Drilling Update: Gulf Keystone Petroleum and Ophir Energy Spud New Wells

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Today’s news that two high-profile and successful explorers have begun new drilling programmes could bode well for shareholders later this year.

Gulf Keystone Petroleum

Onshore oil installation Shaikan goes deep with the spudding of the Shaikan-7 exploration well, which will be the first deep well on Gulf Keystone Petroleum’s (GKP.L) Shaikan block.

Shaikan-7 has a target depth of 4,500m and is expected to take around 9 months to drill, so this won’t be a quick win, but could result in a material increase to Shaikan’s already-impressive proven reserves.

The new well is targeting the mid-to-lower Trisassic and Permian horizons, which Gulf Keystone believes could potentially contain for commercial quantities of light oil. An analysts presentation is due tomorrow that could provide more detail on the firm’s expectations for Shaikan-7, as today’s release was light on detail.

Is GKP still stuck in limbo?

Needless to say, if the well is successful and the firm manages to add significant quantities of recoverable oil to Shaikan’s current 2.2 billion barrels of estimated recoverable resources, then it would provide significant potential upside to the firm’s valuation – assuming the twin issues of export restrictions and litigation are resolved.

Until some progress is made in this area, the new well is unlikely to do much for Gulf Keystone’s share price. Although the firm is aiming to double production from 20kboepd to 40kboepd this year, which should provide useful cash flow to fund the firm’s ongoing activities, as I’ve discussed before, Gulf Keystone’s progress with its Field Development Plan (FDP) for Shaikan appears to be being held back by the wait for a final judgement on its Excalibur court case.

Sure enough, in today’s news release, John Gerstenlauer, Gulf Keystone’s Chief Operating Officer, said (emphasis mine):

“As we are about to commence implementation of our Field Development Plan for the Shaikan discovery and start Jurassic production from the newly constructed Shaikan production facility, the spudding of our first deep exploration well adds a new and exciting dimension to Gulf Keystone’s work programme in 2013. With Shaikan-7, we hope to confirm our expectations of major reservoirs beneath the deepest horizon drilled to date and add to what is already recognised as one of the world’s largest onshore conventional oil & gas developments.”

The wait continues, but surely it won’t be long now? A judgement is expected anytime now, but could easily be delayed into July.

Ophir Energy

Deepwater drillship First up is Ophir Energy (OPHR.L), which announced the start of its drilling programme offshore Ghana, where it has a 20% working interest in and is the operator of the Accra Block.

The first and only well planned for this year is Starfish, which Ophir hopes will be a play-opened and estimates to have mean prospective resources of 292 mmboe, with a 20% chance of success.

Ophir CEO Nick Cooper says that the Starfish-1 well “kicks off an acceleration of Ophir’s drilling operations into a broader gas and oil exploration programme, with four new oil plays being targeted in the next 12 months in addition to the ongoing gas exploration in Tanzania”.

Although 20% of 292 mmboe won’t result in a material increase to Ophir’s current 1,106mmboe of 2C recoverable resources, it could signify the start of something bigger and could add diversity of Ophir’s resource base.

Results are expected in approximately 40 days.

Disclaimer: This article is provided for information only and is not intended as investment advice. The author may own shares in the companies mentioned in the article. Do your own research or seek qualified professional advice before making any purchase decisions.

Heritage Oil Loses $313m Tullow Oil Ugandan Tax Dispute

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Heritage Oil (HOIL.L) has lost a London High Court case against Tullow Oil (TLW.L), relating to a tax dispute stemming from the termination of the companies’ joint venture in Uganda,

The dispute arose after Heritage sold its interest in the Lake Albert basin to Tullow for $1.45bn. Tullow then paid a tax bill which it said formed part of Heritage’s capital gains tax liabilities from the sale.

Heritage disputed the validity of the tax claim and said that Tullow’s payment of the tax was commercially motivated, and that it was not required to reimburse Tullow for the payment.

The judge sided with Tullow and said that Heritage should reimburse the $313m paid by Tullow to the Ugandan authorities on its behalf.

In a statement released after the judgement was announced, Heritage said:

It [Heritage] maintains the view that Tullow’s original payments to the Uganda Revenue Authority were commercially motivated rather than as the result of a valid legal obligation.

As I explained in my original ‘buy’ article on Heritage, all the case needed to settle this dispute has already been set aside in Escrow, so it will not affect the company’s current healthy cash position.

