Hardmanandco 18-08-08
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Leaders in Corporate Research
Nautical Petroleum
5.5p
18 August 2008
Drilling Rig Secured for Hydra, Strong Cash Position After Farmouts Nautical is in a strong cash position as a result of the oversubscribed placing last year and its astute farm-in strategies.
Share Price: 5.5p
We estimate that cash receivables from farm-in partners will come to £6.7m which will leave Nautical with cash resources of around £13m at the end of FY09 sufficient to support Nautical’s program up to the submission of field development plans for both Kraken and Mariner. These FDP submissions (and acceptances) will inturn trigger further cash payments to Nautical including the £10m carry from ENI which will become recoverable. Source – Reuters
•
Statoil/Hydro’s experience with Heimdal reservoir at the Grane Field the Norwegian sector implies that there is likely to be far more recoverable reserves in the Heimdal at Mariner than Chevron previously estimated. We are doubling our hydrocarbon estimates for the Heimdal reservoir on the back of this new data.
•
The Mariner partners shot a new 3D seismic survey over the field in June and an ‘ocean bottom cable survey’ has also been carried out to image the Heimdal in the highest resolution possible.
•
A second appraisal well is set to be drilled on Kraken this autumn – at no cost to Nautical
•
Nautical has secured a drilling rig slot from Senergy in October 2008 to drill a well on the Hydra prospect in Block 3/27a The recent farm-out of Hydra and West Hydra to Canamens reduce Nautical’s costs to below £1m
12m High: 15.5p 12m Low:
5.0p
Market Cap: £70m Shares in Issue: 1,336m fully diluted Core Risked Post- Tax NPV/Share: 37p Gearing: Nil (GBP £17m net cash) Interest Cover: N/A EPIC Code: NPE.L Sector: Oil an Gas Market: London AIM Broker: KBC Peel Hunt PR: Buchanan Communications Redleaf Communications Website: www.nauticalpetroleum.com Description: An independent exploration and development company with a focus on acquiring, developing and adding value to heavy oil prospects.
Our cashflow models indicate a risked, discounted core value of £473 million (37p/share) for Nautical, with risked exploration upside of an additional 103m 8p/share – which totals to 45p/share in aggregate. This compares to a current equity valuation of around £70million (5.5p/share) with, we estimate around £17to 18m of cash in the bank at the end of FY08.
Analyst: Mark Parfitt Tel:
+44(0)20 7929 3399
Email:
[email protected]
FY
Sales
Earnings Before Tax
Adjusted Profit
Eps.
£ 000
£ 000
£ 000
p
0
(7,183)
(7,172)
(0.78)
2007 A
0
(863)
(490)
(0.05)
2008 E
0
(4,580)
(4,580)
(0.38)
2009 E
0
(1,592)
(1,592)
(0.13)
2006 A* *18 month period
Hardman & Co. Leaders in Corporate Research Tel: +44(0)20 7929 3399
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18 August 2008
Successful results from the first Kraken appraisal well drilled late last year have cemented Nautical’s position at the centre of the UK’s emergent ‘heavy oil’ industry. Exploration has proved a little more challenging but the Mariner and Kraken continue to look more attractive and are getting ever closer to field development.
Mariner: Block 9/11a (Licence P 0335)
Figure 1 location and closure outline Mariner Field (Source Company) Mariner Field is located in Block 9/11a in shallow waters of some 107m (350ft) depth close to the eastern edge of the East Shetland Platform in the UK sector of the North Sea. Discovered by Union Oil in 1981 and continues to be the largest undeveloped, appraised field in UK waters- and it looks like it is going to get bigger too. Statoil/Hydro’s experience with Heimdal reservoirs in the Norwegian sector implies that there is likely to be far more recoverable reserves in the Heimdal at Mariner than Chevron previously estimated. The Mariner partners shot a new 3D seismic survey over the field in June. A leading edge technology – an ‘ocean bottom cable survey’ has also been carried out in an effort to image the Heimdal in the highest resolution possible. Discussions lead us to double our recoverable estimates for the Heimdal reservoir at this time with the expectation of further data becoming available when the new surveys have been fully interpreted. As things stand, we would anticipate a field development plan will be submitted towards the end of 2009
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18 August 2008
Kraken: Block 9/2b (Licence P1077) The Kraken appraisal well data has been integrated with the geological model to reassess the hydrocarbons in place at Kraken with results positive enough for the Kraken partners to advance the timing of the next appraisal well into this autumn although we await an independent reserve evaluation of the data. Nautical’s deal with Canamens farming out a 10% interest in Block 9/2b will see Nautical’s full share of the costs of this second Kraken appraisal well carried by Canamens with Canamens paying Nautical an additional $6 million cash when BERR approve the transaction. A further $5m cash payment to Nautical upon DBERR approval of the Kraken FDP In discussions with the company although we maintain that over the field life of Kraken there is likely to be recovery of greater than 20% of STOIP (we recon it will come out to be closer to 30%), nautical are remaining as conservative as always and are basing their plans around a 20% recovery so we are adjusting our estimates accordingly.
Figure 2 location and closure outline Kraken Discovery (source Company)
Tudor Rose Discovery: Block 14/30a 14/30a is a traditional licence awarded in the 23rd Licence Round, located in the outer Moray Firth adjacent to the producing Ivanhoe, Rob Roy, Goldeneye and Hannay fields. Nautical has a 20% equity interest in the block with its partners Endeavour Energy UK Ltd, Lundin Heather Ltd and EnCore plc (acting as operator). The block contains one undeveloped discovery, known as the Tudor Rose Prospect drilled by Texaco in 1977. Found by well 14/30a-2 at around 1,000 metres, the prospect lies in o Tertiary Dornoch Formation Sands expressed as a 24m column of 21 API oil beneath a 3 metre gas cap. 3D seismic over the structure has been reprocessed and is being Hardman & Co. Leaders in Corporate Research Tel: +44(0)20 7929 3399
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18 August 2008
interpreted, geochemical studies are ongoing. Best estimate contingent resources are put at 34.6mmno with stratigraphic upside.
Figure 3 location and closure outline Tudor Rose Discovery (source Company) Three additional prospects have been identified within the Lower Cretaceous (the Kopervik sand) and the Jurassic (the Sgiath sands). The current work programme for the block includes the reprocessing of 3D seismic data and a contingent well on the 14/30a-2 discovery (Q4 calendar 2008) as although logs and pressure readings returned indications o of 21 API oil from the discovery well, only a bituminous dead-oil residue was recovered to the surface.
