Enegi Oil - Lacking Energy

http://www.enegioil.com

Enegi Oil Logo

Enegi Oil (LSE:ENEG) is a London listed oil and gas exploration company with a portfolio that is well diversified. The company has a volatile trading history with a significant spike in early 2012 towards 22p/share and a further spike at around 17p/share in December 2012. The company is currently capitalised at ~£14.30m with ~126 million shares in issue equating to a current share price of 11.38p. At this level the company looks like an interesting proposition with it being one of the cheaper smallcap firms in the sector.


In terms of the chart, the short term outlook for Enegi is relatively bearish with what is likely to form a descending head and shoulders formation with an initial target of 10p/share and then around 8.5p/share. This would be most likely to materialise if a lack of news follows. Consequently, the trading outlook for the stock in uncertain. To create a long-term uptrend the descending resistance band that is currently just above 15p/share would need to be breached and maintained - this looks unlikely to happen in the immediate future. One potential positive is that the 10p level may provide round number support to prevent the completion of the heads and shoulders pattern. The only issue with this is that 10p has not acted as major support historically apart from a period in mid 2012, but even during this period of time it was relatively easily broken through. On technicals alone the shares could be looking to head lower in the near future.

However, with all oil and gas companies it will ultimately be their acreage, resource size and future newsflow that will determine the long-term success of the stock. What is certain is that historically Enegi's price rises have been driven by a combination of speculation and news flow and that on each of these occasions, the price rise has not been maintained. Hence the fundamental situation of the company would need to change significantly for this to happen.

Enegi was admitted to the Alternative Investment Market in early 2008 - certainly in retrospect this has not turned out to have been an ideal listing time especially since the share price ultimately did tank in synchronisation with the rest of the sector and in fact, the entire stock market. Nonetheless, Enegi has managed to significantly explore and extend its asset portfolio since. The company is headed by CEO Alan Minty.

What Enegi has done well is that it's portfolio is highly diversified with assets in Jordan, Ireland, the North Sea and Canada.
courtesy of futureatlas.com on flickr

The company announced it was entering the 6000km2 Dead Sea/WadiAraba Block (denoted DS from now on) on December 13 2012. The heads of terms agreement, signed with Korea Global Energy Corporation sought to grant Enegi access to a 5% working interest in the block, which is deemed highly prospective due to its supposedly analogous geology to that of neighbouring Saudi Arabia. The DS PSA states that at least three wells should be drilled over the next four year period, with KGEC having already secured financing options for this exploration programme. KGEC strongly believes that commercially viable deposits of oil and present within the area having studied 'years-long data research'. This is important considering what is likely to be a high cost for wells in the area considering the type and depth of probable targets compared to low cost wells that are common in the US and Canada. Regardless, the 5% stake is clever as it means that Enegi will not be exposed to too much risk, but is exposed to upside. The concession itself was formerly owned by an American firm but in announcing an oil discovery they inadvertently broke the terms of their PSA hence had it revoked. Whilst this is evidently wrong on behalf of the American firm, the harsh penalty does not set a good governmental example in terms of attracting investment to the area. Whilst no official statement of the resource potential for the area has been made, it is interesting that KGEC did briefly mention before the MOU in early 2012 that they expected up to 1.1 billion barrels on potential. Such a figure cannot be confirmed without further well data though. Assuming these figures are correct, Enegi's 5% stake could turn out to be an astute acquisition. It is worth recognising though that the Jordanian government could pose as an unwelcome obstacle based on their past issues.

Enegi also has two blocks in the North Sea entitled 22/12b and 3/23a where they have a 100% working interest in the latter. Enegi and ABTechnology (ABT) have a 50% interest in the unexplored part of block 22/12b (but have retained 100% in the explored areas)having recently farmed out their unexplored acreage to North Sea player Azimuth in early February. The deal itself looks poor for ABT and Enegi considering seismic interpretation is the main component of the arranged farm-out deal and that there are no cash payments in the transaction. This reflects the currently highly speculative nature of the block. Alan Minty is also the CEO of ABTechnology although the technique for using buoys has been widely recognised albeit not yet widely implemented.