A Ugandan dispute

Additionally, Heritage is also appealing the tax assessment itself with the Ugandan authorities, as it believes that “this retrospectively placed tax, with no precedent, is not valid.”

Winning this Ugandan appeal could reduce the amount Heritage needs to pay Tullow.

Time will tell — there’s no point in ordinary mortals like us trying to guess the outcome of this kind of multinational, opaque tax dispute, but the key point is that Heritage has already set aside the money needed to pay the tax bill in full, so this will not affect its current cash position or its operations.

theFiringRoom.com says:

While winning this case would have enabled Heritage to speed up the repayment of the $500m loan it used to buy its OML 30 licence in Nigeria, this money has long since been in escrow and its loss will have no impact on the company’s financial position or operations.

Heritage is getting production back on track in Nigeria and output levels are currently in excess of 35,000 bopd once more. In my view, Heritage remains a buy and I continue to hold, targeting 250p.

Afren Shareholders Reject Directors’ Remuneration Report Following FHN Share Sale

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Fifty pound note I’m generally a big fan of Africa and Kurdistan E&P company Afren (AFR.L), but the firm’s shareholders delivered a deserved slap on the wrist to the company’s directors today, when they voted overwhelmingly to reject last year’s directors’ remuneration report.

Just 20% of votes were in favour of the report, despite the Chairman Egbert Imomoh’s somewhat glib effort to prepare the ground in his AGM statement this morning, when he sung the firm’s praises and reminder shareholders how important money was to its staff (and directors):

Our remuneration philosophy reflects the need to retain the most able people in a highly competitive talent market and we will provide appropriate rewards for exceptional achievement leading to the long-term increase in Company value.

What’s up?

The underlying cause of the revolt is Afren’s recent acquisition of an additional 10.4% of a company callled First Hydrocarbon Nigeria (FHN).

Afren already owned 44.4% of the the firm, which it acquired three years ago as a means of investing in projects in Nigeria that required indigenous ownership.

What shareholders didn’t realise until last month was that Afren’s chairman, chief executive, chief financial officer and chief operating officer all held shares in FHN. Afren’s purchase of the additional shares has netted this foursome an estimated profit of $23m, according to this article in the FT.

According to the FT, the directors purchased their original 15% stake at $0.13 per share, at a total cost of $1.3m. The transaction completed on 29th May, at a price of $2.47 per share — a healthy 1,800% return on the original purchase price, that looks pretty impressive against the total return of 556% the firm says that Afren shareholders have received since the company’s flotation.

Although this kind of shenanigan is more common in the murky depths of AIM, Afren is a member of the FTSE 250 and has a number of reputable institutional shareholders, many of whom are not impressed, least of all because the directors’ interests were only disclosed last month, not at the time of Afren’s purchase of its original FHN stake in 2010.

This isn’t the first time that shareholder have voted against Afren’s remuneration report, but it’s worth noting that all the affected directors were re-elected at the AGM today — because in reality, no one wants to rock such a successful boat. As long as Afren’s keeps on delivering the good, and doesn’t actually break any rules, then it’s directors jobs — and pay packets — are likely to be safe.

JKX Oil & Gas Shareholders Back CEO Despite Protest Vote

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Some of JKX’s oil assets in Russia.

A majority of shareholders have backed the re-election of JKX Oil & Gas Plc (LON:JKX) CEO Dr Paul Davies, despite nominees representing the company’s two largest shareholders, Eclairs Group and Glengary Overseas, voting against the proposal.

JKX believes these two companies may be acting in concert to try and take control of JKX, without declaring a formal takeover offer.

As I reported this morning, JKX’s decision banning Eclairs and Glengary from voting at today’s AGM was overturned in court and the company was obliged to allow the shareholders’ nominees to vote, although yesterday’s interim court order could still be reversed when the case goes to trial in July.

At today’s AGM, Davies was re-elected with 52% of the vote, giving the JKX board a narrow victory against the 47% of the vote mustered by Eclairs and Glengary and various additional shareholders who chose to vote against Davies. Eclairs and Glengary collectively own 39% of JKX shares.

For the time being, it looks as if shareholders are backing Davies’ to continue with his recovery plan, which has seen the firm deliver good progress against its targets so far this year. I’m going to continue to hold my shares in JKX, with a price target of 80p.

Here’s Why I Think Altona Energy Is A Buy

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The potential for large-scale open cast coal mining should allow Altona to access large, cheap supplies of feedstock for its CTL plant.