Unicorn and Dragon Blocks 2/3a & 2/4b
Figure 4 location and closure outlines blocks 2/3a and 2/4b (source Company) Located on the East Shetland Platform, directly west of Heather and Broom Fields, these sub-blocks contain two oil bearing discoveries Unicorn and Dragon. Nautical has a 33.33 % interest in blocks 2/3a and 2/4b awarded as a Promote Licensing Round.
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Well 2/4-1 on the ‘Unicorn’ structure encountered 16.6° API oil in the Triassic on a bald Brent high. Interpretation of the 2D seismic indicates that the Brent sand thickens downdip of the crest forming the prospect. The second prospect, Dragon, was mapped to the North. Further 2D and 3D seismic is planned and the reprocessing of the data has been contracted to define these shallow prospects
St Laurent Permit (Grenade Discovery) An unsuccessful appraisal well was drilled in January 2008. Further gas prospectivity is present on the permit. Nautical and their partners are investigating both this gas potential and the future possibility of producing from the oil reservoir.
Exploration Portfolio The Hydra Prospect Block 3/27a (Licence 1203)
Figure 5 location and closure outline Hydra and Hydra West Prospects (source Company) Nautical has secured a drilling rig slot from Senergy in October 2008 to drill a well on the Hydra prospect in Block 3/27a targeting a best estimate (P50) prospective resource inplace of 600 million barrels. The recent farm-out of Hydra and West Hydra to Canamens Nautical's costs on the well have been reduced to below £1m funding ongoing licence costs with an additional contribution to past expenses. A site survey for the well has been acquired. The results from this well are expected in late November 2008 Block 3/27a on the East Shetland Platform was part of the multi block farm out to Celtic Oil and Canamens concluded in July 2008. Nautical retains a 35% equity interest while Hardman & Co. Leaders in Corporate Research Tel: +44(0)20 7929 3399
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18 August 2008
remaining Operator. Originally acquired on promote terms the licence was converted to a traditional licence in December 2006. The new high-density high-resolution 2D seismic acquired in 2007 has been used to define one of the Hydra prospects for drilling. This data has been processed and is being interpreted, adding to the legacy 476 km of 2-D seismic which was re-interpreted to generate the leads. The targeted prospect has structural closure, which in the base case has a potentially large stratigraphic upside which, if successful, could contain a best estimate (P50) prospective resource in-place of 600 million barrels.
Scylla Blocks 8/5 & 9/1 (Licence P1277) Nautical was awarded a 100% interest in 23rd Seaward Licensing Round in 2005 of Blocks 8/5 and 9/1, contiguous to block 9/2b (which contains the Kraken discovery). Mapping of an extensive database of 2D seismic data highlighted two culminations on a north west, south east trending channel-like feature at both the Heimdal and Maureen levels, with a similar seismic signature to sand rich channels elsewhere on the platform. Nautical reprocessed and reinterpreted around 250km of 2D seismic data to better delineate these leads. Shooting 484km of new 2D seismic lines cross Blocks 9/1 and 8/5. These new lines have now been reprocessed leading delineating of two leads in the Tertiary and the licence converted to a Traditional Licence. Nautical plan to carry out a
high resolution seismic survey to be acquired by Fugro.
Figure 6 location and closure outline Scylla Prospects (source Company)
The Catcher Prospect: Blocks 28/9 & 28/10b Nautical has a 15% interest in Blocks 28/9 and 28/10b (split) located on the West Central Platform, west of the Central Graben with an operatorship held by Oilexco. Awarded in the 24th Licensing Round, the participating group has a firm commitment well to drill tothePaleocene Forties Formation to test the Catcher Prospect. On the terms of the licence, Nautical is carried for 20% of the cost of the well. The main prospect, Catcher, is a moderately sized (30mmbo) structural trap with an observed direct hydrocarbon indicator (DHI).Catcher is a four-way dip closure at the Forties level within an undrilled Forties/Tay Formation deep water turbidite feeder system. Block 28/9 and Block 28/10a are part of the same turbidite feeder system which contains 120 million barrels of oil and 120 Bcf of gas from the Bittern Field downdip from Catcher.
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The blocks contain numerous leads and prospects at both Eocene (Tay Sandstone) and Paleocene (Cromarty Sandstone) levels together with two large Jurassic leads. Traps are defined on recent 3D seismic which will be reprocessed with a well planned for 2009.
Figure 7 location and closure outline of Catcher and a number of other prospect (source Company) Merrow Prospect: Block 113/29c & 113/30
Figure 8 location and closure outline of Merrow Prospect (source Company) Nautical was awarded an equal 50% interest and operatorship of this Traditional licence covering 113/29c and 113/30/. Its partner is Encore Oil plc The blocks are located in the East Irish Basin adjacent to Walney Island on the Cumbrian coast. There are numerous oil and gas shows in the surrounding wells which indicate proven hydrocarbon migration into the area. A large prospect (Merrow) has been mapped at both Triassic (Ormskirk sandstone) and the Permian (Collyhurst Sandstone) levels. Both reservoirs are proven in the basins. The Hardman & Co. Leaders in Corporate Research Tel: +44(0)20 7929 3399
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18 August 2008
Ormskirk sands have been prolific gas producers in numerous fields (including Morecambe). Expected hydrocarbons could be either heavy oil 123mmbl or gas 393BCF. The close proximity to Walney Island should enable directional offshore drilling to test the prospect. Nautical has committed to purchase and process 2D seismic leading to a drill or drop decision within 4 years of the award.
Block 9/11C Mermaid (Licence P979) After an unsuccessful well was drilled on the Mermaid prospect in November 2007, the block is being assessed for further potential in the Heimdal (see figure 1).
Kelpie and Selkie Prospects: Block 8/25a (Licence P976) Well 8/25a-1 which drilled the Selkie Prospect was drilled to 4692ft and encountered a Tertiary Dornoch Formation more sandy than predicted. Despite all depths being very close to prognosis, the reservoir target was dry, probably due to lack of top seal. The well was drilled below budget at no cost to Nautical with the rig in May 2008. Nautical and its partners continue to evaluate 8/25a which, to the east of the Selkie, contains the Kelpie prospect.
