include the Core assets at PV10, post equity dilution, the deal would add c.8.4p/share to our last published valuation of 138.1p/share excluding synergies. We note that DGOs share price has disconnected from recent spot price strength in Henry Hub in recent weeks and on our last published forecasts the stock yields c 7.4%.

Pontoenoe-1- latest well to disappoint offshore Suriname

Kosmos Energy is plugging and abandoning its Pontoenoe-1 exploration well in Block 42 offshore Suriname, after encountering water in the Upper Cretaceous primary target. It is the company’s second well to be drilled in the region this year, with the Anapai-1 well also failing to find hydrocarbons in the Lower Cretaceous. Both wells did however encounter high quality reservoir and Kosmos believes it has found evidence of a working source kitchen in Pontoenoe-1. Both appear to have failed due to a lack of trap, a key risk in stratigraphic prospects. The company expects to return to drill in Suriname in 2020, where it holds a portfolio of multiple independent prospects. The Kosmos wells were highlighted by us as wells to watch in our ‘Exploration Watch: 2018 exploration wells’ report.

Tullow’s Namibian well disappoints

Tullow Oil’s Cormorant-1 well is being plugged and abandoned after encountering water bearing sands, in the latest well to be drilled in the Walvis Basin offshore Namibia. Interest from industry has been intensifying as it looks to capitalise on the 2013 breakthrough Wingat and Murombe wells, and the majors have been moving in, with ExxonMobil farming into two separate deals in 2018. Attention in the region will now switch to the south of Cormorant, as the Ocean Rig Poseidon moves to PEL 71 to drill Prospect S for Chariot Oil & Gas. Both Cormorant-1 and Prospect S were highlighted by us as wells to watch in our ‘Exploration Watch: 2018 exploration wells’ report.

Tullow spuds Cormorant well offshore Namibia

UK independent Tullow Oil has spudded the Cormorant exploration well in the Walvis Basin offshore Namibia and highlighted by us as a well to watch in our ‘Exploration Watch: 2018 exploration wells’ report. The well is targeting resources of 125mmbbls in a basin slope Cenomanian Cretaceous fan covering 120km2. If successful, the well would open up a potential 1bnbbls in other fans for the company together with the rest of the basin for the industry, where majors have been building a position in recent years, most recently with ExxonMobil’s 30% farm in to AziNam’s PEL 44 licence immediately to the south of Cormorant. The well is one of two high profile wells to be drilled in Namibia this year, with Chariot Oil & Gas due to drill its Prospect S well from mid-October and also covered in our report.

Southern gas corridor to the EU nears agreement

The EU’s desire to diversify sources of gas supply, reducing its dependency on Russia, has driven interest in developing a southern gas corridor from the East Mediterranean towards Europe. Following last month’s meeting between Trump and European Commission President Jean-Claude Juncker, an agreement between both parties was reached, and the EU is poised to raise its US LNG imports in the coming years. In addition, Egypt and Cyprus reaching an agreement to connect the Aphrodite gas field to Egypt highlights a new potential gas supply source to the EU.