Petrel Resources - Nothing Coming

http://www.petrelresources.com/

Petrel Resources Logo

Petrel Resources (LSE:PET), an oil and gas exploration company, rocketed up on Monday starting the session at 6 pence before making an intra-day high on Tuesday at 32.38p equivalent to an enormous 440% in two days at its peak. The share price has since settled down at today's closing price of 18.13p, still up approximately 200% from Friday's closing price. However, the question is whether Petrel can maintain its currently high price and to uncover into the company's operations and financial state. At the current price Petrel has a market capitalisation of £13.90m and 76.67m shares in issue.

All details regarding the latest share price movement are shown in the graph above. The spike recovery failed to set a higher-high and coupled with the excessive movement is likely to mean that a downtrend entails. The spike looks particularly excessive due to the number of shares in issue. The low trade volumes and values that it took to complete the rise was relatively low. Circa 26.75m shares were traded on November 12 which, if the median price during the day is taken (19.19p), leads to a total volume value around £5.13m. Whilst this is huge for the company, you can compare it to only double the average volume for a company like Halfords which gets through about ~£2.5m worth of trades a day. Thus for a 300%+ rise the total trade value was not particularly large.

Petrel were admitted to the AIM market in August 2000 and have since developed an oil and gas exploration portfolio spanning three continents; Africa (Ghana), Europe (Ireland) and Asia (Iraq, but only potential).

In Ghana the company has a 30% stake in the Tano 2A concession where 15mmbo is estimated as reserves along with 193bcf across a selection of both onshore and offshore prospects. Targets are located within the cretaceous era rock and the company works along side Clontarf Energy (LSE:CLON) and the remainder in Ghanaian interests. The block spans 1532km2 and 2D seismic surveys have been conducted. Over 2 billion barrels of oil have been found in the basin to date thus is a prime hydrocarbon location. However, the potential resources Petrel has are unlikely to attract a major industry player. In addition there is a work commitment of $25m over the period of three years. Inevitably this will lead to fundraising through one form or another as Petrel simply does not have the cash in the long-term. Consequently Petrel would be heavily dependent on cash raised via farm-outs. The protracted ratification process here does cast doubt over the company's future position in Ghana. Progress has been slow and an outcome is due before year-end. Whether this actually materialises is another question entirely.
Courtesy of Cudmore
Petrel has been focused on Iraq for over a decade in a PSC
located in the Western Desert near Baghdad. Early in the company's history full scale operations have taken place here, but after discussions Petrel left the area.

Between 2009 and 2011 Petrel applied to be considered for new oil field licences being offered. We expected to qualify and did not. Following a review of our position in Iraq we appointed a new management team with the brief to clarify our standing in the country, in order to highlight our interest in the exploration ground and to seek out new opportunities. Though working only for a short time the team has made significant progress. The first objective was to clarify the position of Petrel with the national authorities in relation to existing and historic projects in which Petrel has or had an interest. This is done. The second objective is to work with national and regional authorities in Iraq to identify projects in which Petrel can be involved. This work is ongoing.

The reason why Petrel failed to re-gain an interest was due to the competitive bidding from majors. Petrel is a tiny oil and gas company so it is still unlikely that they will succeed if they come up against big interest. Whilst no actual exploration work is ongoing in Iraq, this may change. However, with the tight budget Petrel is running it is becoming ever more likely that the possibility of exploring options in Iraq will be pushed to the back of the queue.

Finally, the company has its most prospective asset as acreage offshore Ireland. In October 2011 the company was awarded two licensing options covering 1400km2 in the Porcupine basin. This will be the company-maker if it were to happen as it boasts resources far in excess of Ghana and is where a lot of money is flowing. Offshore Ireland is beginning to become a new exploration province following a boom in oil prices since the late 20th century that was made exploration economically viable. Some of you may recall that Providence Resources (LSE:PVR) uncovered a potential 1.6 billion barrels of oil offshore Ireland at its Barryroe discovery. 31% of this figure is expected to be extractable. If this trend is proved valid along the Irish coast then the area could become as important to Ireland as the North Sea is to Scotland in the long-term. Providence is now seeking a large partner to help fund the development. Its also important to note that Ireland boasts low corporation tax rates (12.5% trading and 25% non-trading income). This makes the area more attractive on a fiscal basis. Petrel has been engaged in a lot of seismic data acquisition during its period in Ireland which should help reduce risk, however, it will still be high as Ireland is effectively a frontier basin where each well could be considered a wildcat thus the chance of success is not particularly high.

Since the award, Petrel purchased additional substantial coverage of seismic lines and has
undertaken a re-interpretation of the full integrated data set across both sets of blocks. The data was
carefully calibrated against the relevant well logs. Our technical and management team interpreted
the extensive 2D seismic coverage of Blocks 35/23, 35/24 and part of 35/25, as well as of Blocks
45/6, 45/11 and 45/16. This phase of the project was completed in June 2012.
The second phase of interpretation detailed and appraised the potential prospects identified in the
first phase. This included the acoustic inversion of selected seismic lines to assess the quality of the
targeted reservoir sections. Additional seismic lines were purchased when crucial to the
interpretation. This was completed in September 2012.