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18 August 2008
Financial Models Once again we have revised our forecasts and are presenting new discounted cashflow models and new financial estimates, all of which take into account up to date/ current cost estimates and up-to-date timings for planned appraisal, exploration and development works. In the light of increased price volatility in the markets, we have chosen to use flat USD$90 oil as a benchmark without discount for gravimetric adjustment. Spreads between say Captain oil and the Brent blend benchmark have recently been minimal with refineries looking to stable heavy oil supplies to maximise their margins. A discount rate of 10% was used (NPV10), which is consistent with industry practice when evaluating oil reserves. We have used a flat, approximately current exchange rate of GBP£1=USD $1.86 for sterlingdollar conversion. All figures are presented post-tax with the appropriate ‘government take’ calculated according to current North Sea or French tax schedules (as appropriate). We have broken down our estimates to categorise assets as either part of the ‘discovery portfolio’ or the ‘exploration portfolio’ reflecting the exploration maturity of Nautical’s portfolio. Finally, we have used the current issue of 1,268 million shares in all per share calculations
The Discovery Portfolio With the increase in oil prices and the re-evaluation of the Heimdall reservoirs in both Mariner and Kraken there has been a significant increase in Nautical’s core portfolio with net reserves estimated at 107mmbo up from 84mmbo. This we estimate has overall discounted, risked post-tax value of £473m or 37p/share This rise seems large – but when you remember that these prospects were targeted by the company with economics based on USD$40-USD$45/bbl oil and when heavy oils were being steeply discounted the money-on-the-table is more easily seen. Yes costs have risen too we have accommodated for the changes in our economics. The numbers speak for themselves. Risk factors of course remain with Mariner being the least risky (80% probability of success), followed by Kraken 70% then Grenade 60% (it was a step-out well that failed) and probabilities of 20% at Unicorn/Dragon and Tudor Rose where significant work remains to be undertaken.
The Exploration Portfolio Nautical’s more heavily risked exploration portfolio which is thinned down to Hydra Catcher, Scylla and the substantial but risk-weighted Merrow has, we estimate some 102 million barrels of oil in these active prospects, excluding other leads. Risked and discounted this adds 8.1pence per share with exploration drilling on Hydra spudding in the autumn.
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18 August 2008
Profit and Loss Pre-tax losses in the six months to 31 December 2007 widened to £4.45m from £0.73m in the corresponding previous period in 2006, after the company took a £3.24m hit on exploration write-offs, from the unsuccessful Mermaid well. Administrative costs also rose from £0.78m to £1.53m, partly from foreign exchange moves but also from increased company activity. We expect the company to report a loss for the current financial year of GBP£4.6 million including non-cash write-offs for unsuccessful exploration activities. This equates to a loss per share of 0.38p with 1,268 million shares in issue. We expect to see continued but smaller losses next year as the company prepares field development plans for Mariner and Kraken.
Cashflow Nautical is in a strong cash position as a result of the oversubscribed placing last year and its astute farm-in strategies. We estimate that cash receivables from farm-in partners will come to £6.7m which will leave Nautical with cash resources of around £13m at the end of FY09 sufficient to support Nautical’s program up to the submission of field development plans for both Kraken and Mariner. These FDP submissions (and acceptances) will in-turn trigger further cash payments to Nautical including the £10m carry from ENI which will become recoverable. The farm-in deals Nautical has recently competed together with those previously put in place underpin the company’s capital program beyond our current estimates to the end of FY2009. During FY2009 we expect Nautical to maintain capital investment levels of around £10m roughly equivalent to the investment levels expected in FY2008. This will fund continuing work on Mariner, Tudor Rose, Catcher and 8/5 – 9.1, drilling on Kraken and Hydra of course will be fully carried to Nautical’s benefit.
Overall Valuation Our cashflow models indicate a risked, discounted core value of £473 million (37p/share) for Nautical, with risked exploration upside of an additional £103m 8p/share – which totals to 45p/share in aggregate. This compares to a current equity valuation of around £70million (5.5p/share) with, we estimate around £17to 18m of cash in the bank at the end of FY08. So, okay the market has been volatile recently and frankly indiscriminate. Small-cap AIM oil and gas has been hit as oil prices have slipped from recent highs but quite frankly valuations are becoming ridiculous. As we said last year – we repeat that that risk aversion should be directed towards credit and counterparty risk – not towards exploration and engineering risk. Yes the recent exploration program has not met with complete success but the appraisal work at Mariner and Kraken has more than surpassed expectations. The geological and other data we have seen give us reasonable confidence that the risk factors applied are appropriate across the portfolio. This draws us to conclude that the market is substantially undervaluing the prospects for the company. With Nautical fully funded to complete field development plans on two substantial oil discoveries and exploration upside we expect Nautical to come on the radar for a bid – as the price is simply too opportune to miss.