These working interest would drop if ABTechnology decides to exercise its option to participate in either block. "Licence applications were based on the identification and evaluation of assets which, in the Company’s opinion, were suitable for buoy technology as conventional development solutions would not be economically feasible. Of greatest importance in selecting these assets was a clear indication of the presence of hydrocarbons, remoteness from available infrastructure meaning that a small, standalone development solution would be necessary, and a physical environment that would allow a buoy to be successfully implemented." Block 3/23 is located in the 'South-west margin of the East Shetland basin. A well entitled 3/23-b encountered oil shows within the well-core cuttings although these are believed to be residual and in low quantities. With recoverable oil figures testing 153mmbl at the lower range and 326mmbl at the upper range, in the case of any sort of discovery Enegi has significant potential to re-rate. The work commitments for the area include a 100km2 3D seismic study - this will then be used to identify whether Enegi will 'drill or drop' the acreage. Licence commitments are unlikely to be an issue for the company in the case of drilling as ample time is provided. Due to this arrangement it is likely that negligible value is given to this block currently. If the seismic is positive then once again, Enegi has significant potential, but this is also likely to be a long-term event. Block 22/12b has an identical scheme implemented except the recoverable resource values are much lower at 9mmbl at the low end and 51mmbl at the higher end. Ultimately, these blocks are far from being confirmed as having economic viability, but if confirmed viable, they would be 'game changing' for a company with a market cap of only £14m. It would also allow the company to examine some of the other delineated prospects that have been discarded, but that could be viable using the buoy technology. Estimates place over 50 undeveloped prospects as having potentially over 850mmbo and 650bcf.

Enegi's third asset (100% WI) located in Ireland is explained as follows:
courtesy of albertane on flickr
"In February 2011, Enegi was informed by the Department of Communications, Energy and Natural Resources in Ireland that it had been awarded an onshore petroleum licensing option, ON11/1. ON11/1 covers an area of approximately 495 km2 within the Clare Basin in County Clare, Ireland. The Clare Basin is within the same fault system trend as the Company's prospect/leads and discovery in Newfoundland.  The award of ON11/1 grants Enegi exclusive rights to undertake a defined programme of work, on areas of interest within the Clare Basin, within the two year option period, which expires on 28th February 2013. There are various elements in the work programme, including the delineation of prospective areas, the quantification of their gas potential, the identification of potential drilling targets and the identification of optimal well design. Depending on the results of the programme of work, an application may be made for an Exploration License over all or part of the areas covered by ON11/1 for the right to conduct drilling activities." The block has had an independent resource report completed for it with 13.05TCF at a Pmean level set. The block has also had its viability confirmed and Enegi have recently exercised their option to convert this area into an exploration licence. With such significant potential for this area and the acreage being onshore, a farm-out would be the best option for the company. If they can farm-out the block once it's granted such that they retain ~35% in return for an exploration well and further seismic, this would be an appropriate way for the company to develop the asset. If any part of the multi-TCF potential is monetised, Enegi's current market cap would be made to look ridiculous in coming years. The issue once again is that this is a long-term project as opposed to short-term.

Enegi's final assets are in Newfoundland (at the Garden Hill field) where the company is seeking to establish stable production flows from their producing well (Garden Hill South) which recently underwent acid treatment - initial production figures signalled 300+bopd potential. Oil seeps have been noted across the acreage and the quality of oil is generally good at 51 degrees API (a relatively light oil). The political risk associated with Jordan is somewhat offset by the Canadian and European assets which have stable and positive fiscal environments. Furthermore, good infrastructure is present and the area is generally well developed for oil and gas discoveries.  Reservoir potentials stand at 61.5mmbl OIP and 117 GIIP hence a smaller amount of these figures will be recoverable. The resources are certainly not huge, but if a source of income can be sustained then it would be an important milestone for the company as it would aid funding their other programmes. Another Newfoundland block is EL1070 where a well was drilled in 2008 that was deemed unsuccessful. However, evaluation has led to the company plus partner Shoal Point Energy believing that the target reservoir was not actually reached. Consequently the well is scheduled to be sidetracked prior to H2 2013. This is one of the closer targets the company has. At the mean level this block is estimated to have 26mmbl and 23bcf. The neighbouring EL1116 block  is also being interpreted with the seismic evaluated with this expected to be completed in Q1 2013 (i.e. before the end of March). Total P50 estimates for all the Newfoundland assets stands at 49.5mmbl assuming a 20% recovery factor.
In many respects it is possible to see why the market only values Enegi at its current market cap; many of the catalysts are in the long-term in the form of drilling with the near term commitments being more corporate and based around data interpretation. Consequently, for multiple assets it is hard to derive a value despite the large quantities of resource - this is shown through their North Sea asset farm-out which validated the highly speculative nature of the asset in terms of it being unconfirmed.

