Edison Investment Research

Wells to watch in 2017

Since the oil price crash of 2014, exploration has been particularly badly hit as companies looked to trim expenditure. Wood Mackenzie estimates that 2017 exploration will account for 8% of upstream expenditure, down from historic norms of 14%. In this more difficult environment, any surviving exploration has tended to be led by majors, for example ExxonMobil’s giant Liza discovery offshore Guyana in 2015. In our most recent Exploration Watch, we highlight wells due to spud in 2017 that involve independent companies, with resources estimates greater than 100mmboe. Our exception is the much anticipated multi-billion barrel potential Korpfjell prospect in the Barents Sea offshore Norway, which is operated by Statoil and partnered by major companies.

EnQuest acquisition: Ability to extract net economics (NAV) will be demonstrated over time

EnQuest’s agreement to take over operatorship of Magnus, SVT and associated infrastructure is a material operational undertaking, especially when considered in parallel with commissioning and ramp-up of production at Kraken. The transaction will involve EnQuest taking on several hundred onshore and offshore staff and contractors. With this in mind, EnQuest’s staged approach, which involves taking on just 25% of Magnus and an additional 3% of SVT at the outset, appears to be sensible. The combination of deferred consideration payments, a ‘call’ option on additional equity in the transaction assets and downside protection mechanisms suggest that EnQuest is backing its ability to maximise value from late-life assets without exposing shareholders to potential downsides. EnQuest has until 15 January 2019 to exercise its option over an additional 75% of Magnus and related transaction assets, giving it time to understand the operational complexities as well as study decommissioning options before taking on risk. 

2017 Senegal appraisal to kick off in January

Cairn Energy confirmed today that it will return to drilling offshore Senegal by the end of January this year, with two firm wells designed to further evaluate its 473mmbbl SNE discovery. The Stena DrillMax is contracted for these two appraisal wells together with multiple follow on options yet to be confirmed but which could include exploration wells in addition to further appraisal.

SDX initiation

Egyptian producers with development and exploration upside

SDX Energy (SDX) is a London/Toronto-listed company with interests in two producing onshore fields in Egypt. Crucially for a small E&P, it will be cash flow positive in 2017 and is unlikely to return to the market for more equity to develop assets. The current work programme (of new wells, workovers and water flood) could see a more than doubling of recoverable volumes and is both cheap and relatively low risk. Once this work starts to bear fruit (later in 2016/17), the low-cost production will put SDX in the enviable position of being able to largely fund development of exploration prospects, while giving it resources and operational credibility to add further assets in Egypt. Our analysis indicates that the share price is more than supported by current operations, giving upside potential for the near-term production increases we see as likely and free exposure to exploration upside.

Oil Macro outlook 2016 - oversupply in the short term

Edison published its latest oil and gas macro outlook on 27 January 2016. Below are highlights of the short term thoughts.
Market thesis: Oversupply to remain in the short term
The oil markets have been in turmoil now for 16 months, with recent trading at its most tumultuous in years as crude prices have plummeted to levels not seen since mid-2004. A Saudi-led OPEC market-share protectionist policy has driven a marked increase in inventories over 2015, with lifting of Iranian sanctions and potentially slowing Chinese demand set to extend the supply overhang.

African Petroleum - Initiation

We initiate on African Petroleum (see link). Pure play E&Ps are not in favour of late as poor exploration results in recent years and the falling oil price has depressed sentiment. However, for investors willing to look through near-term oil prices and seek exposure to exploration risk, African Petroleum has ten offshore blocks with large working interest positions, many of which are very close to successful wells drilled in 2014 (not least SNE-1 and FAN-1 off Senegal, and Total off Côte d’Ivoire) - as seen below.

Five themes from oil majors’ 2015 updates

This post is an excerpt from the latest edition of our Catalytic Converter monthly (link), published on 25 February 2015.

As the Big Oil year-end 2014 reporting season draws to an end, we reflect on the main messages from the strategy updates.

What’s going on with Saudi’s rig count?

While all eyes are on US oil production stats, notably from shale, we take a brief look at Saudi oil production trends. Saudi’s rig count stayed broadly flat from 1997 to 2005 then increased sharply in the 2005-06 period. This can be explained by the expansion of Aramco’s oil capacity to 12mmbbl/d from 2006 to 2010, as well as a new focus on exploration.