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18 August 2008
Nautical Petroleum Post Tax Net Present Valuation (NPV10) Field
Equity
NPV10 USD$/bbl
NPV10 GBP/bbl
Net Reserves mmbbl
NPV10 GBP million
Probability of Success %
NPV10 Risked GBP million
Risked NPV10 Pence per Share
Unrisked NPV10 Pence per Share
Discoveries
Mariner (9/11a) Kraken (9/2b) Grenade (France) Tudor Rose (14/30a) Unicorn/Dragon (2/3 2/4b) Subtotal
26.7% 35.0% 22.0% 20.0% 33.0%
11.5 14.8 21.2 15.4 14.0
6.2 8.0 11.4 8.3 7.5
48.5 34.9 2.8 7.6 13.2 107.1
299.9 261.1 31.8 63.0 99.2 754.1
80% 70% 60% 20% 20%
239.2 182.8 19.1 12.6 19.8 473.5
18.9 14.4 1.5 1.0 1.6 37.3
23.5 20.6 2.5 5.0 7.8 59.5
35.0% 100.0% 15.0% 50.0%
16.5 11.4 13.5 12.9
8.9 6.1 7.3 6.9
18.6 17.0 4.5 61.4 101.5
165.3 104.0 32.7 425.1 302.0
20% 20% 20% 10%
33.1 20.8 6.5 42.5 102.9
2.6 1.6 0.5 3.4 8.1
13.0 8.1 2.6 33.5 57.3
209
1,481
576
45p/share
Exploration Portfolio Hydra 3/27a Scylla 8/5 & 9/1 # Catcher (28/9 28/10b) Merrow Subtotal Nautical Group plc
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18 August 2008
P &L Forecasts Y/E 30th June GBP 000
FY06A*
FY07A
FY08E
FY09E
Oil Production Revenues Cost of Sales DD & A Gross Profit Gross Margin Administrative Expenses Exploration and Appraisal Write Offs Share-based Payments Forex Goodwill On Reverse Acquisition Operating Profit/Loss EBIT Interest Receivable Interest Payable Net Interest Exceptional Items Earnings Before Tax
0 0 (79) (79) 0% (1,077) 0 (1,215) 55 (5,077) (7,393) 432 (222) 210 0 (7,183)
0 (17) (144) (161) 0% (1,145) 0 (391) 267 0 (1,430) 493 0 493 74 (863)
0 (30) (140) (170) 0% (1,500) (3,250) (450) 0 0 (5,370) 790 0 790 0 (4,580)
0 (30) (140) (170) 0% (1,800) 0 (540) 0 0 (2,510) 918 0 918 0 (1,592)
Tax Charge/Rebate Tax Charge % Earnings After Tax Effective Tax Rate % Dividends Minority Interests Equity Shareholders Retained Earnings
0 30% (7,183) 0% 0 (11) (7,172)
472 30% (391) 0% 0 99 (490)
0 30% (4,580) 0% 0 0) (4,580)
0 30% (1,592) 0% 0 0 (1,592)
Weighted av. number of shares million Actual number of shares in issue million Number of shares fully diluted million
918 1,078 1,145
1,075 1,078 1,145
1,205 1,268 1,336
1,268 1,268 1,336
(0.78) (0.78) (0.78)
(0.05) (0.05) (0.05)
(0.38) (0.38) (0.38)
(0.13) (0.13) (0.13)
0 (79) (79) (7,104)
0 (144) (144) (346)
0 (140) (140) (4,440)
0 (140) (140) (1,452)
Earnings Data Basic FRS3 EPS p Adj. FRS3 EPS p Adj. EPS FRS 14 diluted p Depreciation & Depletion Amortisation Net DD & A EBITDA
*18 month period
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Cashflow Forecasts Y/E 30 June GBP 000 Operating profit/loss DD & A Net Interest Goodwill Exploration and Appraisal Write-Off Share Based Payment Charges FOREX Change in Working Capital Finance Income Tax Operating cash flow
FY06A* (7,393) 79 (210) 5,077 0 1,215 (55) 511 (302) 0 (1,078)
FY07A (1,430) 144 493 0 0 391 (267) 485 0 0 (184)
FY08E (5,370) 140 790 0 3,250 450 0 0 0 0 (740)
FY09E (2,510) 140 918 0 0 540 0 0 0 0 (912)
Capital expenditure Acquisitions Cash received from farm-in agreements Cash received via acquisitions
(2,401) (3,475) 0 1,545
(2,695) 0 0 0
(10,000) 0 0 0
(10,000) 0 6,700 0
Net cashflow before financing
(4,331)
(2,879)
(10,530)
(4,212)
Share capital issues (net) Cost of Share Issue Issue of debt Repayment of loans Repayment of debt Net Financing
18,002 (947) 0 0 646 17,701
0 0 0 (360) (118)0 (478)
20,000 (800) 0 0 0 19,200
0 0 0 0 0 0
Movement in net cash/(net debt) in period Opening net cash (net debt) Closing net cash (net debt)
12,292 8 12,300
(3,357) 12,300 8,943
8,460 8,943 17,403
(4,212) 17,403 13,191
*18 month period
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18 August 2008
Management
Major Shareholders
Chairman: Ian Williams
International Energy Group AG
CEO: Stephen Jenkins
Shin Cheon Co Limited
6.02%
Finance Director: Hemant Thanawala
OMX Securities Nominees (UK) Limited
3.20%
32.51%
Commercial Director: Paul Jennings Non-executive Director: Philip Dimmock Non-executive Director: Patrick Kennedy
Key Dates
Key Milestones
Next Full Year Results: September/October 2008
2005 Acquired 26.67% interest in Mariner Field.
AGM: November 2008
2007 Funding for exploration activities up to Mariner and Kraken FDP submission secured
Next Interim Results: March 2009
2007 Successful Kraken Appraisal completed
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Disclaimer The conclusions and opinions expressed in the investment research accurately reflect the views of the first named analyst. Hardman & Co provides professional independent research services and the companies researched pay a set fee in order for this research to be made available. While the information in the research is believed to be correct, this cannot be guaranteed. There are no other conflicts of interest. Neither Hardman & Co nor the analysts responsible for this research own shares in the companies analysed in this research note. Neither do they hold any other securities or derivatives (including options and warrants) in the companies concerned. Hardman & Co does not transact corporate finance and therefore does not earn corporate finance fees. It does not buy or sell shares, and does not undertake investment business either in the UK or elsewhere. Hardman & Co does not make recommendations. Accordingly we do not publish records of our past recommendations. Where a Fair Value price is given in a research note this is the theoretical result of a study of a range of possible outcomes, and not a forecast of a likely share price. Our research is issued in good faith but without legal responsibility and is subject to change or withdrawal without notice. Members of the professional investment community are encouraged to contact the analyst concerned. This research is provided for the use of the professional investment community, market counterparties and sophisticated and high net worth investors as defined in the rules of the regulatory bodies. It is not intended to be made available to unsophisticated individuals. In the UK, any such individual who comes into possession of this research should consult their properly authorized professional adviser, or undertake one of the ‘self certified’ sophisticated investor tests that are available. This research is not an offer to buy or sell any security. Past performance is not necessarily a guide to the future and the price of shares, and the income derived from them, may fall as well as rise and the amount realised may be less than the original sum invested. For AIM and PLUS shares, it is the opinion of the regulator that risks are higher. Furthermore the marketability of these shares is often restricted. This document must not be accessed or used in any way that would be illegal in any jurisdiction. In some cases research is only issued electronically and in some cases printed research will be received by those on our distribution lists later than those receiving research electronically. The report may be reproduced either whole or in part on condition that attribution is given to Hardman & Co, and on condition that Hardman & Co accepts no liability whatsoever for the actions of third parties in this respect. Hardman & Co is not regulated by the Financial Services Authority (FSA). © Hardman & Co.