Today’s announcement that micro-cap Australian coal-to-liquids firm, Altona Energy (LSE: ANR), has secured two-year extensions for its three Arckaringa project exploration licences provides me with the ideal opportunity to explain what I believe this tiny firm is a compelling buy.

Hold your horses…

Before you hotfoot it to your broker’s website and invest your children’s inheritance in this stock, let’s be sensible.

Altona Energy is a tiny, speculative natural resources company with a market cap of £8m. It has no productive assets, no revenue, and no means of getting either without the backing of its large, wealthy joint venture partner. It is risky, and it’s quite possible that in a few years time, Altona shares will be worth about as much as used chip wrappings…

A powerful partner

On the other hand, this interesting little firm does have a few things going for it, which is why I made a small investment in the firm some months ago.

I mentioned Altona’s joint venture partner above, and in my opinion, this is one of the reasons that it’s a credible investment.

The company in question is CNOOC New Energy Investment Co Ltd (CNOOC-NEI), a subsidiary of the China National Offshore Oil Corporation (CNOOC), which employs 51,000 people globally and is China’s largest offshore oil and gas producer.

CNOOC-NEI is putting up A$40m to perform a Bankable Feasibility Study (BFS) for the Arckaringa project, in which it has a 51% stake; the remaining 49% is owned by Altona. To earn its share, Altona is leading the technical operations necessary to complete the BFS.

Should the project proceed to construction, CNOOC-NEI can increase its interest in the project to 70%, if it procures all of the funding necessary, which is currently estimated to be $3.5bn.

The Arckaringa Project

Back in the dim mists of time, Altona secured three exploration licences in South Australia, which it was planning to turn into coal mines.

In 2006, Altona realised that the project might offer a far more attractive and lucrative opportunity — a large-scale coal-to-liquids (CTL) plant, along with associated gas-fired power plant.

The reason for this is that early indications are that these coal resources could provide vast amounts of commercially viable synthetic transportation fuel and gas. At the lower end of the range — a JORC-compliant estimate for the Wintinna licence (EL4512) alone — it might be possible to convert the coal to 419 million barrels of transportation fuel and 5.3Tcf of gas.

At the other end of the scale, Altona’s non-JORC compliant estimate for all three licences in the Arckaringa project is that it might be possible to produce 2.5 billion barrels of fuel and 32Tcf of gas.

By way of comparison, proven reserves in the North Sea are 8.7 billion barrels of oil and 114Tcf of gas (BP figures, 2009).

What’s the plan?

The main focus of the BFS is to demonstrate the commercial case for an integrated CTL plant and gas-fired power plant.

An open cut mine would be created at Wintinna producing around 10mtpa of coal, which would be used to produce:

Around 30,000 barrels per day of fuel, with a forecast break-even cost of $55-60 per barrel (significantly less than U.S. shale oil);
1,140MW of power, of which 560MW would be sold into the national grid;
Potential coal and liquid exports to China and Asia.

Altona says that one tonne of Wintinna coal will yield one barrel of liquids plus other products, creating potential value far greater than that offered by conventional coal-powered electricity generation.

All aspects of this project would have the potential to be expanded, and Altona says that South Australia currently imports 10 million barrels of transportation fuel per year and faces a 1,000MW power shortfall over the next decade, highlighting the commercial viability of the project.

If you would like to know more, I would strongly suggest you take a look at the material on Altona Energy’s website, including the firm’s February 2013 OIl Barrel presentation.

A bet on China…

Although I like the concept behind the Arckaringa Project, I would never have invested in Altona Energy if it didn’t have such powerful backing.

In essence, I see this as a bet on Chinese money and political will. As an example, the Chinese authorities are currently helping Altona to acquire two productive coal mining licences in China, which it will be able to use as a source of funding while the Arckaringa Project is developed.

Naturally, any such deal has the potential to be arbitrarily reversed, but there does seem to be quite strong political and business will behind this deal.

Is it a buy?

I believe Altona Energy is an attractive, if speculative, buy. I’ve only invested a small amount in this firm, but I do think it has the potential to deliver.

Chinese money is flowing into a lot of energy and natural resources firms at the moment, and I believe that investing in such projects — at attractive valuations — could be quite rewarding.

Altona Energy is one of two companies I’ve invested in that have high-conviction Chinese backing, and I’m looking forward to finding out whether this hunch pays off over the long term.