The company has released a selection of news since the start of 2013. The first of these included the agreement over further North Sea licenses:"Enegi, the independent Oil and Gas Company, is pleased to announce that, further to its press release on 26 October 2012, the Department of Energy and Climate Change ("DECC") has confirmed the award of Traditional Production Licences, provisionally numbered P2007 and P1974, over Block 22/12b and Block 3/23 (split southern section), respectively ("the Blocks"). Under Licence P1974, Block 3/23 (split southern section) is referred to as Block 3/23a. Enegi has a 100% interest in both Blocks. " The following announcement confirmed that the Newfoundland well would be sidetracked as discussed earlier whereas the third announcement outlined the details of the Azimuth farm-in (which excludes one of the prospect named Malvolio). This was further confirmed by an RNS on February 11 before an update from Ireland in the form of the application for the exploration license was announced. The final announcement was made on March 4: "At a meeting which was chaired by Prime Minister Abdullah Ensour, the Cabinet approved a co-production agreement with Korea Global Energy Corporation ("KGEC") for oil exploration in the Dead Sea and Wadi Araba areas." This is clearly very positive news for the company as one hurdle for the project has now been removed. 

The following points are regarding their last set of annual results that were released in December 2012:
- £3.1m was raised over the year through the placement of shares
- Pre-tax loss increased to £2.375m due to increased expenditure
- Revenue of £204,000 compared to £0 in 2011
- No company debt
- Low cash balance as the £2.1m (as of June 2012) will have been depleted substantially

Enegi certainly has a series of interesting prospects with some very attractive resource estimates, but the current issues for the company are three-fold. Firstly they do not have the cash that will be required to further the work. Therefore it is likely that placements will take place in order to fund the workload. Assuming the company needs another £3.1m for the current year, at the present share price this would lead to 27.5m new shares needing to be issued equivalent to roughly 20% dilution. If the shares were to be issued at 10p/share, then 31m new shares would need to be issued to raise the same amount. Clearly this would have an adverse effect on the share price. Secondly, the company does not have any immediate catalysts that appear capable of determining the medium-term trend. The assets have in general just been reorganised and sorted meaning that for most of them there is no immediate upside. The final point is that the shares are still within a long-term downtrend and have a slightly bearish chart pattern. Regardless of this, with a 17% institutional backing and upside potential, this is a company to watchlist - it is unlikely that investors would need to be in any great rush to purchase the shares based on current expected newsflow, but upcoming RNS' could shed light on this case. No Rating for now as I can see 10p being reached before upside. Stay tuned though, I will likely examine Enegi again in the future to re-examine the situation after some further news has been released. This could well turn out to be a very prospective long term play, but it is currently lacking energy.

7 comments:

  1. Wanted my pick of verona pharma reviewed but got picked to the post on this occasion. Nice writeing on energi.

    CraigJ

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  2. Good to hear different takes. I'm in for the long haul so not too bad

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  3. These sort of plays have a habit of suddenly re rating, enegi have some big assets but as an small e&p has limited funding to develop them. If news of an income stream comes in via GHS or another source then the market cap could re rate up to ten fold within a few months. We ill have to wait and see as the next news flow looks to be very important.

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    1. Reminds me of Petrel resources! but a bit better !

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  4. Superb article. Thanks for the revuew

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  5. A couple of factual inaccuracies, so commented as below:-

    Eneg are not partnering with shoal point. They have no interest in the current activities on EL1070, but do need to see these succesful in order to keep their licence for the lower rights alive. Spe must obtain a significant discovery licence or enegs rights over the lower portion of 1070 will lapse.

    They haven't given up 50% of the NS blocks. They have given up 50% of the unexplored area keeping all of the explored area. This is in exchange for some work also being done on the explored area. Hence they retain 100% of the known prospective area at the time of application.

    Some clarification in the main text wouldn't go amiss.

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    Replies
    1. That is what is written already?

      P.S good call on NTOG

      CraigJ

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