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Nautical Petroleum
5.5p
18 August 2008
Drilling Rig Secured for Hydra, Strong Cash Position After Farmouts Nautical is in a strong cash position as a result of the oversubscribed placing last year and its astute farm-in strategies.
Share Price: 5.5p
We estimate that cash receivables from farm-in partners will come to £6.7m which will leave Nautical with cash resources of around £13m at the end of FY09 sufficient to support Nautical’s program up to the submission of field development plans for both Kraken and Mariner. These FDP submissions (and acceptances) will inturn trigger further cash payments to Nautical including the £10m carry from ENI which will become recoverable. Source – Reuters
•
Statoil/Hydro’s experience with Heimdal reservoir at the Grane Field the Norwegian sector implies that there is likely to be far more recoverable reserves in the Heimdal at Mariner than Chevron previously estimated. We are doubling our hydrocarbon estimates for the Heimdal reservoir on the back of this new data.
•
The Mariner partners shot a new 3D seismic survey over the field in June and an ‘ocean bottom cable survey’ has also been carried out to image the Heimdal in the highest resolution possible.
•
A second appraisal well is set to be drilled on Kraken this autumn – at no cost to Nautical
•
Nautical has secured a drilling rig slot from Senergy in October 2008 to drill a well on the Hydra prospect in Block 3/27a The recent farm-out of Hydra and West Hydra to Canamens reduce Nautical’s costs to below £1m
12m High: 15.5p 12m Low:
5.0p
Market Cap: £70m Shares in Issue: 1,336m fully diluted Core Risked Post- Tax NPV/Share: 37p Gearing: Nil (GBP £17m net cash) Interest Cover: N/A EPIC Code: NPE.L Sector: Oil an Gas Market: London AIM Broker: KBC Peel Hunt PR: Buchanan Communications Redleaf Communications Website: www.nauticalpetroleum.com Description: An independent exploration and development company with a focus on acquiring, developing and adding value to heavy oil prospects.
Our cashflow models indicate a risked, discounted core value of £473 million (37p/share) for Nautical, with risked exploration upside of an additional 103m 8p/share – which totals to 45p/share in aggregate. This compares to a current equity valuation of around £70million (5.5p/share) with, we estimate around £17to 18m of cash in the bank at the end of FY08.
Analyst: Mark Parfitt Tel:
+44(0)20 7929 3399
Email:
[email protected]
FY
Sales
Earnings Before Tax
Adjusted Profit
Eps.
£ 000
£ 000
£ 000
p
0
(7,183)
(7,172)
(0.78)
2007 A
0
(863)
(490)
(0.05)
2008 E
0
(4,580)
(4,580)
(0.38)
2009 E
0
(1,592)
(1,592)
(0.13)
2006 A* *18 month period
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Successful results from the first Kraken appraisal well drilled late last year have cemented Nautical’s position at the centre of the UK’s emergent ‘heavy oil’ industry. Exploration has proved a little more challenging but the Mariner and Kraken continue to look more attractive and are getting ever closer to field development.
Mariner: Block 9/11a (Licence P 0335)
Figure 1 location and closure outline Mariner Field (Source Company) Mariner Field is located in Block 9/11a in shallow waters of some 107m (350ft) depth close to the eastern edge of the East Shetland Platform in the UK sector of the North Sea. Discovered by Union Oil in 1981 and continues to be the largest undeveloped, appraised field in UK waters- and it looks like it is going to get bigger too. Statoil/Hydro’s experience with Heimdal reservoirs in the Norwegian sector implies that there is likely to be far more recoverable reserves in the Heimdal at Mariner than Chevron previously estimated. The Mariner partners shot a new 3D seismic survey over the field in June. A leading edge technology – an ‘ocean bottom cable survey’ has also been carried out in an effort to image the Heimdal in the highest resolution possible. Discussions lead us to double our recoverable estimates for the Heimdal reservoir at this time with the expectation of further data becoming available when the new surveys have been fully interpreted. As things stand, we would anticipate a field development plan will be submitted towards the end of 2009
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Kraken: Block 9/2b (Licence P1077) The Kraken appraisal well data has been integrated with the geological model to reassess the hydrocarbons in place at Kraken with results positive enough for the Kraken partners to advance the timing of the next appraisal well into this autumn although we await an independent reserve evaluation of the data. Nautical’s deal with Canamens farming out a 10% interest in Block 9/2b will see Nautical’s full share of the costs of this second Kraken appraisal well carried by Canamens with Canamens paying Nautical an additional $6 million cash when BERR approve the transaction. A further $5m cash payment to Nautical upon DBERR approval of the Kraken FDP In discussions with the company although we maintain that over the field life of Kraken there is likely to be recovery of greater than 20% of STOIP (we recon it will come out to be closer to 30%), nautical are remaining as conservative as always and are basing their plans around a 20% recovery so we are adjusting our estimates accordingly.
Figure 2 location and closure outline Kraken Discovery (source Company)
Tudor Rose Discovery: Block 14/30a 14/30a is a traditional licence awarded in the 23rd Licence Round, located in the outer Moray Firth adjacent to the producing Ivanhoe, Rob Roy, Goldeneye and Hannay fields. Nautical has a 20% equity interest in the block with its partners Endeavour Energy UK Ltd, Lundin Heather Ltd and EnCore plc (acting as operator). The block contains one undeveloped discovery, known as the Tudor Rose Prospect drilled by Texaco in 1977. Found by well 14/30a-2 at around 1,000 metres, the prospect lies in o Tertiary Dornoch Formation Sands expressed as a 24m column of 21 API oil beneath a 3 metre gas cap. 3D seismic over the structure has been reprocessed and is being Hardman & Co. Leaders in Corporate Research Tel: +44(0)20 7929 3399
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interpreted, geochemical studies are ongoing. Best estimate contingent resources are put at 34.6mmno with stratigraphic upside.
Figure 3 location and closure outline Tudor Rose Discovery (source Company) Three additional prospects have been identified within the Lower Cretaceous (the Kopervik sand) and the Jurassic (the Sgiath sands). The current work programme for the block includes the reprocessing of 3D seismic data and a contingent well on the 14/30a-2 discovery (Q4 calendar 2008) as although logs and pressure readings returned indications o of 21 API oil from the discovery well, only a bituminous dead-oil residue was recovered to the surface.
