Kea Petroleum - Appropriately Priced

http://www.keapetroleum.com/

Kea Petroleum Logo

Kea Petroleum (LSE:KEA) is an AIM listed oil and gas exploration company which started trading on the LSE in February 2010. The company operated in New Zealand in the Taranaki basin which is located predominantly in New Zealand's North Island. Despite reaching an all-time peak over 28p/share in 2010, the company has drifted back to a current share price of 6.85p having made a low at 4p in 2012. The company is pending news regarding its Puka-2 appraisal well and is preparing itself to spud the key Mauku-1 exploration well in the coming weeks. The company has 548m shares in issue with a market cap of £37.5m.


The current technical position of Kea is quite bearish with another downward wedge hinting that a level around 5.75-6.00p is possible in the medium term especially if the support around the current share price is broken. For a positive long-term trend to be established, the trend needs to be broken which would require a breakout past 8p. For confirmation, the 10p level needs to be turned into support which requires a sustained price above ~10.5p. Directors holdings exceed a fifth of the issued share capital with a number of institutional investors involved.

Kea has four exploration permits within the Taranaki basin, three of which are onshore and one offshore. The fiscal regime is favourable and economic environment of New Zealand is stable. The only potentially destructive downside is that New Zealand lies adjacent to a convergent plate boundary where earthquakes can cause major damage(such as the Christchurch earthquake in 2011. However, this did not interrupt production). It is important to recognise though that these are infrequent and part and parcel of investing in any company that operates in earthquake-prone regions. The permits total 958km2 and the company has a 100% working interest in each of these licenses. Across the portfolio, a best case estimate for the oil and gas inventory is 1.56TCF and 164mmbl of oil or condensate.
Courtesy of Nick Bramhall on flickr
The Taranaki basin is New Zealand's only producing basin and has had well over 400 wells drilled in it during the late 1950's. Current production there (from all firms operating) is predominantly oil and gas, albeit condensate is produced in isolated locations. The source rocks for the region are within the Jurassic, Palaeocene and Cretaceous eras with some of the larger producing field including the Maui gas-condensate field with estimated resources of 3.4TCF gas. The drill depths are consequently relatively shallow thus allow for cheap drill costs. It is worth noting though that the oils in the region are of a waxy nature.

Kea's permits span the West Coast of the North Island. From North to South the permits are entitled as follows: 381204, 52333, 51155 and 51153. Permits 381204 and 52333 have significant amounts of offshore acreage albeit some of this is in shallow-water. Within these are 9 undrilled prospects and one discovery. Since the turn of the millennium there have been discoveries close to Kea's acreage totalling 217mmbl and 950bcf.

The discovery (Puka-1) followed a series of disappointing wells in New Zealand that were found to intersect water-bearing intervals at the target depths (hence the fall in 2011). Kea spudded Puka-1 during March 2012 with a target depth of 1500m. Resource estimates were between 1mmbo and 3mmbo hence the well was certainly not a 'company-maker'. The company announced it had encountered oil in April with the well having a maximum flow of 310bopd and 1.8mmscfd for a total consideration of just $2.4m. Sustainable rates of between 150bopd and 200bopd are expected. Clearly what these wells currently offer is a low-risk/low-medium reward option - despite this, the share price has fluctuated widely recently. Following this, additional seismic had been acquired in order to better delineate future prospects, whilst a current well entitled Puka-2 is being drilled to follow-up the Puka-1 discovery. Results from Puka-2 are expected imminently and are the next pivot-point for the share price as they will also determine how big the field is.
Courtesy of Eschipul on flickr
Kea is also planning to drill another well known as Mauku-1 (in 381204) in the coming months to test a prospect with a mean resource estimate of 485bcf and 27mmb of oil/condensate. The prospect has a 25% chance of success and will have a much larger impact on the share price due to its potential resources and higher cost of drilling ($7.5m). This figure was originally $15m, however Kea completed an impressive agreement with gas buyer Methanex whereby Methanex would fund 50% of drilling for full access to the gas. The company is considering to farm-out this asset and these are supposedly 'well-advanced' - the completion of this would help mitigate the risk and lower drilling costs thus strengthening the balance sheet through a reduction in planned expenditure. Kea is also planning to farm-out its 52333 permit with negotiations currently underway. 3D seismic will also be shot over this permit.

