Replies to post #335 on The Rising Influence of Rising Affluence

[DewDiligence]

From the same FT write-up on APC:

The Venus well does not prove that the area is full of oil, but it makes it more likely and will sharpen bigger companies’ interests.

The British art of the understatement :- )

[DewDiligence]

APC – As I’ve been saying on this board (I was beginning to sound like a broken record :- )), APC is much more than a domestic NG company!

Today’s APC news was good for a 10% rise, a big move for a company with a $30B market cap.

Today’s moves for some other NR stocks I follow:

CLF +6% (continued follow-through re #msg-41407339)
PCL +4% (see #msg-40570222)
HES +4%
VALE +3%
BHP +3%

[DewDiligence]

This is the APC follow-up from FT.com with some of my annotations.

http://www.ft.com/cms/s/0/0c940ea8-a2e9-11de-ba74-00144feabdc0.html

›Andarko and Tullow Betting Big on Venus

By Carola Hoyos in London
September 16 2009 19:42

“A $40m punt.” That is how one oil company executive described the Venus well drilled by Anadarko, the US oil and gas company, UK-listed Tullow, and their partners off the coast of Sierra Leone.

Tullow itself admitted to analysts that the chance of hitting enough oil to make the exercise worthwhile was about 5 per cent.

Despite its low odds, Venus over the past months has become one of the most closely watched drilling operations in the industry. That is because discovering oil and gas at the well would indicate far more than the presence of just one single field.

Yesterday, the companies – together with Repsol and Woodside, the two other partners – announced that Venus had come up with evidence of hydrocarbons. More importantly, they said that the discovery established a whole new, active hydrocarbons system that spanned at least 1,000km to the coast of Ghana and perhaps all the way to the Latin American nation of Guyana [This makes sense—the two countries’ names are almost the same :- )].

Both Tullow and Anadarko had a lot riding on Venus’s success. True; however, APC’s stake in the project is four times as large: 40% vs 10%.] The companies, both of which are partners in the Jubilee field – Africa’s biggest deep water field – off the coast of Ghana, had snapped up the right to explore much of the coastline between their Ghanaian field and the Venus well.

The cost of the licences was low, reflecting the risk that the companies were taking in an area known better for cocoa and coups than for oil.

Those positions are now a lot more valuable, analysts say. [Ah, the British art of understatement once again :- )]

Aidan Heavey, chief executive of Tullow, said: “There is a very good chance of finding more Jubilee fields between Sierra Leone and Ghana.” The Jubilee field holds as many as 2bn barrels of oil and will turn Ghana into one of the world’s 50 biggest oil producers after it begins pumping next year.

The companies will now try to repeat that success, spending about $3bn and drilling wells in about half a dozen of their best prospects, expanding that programme if those wells are successful. In all, investment could rise to about $15-18bn, if the companies are successful and need to bring big fields to production. [Clearly, other companies’ money will pay for some of this if it should come to pass.]

Based on past comments by Tullow executives, Peter Hitchens, analyst at Panmure Gordon, said the odds were 25 per cent. “That’s really good for wildcat drilling,” he said, referring to the industry term for the risky exploratory drilling Tullow and Anadarko have ahead of them.

Those dramatically improved odds yesterday began to be reflected in the companies’ share prices. Tullow shares rose 9 per cent to £11.87 yesterday.

But Mr Hitchens said that it would take time for the markets to fully understand the potential Venus has opened up. [Today was a good start.] The basin could be a game changer for the industry. Analysts at Sanford Bernstein believe it could attract big companies, which are not present there [duh].‹

[DewDiligence]

E&P Valuations Are Looking Stretched, Says WSJ

[I’m inclined to agree; for instance, APC sports an enterprise value (market cap plus net debt) of more than $40B and insiders have been heavy sellers since the announcement of the Sierra Leone find in Sep 2009.]

http://online.wsj.com/article/SB10001424052748704320104575014822664144494.html

›January 20, 2010
By MATTHEW CURTIN

Tullow Oil and Heritage Oil, two London-listed explorers, have hit the jackpot in Uganda -- the latest in a string of major oil finds by European exploration and development groups that helps explain why the sector has been on a tear. The share prices of Tullow, Heritage and U.K. rival Cairn Energy have more than doubled in the past year. France's Maurel et Prom is up 61%. But the peak may not be far away.

Tullow's decision this week to exercise pre-emption rights over two Heritage-controlled blocks for up to $1.5 billion, subject to Ugandan government approval, will allow it to consolidate its hold over one of Africa's most exciting new oil provinces. Independents like Tullow have benefited from the majors' recent focus on developing existing fields, downstream projects and returning cash to shareholders.

That has enabled the juniors to fill the exploration gap, making big onshore and offshore discoveries from Brazil to India. In the case of the vast Jubilee oil field offshore Ghana thought to hold 1.8 billion barrels of crude, more recent exploration suggests similar fields may exist along a 1,100-kilometer stretch of the West African coast.

But the majors are increasingly under pressure from investors to fire up sluggish share prices with higher-risk exploration given many will battle to average more than 1% annual production growth over the next five years. Shares in BP, the best performing European major, are up 28% in the past year, lagging the FTSE 100, let alone the independents. National oil companies also look increasingly intent on building up their production reserves.

But so far, that's not translated into the anticipated takeovers that have boosted the share prices of explorers. The acquisition of Addax Petroleum by Chinese state-owned oil group Sinopec is the only major deal that's come to pass in Europe. Instead, the majors are regaining their appetite for exploration risk. ExxonMobil has offshore exploration concessions in Guyana alongside Tullow and CGX Resources. Italian energy group Eni dropped a planned bid for Tullow last year and bet instead on the Ugandan government vetoing Tullow's pre-emption of the Heritage blocks. [This plan appears to have worked, according to recent statements from the government of Uganda.]

Meanwhile, barriers to entry are falling as industry deflation is reducing exploration costs from the 2008 average of $17 to $20 a barrel of proven reserves average toward their market value of $10-$15.

In the absence of takeovers, exploration group valuations are starting to look stretched at current oil prices. Tullow's stock is trading at a 2% premium to net asset value while the rest of the sector is trading at a modest 12% discount, based on an oil price of $79 a barrel, according to UBS research.

In such a shifting competitive landscape, further share price rises will depend not only on the independents' ability to maintain recent exploration success rates and control costs, but also much higher oil prices.‹