Unicorn and Dragon Blocks 2/3a & 2/4b
Figure 4 location and closure outlines blocks 2/3a and 2/4b (source Company) Located on the East Shetland Platform, directly west of Heather and Broom Fields, these sub-blocks contain two oil bearing discoveries Unicorn and Dragon. Nautical has a 33.33 % interest in blocks 2/3a and 2/4b awarded as a Promote Licensing Round.
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Well 2/4-1 on the ‘Unicorn’ structure encountered 16.6° API oil in the Triassic on a bald Brent high. Interpretation of the 2D seismic indicates that the Brent sand thickens downdip of the crest forming the prospect. The second prospect, Dragon, was mapped to the North. Further 2D and 3D seismic is planned and the reprocessing of the data has been contracted to define these shallow prospects
St Laurent Permit (Grenade Discovery) An unsuccessful appraisal well was drilled in January 2008. Further gas prospectivity is present on the permit. Nautical and their partners are investigating both this gas potential and the future possibility of producing from the oil reservoir.
Exploration Portfolio The Hydra Prospect Block 3/27a (Licence 1203)
Figure 5 location and closure outline Hydra and Hydra West Prospects (source Company) Nautical has secured a drilling rig slot from Senergy in October 2008 to drill a well on the Hydra prospect in Block 3/27a targeting a best estimate (P50) prospective resource inplace of 600 million barrels. The recent farm-out of Hydra and West Hydra to Canamens Nautical's costs on the well have been reduced to below £1m funding ongoing licence costs with an additional contribution to past expenses. A site survey for the well has been acquired. The results from this well are expected in late November 2008 Block 3/27a on the East Shetland Platform was part of the multi block farm out to Celtic Oil and Canamens concluded in July 2008. Nautical retains a 35% equity interest while Hardman & Co. Leaders in Corporate Research Tel: +44(0)20 7929 3399
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remaining Operator. Originally acquired on promote terms the licence was converted to a traditional licence in December 2006. The new high-density high-resolution 2D seismic acquired in 2007 has been used to define one of the Hydra prospects for drilling. This data has been processed and is being interpreted, adding to the legacy 476 km of 2-D seismic which was re-interpreted to generate the leads. The targeted prospect has structural closure, which in the base case has a potentially large stratigraphic upside which, if successful, could contain a best estimate (P50) prospective resource in-place of 600 million barrels.
Scylla Blocks 8/5 & 9/1 (Licence P1277) Nautical was awarded a 100% interest in 23rd Seaward Licensing Round in 2005 of Blocks 8/5 and 9/1, contiguous to block 9/2b (which contains the Kraken discovery). Mapping of an extensive database of 2D seismic data highlighted two culminations on a north west, south east trending channel-like feature at both the Heimdal and Maureen levels, with a similar seismic signature to sand rich channels elsewhere on the platform. Nautical reprocessed and reinterpreted around 250km of 2D seismic data to better delineate these leads. Shooting 484km of new 2D seismic lines cross Blocks 9/1 and 8/5. These new lines have now been reprocessed leading delineating of two leads in the Tertiary and the licence converted to a Traditional Licence. Nautical plan to carry out a
high resolution seismic survey to be acquired by Fugro.
Figure 6 location and closure outline Scylla Prospects (source Company)
The Catcher Prospect: Blocks 28/9 & 28/10b Nautical has a 15% interest in Blocks 28/9 and 28/10b (split) located on the West Central Platform, west of the Central Graben with an operatorship held by Oilexco. Awarded in the 24th Licensing Round, the participating group has a firm commitment well to drill tothePaleocene Forties Formation to test the Catcher Prospect. On the terms of the licence, Nautical is carried for 20% of the cost of the well. The main prospect, Catcher, is a moderately sized (30mmbo) structural trap with an observed direct hydrocarbon indicator (DHI).Catcher is a four-way dip closure at the Forties level within an undrilled Forties/Tay Formation deep water turbidite feeder system. Block 28/9 and Block 28/10a are part of the same turbidite feeder system which contains 120 million barrels of oil and 120 Bcf of gas from the Bittern Field downdip from Catcher.
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The blocks contain numerous leads and prospects at both Eocene (Tay Sandstone) and Paleocene (Cromarty Sandstone) levels together with two large Jurassic leads. Traps are defined on recent 3D seismic which will be reprocessed with a well planned for 2009.
Figure 7 location and closure outline of Catcher and a number of other prospect (source Company) Merrow Prospect: Block 113/29c & 113/30
Figure 8 location and closure outline of Merrow Prospect (source Company) Nautical was awarded an equal 50% interest and operatorship of this Traditional licence covering 113/29c and 113/30/. Its partner is Encore Oil plc The blocks are located in the East Irish Basin adjacent to Walney Island on the Cumbrian coast. There are numerous oil and gas shows in the surrounding wells which indicate proven hydrocarbon migration into the area. A large prospect (Merrow) has been mapped at both Triassic (Ormskirk sandstone) and the Permian (Collyhurst Sandstone) levels. Both reservoirs are proven in the basins. The Hardman & Co. Leaders in Corporate Research Tel: +44(0)20 7929 3399
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Ormskirk sands have been prolific gas producers in numerous fields (including Morecambe). Expected hydrocarbons could be either heavy oil 123mmbl or gas 393BCF. The close proximity to Walney Island should enable directional offshore drilling to test the prospect. Nautical has committed to purchase and process 2D seismic leading to a drill or drop decision within 4 years of the award.
Block 9/11C Mermaid (Licence P979) After an unsuccessful well was drilled on the Mermaid prospect in November 2007, the block is being assessed for further potential in the Heimdal (see figure 1).
Kelpie and Selkie Prospects: Block 8/25a (Licence P976) Well 8/25a-1 which drilled the Selkie Prospect was drilled to 4692ft and encountered a Tertiary Dornoch Formation more sandy than predicted. Despite all depths being very close to prognosis, the reservoir target was dry, probably due to lack of top seal. The well was drilled below budget at no cost to Nautical with the rig in May 2008. Nautical and its partners continue to evaluate 8/25a which, to the east of the Selkie, contains the Kelpie prospect.