Courtesy of NASA Goddard Photo and Video

Furthermore, Ireland currently imports almost all of its gas for generating electricity. This figure is estimated at around 93%. Thus the creation of domestically produced gas could attract a lot of demand. ExxonMobil is also preparing to drill the Dunquin prospect in the same area in H1 2013 which could further boost exploration if successful. The farm-out of this area will be key for Petrel. Securing a good deal in either a formal/informal manner will dictate the forward work program. An issue with the Ireland area though are the high well costs are likely to run over £30m due to the deep water depths. Consequently the farm-out is vital and a complete necessity for the company as without it they would be unable to raise cash to fund exploration at even slightly attractive terms or they may see their stake in the license revoked. Thus upcoming drills will be key pivot points for the company. Success in surround offshore areas will boost the message that Ireland is very prospective and vice versa.

The boost on Monday was in reaction to a technical update on the company's Irish prospects. This was commented as follows:
"We have long known that Ireland's offshore Porcupine Basin is a hydrocarbon province. There are established petroleum systems, reservoir sands and possible traps at several levels. Our recent work has identified a number of high-potential prospects, at least one of which, we believe, has a billion barrel potential.
Whilst the stacked reservoirs greatly improves the economics as less, very expensive wells will need to be drilled to access multiple targets, exploration is very far away hence the reaction to the news appears excessive. However, the details are not very specific - 'at least one' leaves the door open to interpretation and we are unaware of the estimated recovery rates. Therefore purchasing shares on the current spike would be a blind punt at best.

Thus it is important to consider the company's latest set of interim results/finances. The operating loss was up to €267,000 from €206,000 in 2011. Total expenditure for the company can be derived as being between €0.9m and €1.25m year which, based on €4m in late September would give it enough money to cover general administrative costs for a few years. Effectively, the company is trying to reduce any cost leaks and to preserve the money until farm-outs are complete. Hence little activity is forthcoming and little should be expected in the medium-term. Of course, closer to the well exploration in 2014/2015 equity will need to be raised if the farm-outs fail to cover the costs. It will also be interesting to see whether Petrel capitalises on the recent share price spike and raises cash whilst the share price is high thus its less dilutive. It may be in the best interests of shareholders that they do this. However, even at 20p/share raising £3m would need 15,000,000 new shares.

Ultimately, the company is in a very mixed current position. Uncertainty in Iraq and Ghana means that Petrel is a very risky investment especially since its Irish assets are also high risk. Despite having over 1 billion barrels of potential any price spikes are likely to very quickly decline. Hence at the current price over 18p Petrel is a strong sell simply because of its forward news timescale. Taking profits at this level would certainly be the best policy. Even though a further spike may arrive within the next few months as more details are released these are unlikely to be as high as the initial speculative bubble has been burst. With the first wells to be drilled in Ireland and Ghana expected in 2014/2015 and prior to 2015 calendar year end which is a substantial time period to wait. Therefore it is almost inevitable that the share price will drift back down to a more reasonable level around 9-10p/share. Despite this only valuing the company at less than £10m it reflects the current position of the company.

Update 26/07/13: I have moved Petrel from sell to neutral today following erratic price action that looks set to see Petrel break upwards on thin news. I am not convinced about the company, but it can move quickly on low volumes so I'll cut the price target and take 18% profits now

15 comments:

  1. Agreed - can't see much coming. investors got shafted.

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  2. Beware of the 'Blarney Boys'. Take a look at the records of the directors and various ventures they have been associated with, a common theme is 'ramp, ramp, ramp, mostly myth and little substance.

    Read any news (RNS) very, very carefully.

    If you are ahead take the money and run.

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  3. erm look at the sister company ...PRV... market cap £400 million

    PET market cap £14 million...both similar number of shares in issue

    miss out on a 20-30 bagger and sell PET at your peril!

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  4. good timing. PET is destined for 8p. Nothing is coming as you say,

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  5. A bit of background info here on John Teeling's Holding company 162 Group

    http://www.162group.com/ .

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  6. good accurate write. cya petrel

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  7. 20p/share share issue raising £3m doesnt give 150,000 new shares... more like 150,000,000

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  8. PET - overvalued - market cap of £13m and has very little 9or has a lot but at a very early stage). Compare that to EOG, also £13m - revenue of circa £5m, positve cash flow, imminent drilling in UK, massive asset in France worth $600m unrisked NPV, and two licences in Ireland with similar potential barrles in one (1.1bn) and the second licence expected to have similar prospect.