The company has also drilled a well known as Douglas-1 recently. However, flow testing operations were suspended for two months from June 2012, before further being suspended until '2013'. This does lead to questioning over the discovery itself as it may have failed to flow properly thus meaning the well was unsuccessful. If this is the case, the well would be plugged and abandoned and it will be interesting to see whether this is snuck into a news announcement. Alternatively, the company may not have enough funds to pursue it at the current point in time as it may lead to a shortfall later on in the year. Regardless of this, Kea will soon be a producing firm which should help it financially in the future and help realise the value of the extracted reserves.

Ian Gowrie-Smith, Chairman of Kea Petroleum, commented: "We are delighted by the progress being made in our drilling work at Mauku 1 and at Puka 2, where we are on track to drill to total depth at both sites in the coming weeks. We are continuing to negotiate the farm out of Mauku and remain optimistic of signing an agreement in the near future.

"We have also made progress with further exploration of the Puka field and expect initial results from 3D seismic work in Q2 2013."


Courtesy of NJKean on flickr
Estimated cash commitments are expected to total $19.9m in 2013 - Kea had cash reserves of $16.8m after the recent share placement hence they may be a small shortfall although this can be easy negated through small deferrals. This would not need to be undertaken if the farm-out of 52333 is completed during the year. Therefore the cash position of the company is comfortable, especially since any cost overruns when drilling will likely be relatively small unless there are substantial problems encountered. The recent placement raised £7m through placing 87.5m shares at 8p/share, potentially this is the reason why the share has dropped - there may be an overhang within the market. The 8p price represented a circa 13.5% discount at the time. One big positive with Kea is that the management are not taking huge salaries, they seem relatively modest compared to a lot of oil and gas firms which is commendable.

Kea currently has target prices from brokers at 20p/share and 22.5p/share from HB Markets and WH Ireland respectively which equate to market caps of £109.6m and £123.3m. Personally, I think that Kea's current ~£38m market cap actually reflects the current position of the company. It has a decent discovery, a pot of cash to fund 2013 expenditure, but is does not yet have production or a large enough discovery to justify the 20p+ broker targets. The Mauku-1 well could help this be achieved with any find over 250bcf (the mean resource estimate is much larger) becoming a significant asset for the company. If the mean 485bcf plus associated liquids is drilled successfully, a market cap of £70m is more reasonable which equates to a share price of around 12.5p/share. If the share price does manage to recover prior to this result. this can be increased. In terms of fundamentals and deciding an entry point, the chart is looking relatively weak despite being noted as oversold on the relative strength index. The Mauku-1 well really will be the critical point for the share price. The Puka-2 well will unlikely determine the long-term trend for the share - Mauku will. It is unlikely that the full value of Kea will be priced in immediately after Mauku (if successful) thus there will likely still be an entry point. Conversely, if Mauku fails, I will write a follow-up article to address the situation of the company. The Mauku-1 result is still at least a couple of months away though. Ultimately, Kea seems appropriately priced at the current point in time.

"Strong newsflow in terms of drilling, farm outs, and production ramping up will all help to increase the current valuation,“ (WH Ireland)


7 comments:

  1. I am a Kea shareholder and agree with your conclusion. Kea is progressing but slowly and will need something to push it forward. THis will go some way to explaining why the shareprice has been poor.

    Thank you!

    ReplyDelete
  2. hold for me

    CraigJ

    ReplyDelete
  3. Good write, thanjks

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  4. Interesting viewpoint. I do agree that Puka2 will not be as momentous as a lot of investors are hinting at. I believe a farming out of Mauku is completely necessary to the financial state of the company

    Subscribed by email

    Chris


    ReplyDelete
  5. Video Talk
    Kea Petroleum leaps after hitting oil
    Posted on: Feb 15th, 2013
    http://www.directorstalk.com/kea-petroleum-leaps-after-hitting-oil/

    ReplyDelete
  6. El1te, any chance of a small update on your thoughts about Kea's current share price?

    ReplyDelete