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Financial Models Once again we have revised our forecasts and are presenting new discounted cashflow models and new financial estimates, all of which take into account up to date/ current cost estimates and up-to-date timings for planned appraisal, exploration and development works. In the light of increased price volatility in the markets, we have chosen to use flat USD$90 oil as a benchmark without discount for gravimetric adjustment. Spreads between say Captain oil and the Brent blend benchmark have recently been minimal with refineries looking to stable heavy oil supplies to maximise their margins. A discount rate of 10% was used (NPV10), which is consistent with industry practice when evaluating oil reserves. We have used a flat, approximately current exchange rate of GBP£1=USD $1.86 for sterlingdollar conversion. All figures are presented post-tax with the appropriate ‘government take’ calculated according to current North Sea or French tax schedules (as appropriate). We have broken down our estimates to categorise assets as either part of the ‘discovery portfolio’ or the ‘exploration portfolio’ reflecting the exploration maturity of Nautical’s portfolio. Finally, we have used the current issue of 1,268 million shares in all per share calculations
The Discovery Portfolio With the increase in oil prices and the re-evaluation of the Heimdall reservoirs in both Mariner and Kraken there has been a significant increase in Nautical’s core portfolio with net reserves estimated at 107mmbo up from 84mmbo. This we estimate has overall discounted, risked post-tax value of £473m or 37p/share This rise seems large – but when you remember that these prospects were targeted by the company with economics based on USD$40-USD$45/bbl oil and when heavy oils were being steeply discounted the money-on-the-table is more easily seen. Yes costs have risen too we have accommodated for the changes in our economics. The numbers speak for themselves. Risk factors of course remain with Mariner being the least risky (80% probability of success), followed by Kraken 70% then Grenade 60% (it was a step-out well that failed) and probabilities of 20% at Unicorn/Dragon and Tudor Rose where significant work remains to be undertaken.
The Exploration Portfolio Nautical’s more heavily risked exploration portfolio which is thinned down to Hydra Catcher, Scylla and the substantial but risk-weighted Merrow has, we estimate some 102 million barrels of oil in these active prospects, excluding other leads. Risked and discounted this adds 8.1pence per share with exploration drilling on Hydra spudding in the autumn.
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Profit and Loss Pre-tax losses in the six months to 31 December 2007 widened to £4.45m from £0.73m in the corresponding previous period in 2006, after the company took a £3.24m hit on exploration write-offs, from the unsuccessful Mermaid well. Administrative costs also rose from £0.78m to £1.53m, partly from foreign exchange moves but also from increased company activity. We expect the company to report a loss for the current financial year of GBP£4.6 million including non-cash write-offs for unsuccessful exploration activities. This equates to a loss per share of 0.38p with 1,268 million shares in issue. We expect to see continued but smaller losses next year as the company prepares field development plans for Mariner and Kraken.
Cashflow Nautical is in a strong cash position as a result of the oversubscribed placing last year and its astute farm-in strategies. We estimate that cash receivables from farm-in partners will come to £6.7m which will leave Nautical with cash resources of around £13m at the end of FY09 sufficient to support Nautical’s program up to the submission of field development plans for both Kraken and Mariner. These FDP submissions (and acceptances) will in-turn trigger further cash payments to Nautical including the £10m carry from ENI which will become recoverable. The farm-in deals Nautical has recently competed together with those previously put in place underpin the company’s capital program beyond our current estimates to the end of FY2009. During FY2009 we expect Nautical to maintain capital investment levels of around £10m roughly equivalent to the investment levels expected in FY2008. This will fund continuing work on Mariner, Tudor Rose, Catcher and 8/5 – 9.1, drilling on Kraken and Hydra of course will be fully carried to Nautical’s benefit.
Overall Valuation Our cashflow models indicate a risked, discounted core value of £473 million (37p/share) for Nautical, with risked exploration upside of an additional £103m 8p/share – which totals to 45p/share in aggregate. This compares to a current equity valuation of around £70million (5.5p/share) with, we estimate around £17to 18m of cash in the bank at the end of FY08. So, okay the market has been volatile recently and frankly indiscriminate. Small-cap AIM oil and gas has been hit as oil prices have slipped from recent highs but quite frankly valuations are becoming ridiculous. As we said last year – we repeat that that risk aversion should be directed towards credit and counterparty risk – not towards exploration and engineering risk. Yes the recent exploration program has not met with complete success but the appraisal work at Mariner and Kraken has more than surpassed expectations. The geological and other data we have seen give us reasonable confidence that the risk factors applied are appropriate across the portfolio. This draws us to conclude that the market is substantially undervaluing the prospects for the company. With Nautical fully funded to complete field development plans on two substantial oil discoveries and exploration upside we expect Nautical to come on the radar for a bid – as the price is simply too opportune to miss.