    That shows PET to be overvalued by about £5m, IMO. GL to all there though, in a year or two it may be closer to £30/40m and a lot more if the progress fast and drill, but not yet

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  9. Can anyone do mathes here? Jesus

    If they riase £3m at 20p then additional shares approx 20m, but more like it to be £3m at 12p which would give 25m new shares.

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    Replies
    1. £3m / 20p = 15,000,000 new shares

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    2. It should be 15m rather than 150k. This has now been changed.

      Cheers

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    3. Good article. Guessed it meant 15m. I wonder who will farm-into the license!

      Ray

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  10. comparing Providence with PET is just stupid. (and Providence is NOT a sister company of PET)
    @anonymous 7:52

    PVR has actually discovered 1.4 billion barrels of oil (Barryroe) - it has proven reserves. It has over £100m in cash. It has already farmed out its acreages

    What has PET got ? NOTHING. No oil, no proven reserves .. it hasnt discovered a single drop of oil. The Irish licenses arent even owned yet. They have an option to buy them in Oct 2013. Then they will have to shoot 3D seismic which will take 6 months. Another 6 months for analysis. Then a CPR report will be done which will take another 6 months. Then a data room will be opened to attract a farm in partner which will take another 6 to 12 months. So any news on farm in is 3 years away... and drilling will be further out after than. In the mean time expect hefty dilution.

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  11. http://www.tradingresearchpoint.co.uk/2012/11/13/petrel-resources-valuation-not-justifiable/

    Petrel Resources – Valuation Not Justifiable

    November 13, 2012 | Filed under: AIM,Bearish,Stocks | Posted by: Tom Winnifrith

    Apologies to my friends John Teeling and David Horgan who run AIM listed Irish oil explorer Petrel Resources (PET) but the valuation of your company is just not justifiable. At 19.375p the company is valued at £14.4 million. Even the house broker Northland gives a valuation range of 3.6p (base case) to 14p (maximum best cast). The share price is simply far too high and here is why.

    For years Petrel claimed that it was in the Iraqi oil exploration game. But it appears to have no licenes there now and whilst it claims to be evaluating new options the game has moved on. In Ghana it has a 30% stake in block Tano 2A ( with another Teeling company having 60%). But the authorities seem reluctant to ratify its stake in a hurry. This acreage is near to a big Tullow find but nothing is actually proven there. So years of costly seismic and drilling lie ahead even if a permit is granted.

    The big hope is the Porcupine Basin off the West coast of Ireland. Petrel yesterday released a “technical evaluation” of its acreage. The headline announcement which saw the shares rocket was that “Detailed modeling has outlined a one billion barrel potential on Quad 35; part of our 11/4 Licencing Option”

    Ok computer modelling has outlined a target which looks as if it could be interesting albeit it lies 2,500 metres below a seabed which is itself 800 metres below the surface of the water. But read the release carefully “Thick reservoir quality deltaic and shallow marine sandstones have been drilled in earlier wells in the region… the mapped sandbodies have the capability to host in-place reserves in excess of one billion barrels.”

    These results are derived solely from 2D seismic data. 3D data has now been acquired but is only now being interpreted. More work is needed. Specifically the company says that it now needs to undertake completion of the 3D seismic data interpretation in the south-east part of Quad 35.

    Then, a seismic / sequence stratigraphic project is underway to characterise the depositional facies of the Lower Tertiary and Lower Cretaceous successions in the option blocks.

    And then, a provenance study, involving petrographic analysis and the application of Lead-in-Potassium-feldspar geochemistry of the Lower Tertiary and Lower Cretaceous successions is underway.

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    1. continued..

      Did you read the word drilling anywhere? Nope. The bottom line is that there is unlikely to be a drill bit sunk in Ireland for quite some time. Until then it is all guesswork.

      Meanwhile Petrel had 3.6 million euro net cash at 30th June. Administrative costs in the first half were 267,000 Euro. But buying and interpreting seismic does not come at all cheap. Drilling in the Porcupine Basin would simply be unfundable for Petrel as it is. And how then have to ask yourselves how many recoverable barrels of oil (assume a 35% recovery rate?) would it take for a farm-in partner to be interested?

      There are so many ifs and buts here that a true valuation is just not possible at this stage. But I would suggest that a) Petrel is a good candidate to raise equity in 2013 if there is any good news ( potentially from ExxonMobil drilling the Dunquin prospect in the first half of 2013 elsewhere in the Porcupine basin) and b) that merely interpreting 2D data that suggests there may be a billion dollar barrel prospect bears as much relation to finding a billion barrels as the Clontarf Veterans XV ( Capt J Teeling, occasional utility forward T Winnifrith) does to the Irish National rugby team, notwithstanding the lamentable showing of the latter at the weekend.

      Unless there is a surprise from Ghana I would not expect any dramatic news on this front until Exxon starts its 2013 drill campaign at Dunquin. The shares are thus likely to drift. At a lower level just ahead of the Dunquin drilling I might be tempted to have a little flutter but at 19.375p I’d take my chips off the table for now.

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