PANCONTINENTAL OIL AND GAS NL
First Up Gas Discovery – Upgrade to Buy
Pancontinental Oil and Gas Limited (“Pancontinental”, “PCL”, “Company”) has announced first up drilling success at its 15% owned L8 block offshore Kenya. The Company has encountered 50m of net pay in gas charged sands at the primary target in the Mbawa prospect, operated by Apache.
The result is very significant as it opens up a new hydrocarbon province offshore Kenya and additional success is now highly likely. The secondary target in this well has been de-risked by this result and should be encountered any day. The possibility of oil in this zone has not been ruled out; however, the gas case now seems more likely.
Whilst many of the parameters required to make an estimate on recoverable volume have not been disclosed, we can infer and make assumptions based around pre-drill estimates and also the nature of the discoveries to the south. These are detailed on page 3. The upshot is a range of 2-5 trillion cubic feet of recoverable gas, with a mid case of 3.5 trillion cubic feet of gas (Hartleys estimates). We assume PCL’s interest will reduce to 10% (Tullow will free carry PCL in a second well), which results in value of 23cps for this horizon alone.
We have upgraded PCL from a Speculative Buy to a Buy and increased our valuation from 30cps to 85cps. Our price target is 51cps.
First of Many – Kenya Re-Rated
We now assume that 25 trillion cubic feet of gas will ultimately be discovered across PCL’s 4 permits offshore Kenya (L6, L8, L10A, L10B). Our estimated chance of success has increased from an average of <10% to ~40% (50% for L8 – 30% for L6, L10A, L10B). Using these estimates results in a risked valuation for the Kenyan acreage of 73.5cps, with upside potential of 275cps.
Remember Cove? Time for Smart Money to Move In
It took considerable time for the market to digest the significance of the discoveries made by Cove offshore Mozambique; however, the initial success was followed by many more and ultimately the company was acquired for over A$2b by PTTEP after a bidding war with Shell.
Onwards and Upwards – More Drilling Success Inevitable
Results from the secondary target in the Jurassic should be encountered any day. Pre drill estimates of potential closure at this horizon are in excess of 300km2 (as compared with 179km2 at the primary target level) and, as with the primary target, followup potential is very large.
It now seems likely that Tullow will exercise its option to drill a second well as part of its farm-in with PCL. This will reduce PCL’s interest to 10% in L8 and should see drilling of an additional well within 6 months, subject to rig availability.
BG has been fast tracking its exploration program at L10A and L10B (PCL 15%) and it is likely that at least one well will be drilled on this acreage in H1 2013.
PCL also has a 40% interest in L6, which is adjacent to L8 and the source kitchen from which the Mbawa hydrocarbons have been generated. 3D seismic was recently acquired over two large prospects on this permit.
We have upgraded to PCL to a Buy with a price target of 51cps