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Nautical Petroleum Post Tax Net Present Valuation (NPV10) Field
Equity
NPV10 USD$/bbl
NPV10 GBP/bbl
Net Reserves mmbbl
NPV10 GBP million
Probability of Success %
NPV10 Risked GBP million
Risked NPV10 Pence per Share
Unrisked NPV10 Pence per Share
Discoveries
Mariner (9/11a) Kraken (9/2b) Grenade (France) Tudor Rose (14/30a) Unicorn/Dragon (2/3 2/4b) Subtotal
26.7% 35.0% 22.0% 20.0% 33.0%
11.5 14.8 21.2 15.4 14.0
6.2 8.0 11.4 8.3 7.5
48.5 34.9 2.8 7.6 13.2 107.1
299.9 261.1 31.8 63.0 99.2 754.1
80% 70% 60% 20% 20%
239.2 182.8 19.1 12.6 19.8 473.5
18.9 14.4 1.5 1.0 1.6 37.3
23.5 20.6 2.5 5.0 7.8 59.5
35.0% 100.0% 15.0% 50.0%
16.5 11.4 13.5 12.9
8.9 6.1 7.3 6.9
18.6 17.0 4.5 61.4 101.5
165.3 104.0 32.7 425.1 302.0
20% 20% 20% 10%
33.1 20.8 6.5 42.5 102.9
2.6 1.6 0.5 3.4 8.1
13.0 8.1 2.6 33.5 57.3
209
1,481
576
45p/share
Exploration Portfolio Hydra 3/27a Scylla 8/5 & 9/1 # Catcher (28/9 28/10b) Merrow Subtotal Nautical Group plc
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P &L Forecasts Y/E 30th June GBP 000
FY06A*
FY07A
FY08E
FY09E
Oil Production Revenues Cost of Sales DD & A Gross Profit Gross Margin Administrative Expenses Exploration and Appraisal Write Offs Share-based Payments Forex Goodwill On Reverse Acquisition Operating Profit/Loss EBIT Interest Receivable Interest Payable Net Interest Exceptional Items Earnings Before Tax
0 0 (79) (79) 0% (1,077) 0 (1,215) 55 (5,077) (7,393) 432 (222) 210 0 (7,183)
0 (17) (144) (161) 0% (1,145) 0 (391) 267 0 (1,430) 493 0 493 74 (863)
0 (30) (140) (170) 0% (1,500) (3,250) (450) 0 0 (5,370) 790 0 790 0 (4,580)
0 (30) (140) (170) 0% (1,800) 0 (540) 0 0 (2,510) 918 0 918 0 (1,592)
Tax Charge/Rebate Tax Charge % Earnings After Tax Effective Tax Rate % Dividends Minority Interests Equity Shareholders Retained Earnings
0 30% (7,183) 0% 0 (11) (7,172)
472 30% (391) 0% 0 99 (490)
0 30% (4,580) 0% 0 0) (4,580)
0 30% (1,592) 0% 0 0 (1,592)
Weighted av. number of shares million Actual number of shares in issue million Number of shares fully diluted million
918 1,078 1,145
1,075 1,078 1,145
1,205 1,268 1,336
1,268 1,268 1,336
(0.78) (0.78) (0.78)
(0.05) (0.05) (0.05)
(0.38) (0.38) (0.38)
(0.13) (0.13) (0.13)
0 (79) (79) (7,104)
0 (144) (144) (346)
0 (140) (140) (4,440)
0 (140) (140) (1,452)
Earnings Data Basic FRS3 EPS p Adj. FRS3 EPS p Adj. EPS FRS 14 diluted p Depreciation & Depletion Amortisation Net DD & A EBITDA
*18 month period
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Cashflow Forecasts Y/E 30 June GBP 000 Operating profit/loss DD & A Net Interest Goodwill Exploration and Appraisal Write-Off Share Based Payment Charges FOREX Change in Working Capital Finance Income Tax Operating cash flow
FY06A* (7,393) 79 (210) 5,077 0 1,215 (55) 511 (302) 0 (1,078)
FY07A (1,430) 144 493 0 0 391 (267) 485 0 0 (184)
FY08E (5,370) 140 790 0 3,250 450 0 0 0 0 (740)
FY09E (2,510) 140 918 0 0 540 0 0 0 0 (912)
Capital expenditure Acquisitions Cash received from farm-in agreements Cash received via acquisitions
(2,401) (3,475) 0 1,545
(2,695) 0 0 0
(10,000) 0 0 0
(10,000) 0 6,700 0
Net cashflow before financing
(4,331)
(2,879)
(10,530)
(4,212)
Share capital issues (net) Cost of Share Issue Issue of debt Repayment of loans Repayment of debt Net Financing
18,002 (947) 0 0 646 17,701
0 0 0 (360) (118)0 (478)
20,000 (800) 0 0 0 19,200
0 0 0 0 0 0
Movement in net cash/(net debt) in period Opening net cash (net debt) Closing net cash (net debt)
12,292 8 12,300
(3,357) 12,300 8,943
8,460 8,943 17,403
(4,212) 17,403 13,191
*18 month period
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Management
Major Shareholders
Chairman: Ian Williams
International Energy Group AG
CEO: Stephen Jenkins
Shin Cheon Co Limited
6.02%
Finance Director: Hemant Thanawala
OMX Securities Nominees (UK) Limited
3.20%
32.51%
Commercial Director: Paul Jennings Non-executive Director: Philip Dimmock Non-executive Director: Patrick Kennedy
Key Dates
Key Milestones
Next Full Year Results: September/October 2008
2005 Acquired 26.67% interest in Mariner Field.
AGM: November 2008
2007 Funding for exploration activities up to Mariner and Kraken FDP submission secured
Next Interim Results: March 2009
2007 Successful Kraken Appraisal completed
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Disclaimer The conclusions and opinions expressed in the investment research accurately reflect the views of the first named analyst. Hardman & Co provides professional independent research services and the companies researched pay a set fee in order for this research to be made available. While the information in the research is believed to be correct, this cannot be guaranteed. There are no other conflicts of interest. Neither Hardman & Co nor the analysts responsible for this research own shares in the companies analysed in this research note. Neither do they hold any other securities or derivatives (including options and warrants) in the companies concerned. Hardman & Co does not transact corporate finance and therefore does not earn corporate finance fees. It does not buy or sell shares, and does not undertake investment business either in the UK or elsewhere. Hardman & Co does not make recommendations. Accordingly we do not publish records of our past recommendations. Where a Fair Value price is given in a research note this is the theoretical result of a study of a range of possible outcomes, and not a forecast of a likely share price. Our research is issued in good faith but without legal responsibility and is subject to change or withdrawal without notice. Members of the professional investment community are encouraged to contact the analyst concerned. This research is provided for the use of the professional investment community, market counterparties and sophisticated and high net worth investors as defined in the rules of the regulatory bodies. It is not intended to be made available to unsophisticated individuals. In the UK, any such individual who comes into possession of this research should consult their properly authorized professional adviser, or undertake one of the ‘self certified’ sophisticated investor tests that are available. This research is not an offer to buy or sell any security. Past performance is not necessarily a guide to the future and the price of shares, and the income derived from them, may fall as well as rise and the amount realised may be less than the original sum invested. For AIM and PLUS shares, it is the opinion of the regulator that risks are higher. Furthermore the marketability of these shares is often restricted. This document must not be accessed or used in any way that would be illegal in any jurisdiction. In some cases research is only issued electronically and in some cases printed research will be received by those on our distribution lists later than those receiving research electronically. The report may be reproduced either whole or in part on condition that attribution is given to Hardman & Co, and on condition that Hardman & Co accepts no liability whatsoever for the actions of third parties in this respect. Hardman & Co is not regulated by the Financial Services Authority (FSA). © Hardman & Co.
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