Petsec Energy Ltd – Remarkable oil production opportunity

June 21, 2017 | Investment |

Key Points

  • Australian E&P company has acquired two key oil permits in Yemen
  • Oil production expected from each Block in 2017
  • Substantial current reserves to allow min 7,000bopd n 2018
  • Higher throughput of >12,000bopd expected in 2019
  • US operations to achieve higher revenues from Dec Qtr 2017
  • MPS appraised value A$1.46 as 12 month price target
  • Exploration potential in Yemen is very high
  • Numerous Yemen oil fields have reservoirs in `fractured basement rocks’
  • Potential for major rerating of share price from current A$0.16
Call Martin Place Securities to discuss ways of participating bdawes@mpsecurities.com.au +61 2 9222 9111

ASX.PSA began a new corporate strategy in 2014 away from its traditional US Gulf of Mexico base with the introduction of a new MENA technical team ex Oil Search and the acquisition of portion of the Al Barqa Block 7 exploration tenement in Yemen from ASX:AWE.  Petsec subsequently purchased of 100% of the Block from ASX:OSH, Mitsui and Kuwait’s national oil company Kufpec.

Petsec followed this with the acquisition of the Damis Block S-1 production tenement with its 20,000bopd production facility on the An Nagyah field which had around 23million barrels of recoverable oil remaining and nearby undeveloped oil fields totalling 35 million barrels and 600BCF gas.

The MENA technical and management team has had as much as 20 years operating experience in Yemen and were responsible for designing and drilling almost 50 wells on behalf of Oil Search.

Petsec is now planning oil production in Yemen before end 2017 and should also experience the start of a growing cashflow again from its US operations.

The results should be very beneficial for Petsec and could even be spectacular.

Damis Block – S1 and surrounding fields and infrastructure

Source:PSA

These two tenements are well known to Petsec and the potentially >110million barrel Al Meashar discovery was drilled by Petsec’s now-current MENA team.

With these two blocks Petsec now has potential oil production from each in the next six to nine months.

Each block has the potential to produce substantial cashflows for Petsec that would match the company’s current market capitalisation in 2018 and far exceed it in 2019.

Yemen’s geology reflects the abundant and unquestionably high quality source rock that has provided the carbonaceous source to oil formation throughout the Persian Gulf region but it also reflects massive regional tectonic activity that has literally shattered much of the brittle crystalline rocks such as granites and high grade metamorphics.   Oil from the source rocks has entered the intensive fracturing joints which have in many cases become very large reservoirs for oil entrapment.   The Masila oilfield region has several fractured reservoir fields totalling over 2 billion barrels and many of the post- 2000 oil discoveries in Yemen have been in such reservoirs.

The abundance of high quality source rock indicates a much higher probability of any potential trap being charged with oil.

Consequently these fractured basement reservoirs offer the potential of oil fields with hundreds of millions of barrels of oil.   `

Fractured Granites at Surface in Yemen

Source: Oil Search

The Al Meashar discoveries in Block 7 had an 800m oil column down to total well depth(no oil-water contact was encountered so this is still `open’ at depth) with much of this in fractured basement.

Al Meashar Wells 1 and 2 with Reservoir Estimate Targets

Source: PSA

This field is only 14km from Austrian oil company OMV’s Habban oil field that has a 945m oil column in fractured basement and reserves of 170 million barrels in a very similar geological environment.

The An Nagya field is a `conventional’ oil field but it also has potential for fractured basement reservoirs beneath it.

An Nagyah Oilfield with vertical and horizontal wells

Source:PSA

`PSA is following Oil Search, now a major LNG producer out of PNG that in 2000 had also set up a Yemen portfolio and drilling ~50(including 12 exploration) wells. PSA, unlike Oil Search, has acquired 100% of existing or producing fields and infrastructure (as well as the experienced management and technical teams) on very modest outlays and so eliminated most capital expenditure risk.

The parameters set by Oil Search for a Yemen portfolio are otherwise the same:

  • World class petroleum system –success rates >30%
  • Acceptable fiscal regime within conventional PSA terms
  • Access to producing infrastructure in key areas
  • Relatively under-explored petroleum basins
  • Recent discoveries and new developments
  • Low capex and opex (typically <US$<5/bbl and <US$10/bbl)
  • Active and established E & P industry’

I have prepared a thorough research report on Petsec Energy that represents due diligence carried out prior and after the underwriting of the A$11m rights issue by Petsec in December 2016.

The Appraised Value 12 month share price target is A$1.46.

The link is here:-

http://www.mpsecurities.com.au/petsec-energy-research-report-13-june-2017-final/

The author and Martin Place Securities hold shares in Petsec Energy at the time of this report.

The political position in Yemen has been uncertain since early 2014 when a rebellion led to curtailment of a wide range of business activities and the cessation of oil tanker liftings from Yemen’s four oil export terminals.

Yemen oil production was essentially shut down.

In recent times the rebellious regions have contracted to the north west on the border with Saudi Arabia and a small area on the Red Sea and well away from Petsec’s Block S-1 and Block 7 tenements.

Petsec Energy’s Tenements and Yemen Pipeline and Port Infrastructure

Improving prospects for a peaceful resolution in the hostilities allowed the Yemen Government’s national oil company Petro Masila in August 2016 to recommence oil production in the Masila oil fields in the eastern half of Yemen, well away from the disputed regions of the Shiite Houthi rebels near the northwest border with Sunni Saudi Arabia.

Oil production is now around a reported 75,000 barrels per day and is pumped via the 138km Ash Shihr pipeline and allowing resumption of oil exports.  Shipping has resumed and an estimated six million barrels have now been lifted since August 2016 without incident.

Petsec’s An Nagyah field has 15 shut in oil wells and 20,000bopd processing capacity that are linked to the major Marib pipeline that runs 438km to the Red Sea but this pipeline is closed and is not considered likely to be reopened before 2019.

However, Petsec considers that it will receive official confirmation of its work plan during the Sept Qtr 2017 that will allow installation of a truck filling gantry (July) and a commencement of trucking convoys to Petro Masila oil fields and gaining access to the Ash Shihr pipeline for export.

The Yemen Government has historically relied on oil revenues for around 60% of its Budget income and in the current environment has encouraged foreign companies to resume oil production.

An Nagyah in Damis Block S-1 has 20,000bopd capacity today and should be able to re open wells to commence at 5,000bopd and steadily build up to 20,000bopd from existing wells and additional infill and appraisal wells.  The additional undeveloped resources should ensure the capacity of processing facility is filled.

Damis Block S-1 Reserves

The two Al Meashar wells should provide at least 1,000bopd while production testing.  The exploration potential in Block 7 is very high as these unrisked targets show.

Petsec should receive about 63% of the fields oil revenues under the Production Sharing Agreement to cover authorised capital and operating costs and its ~29% of the oil field profit.  All sales receipts are received offshore to Petsec’s account.  These cashflows should allow the drilling of infill wells and subsequently some exploration wells on structures that have >100m million barrel targets.

I have done considerable due diligence on this company’s operations and consider it an absolutely outstanding opportunity.

There is a large amount of information to absorb to fully understand the opportunity here but I can say that the numbers are very high and the risks are surprisingly low.

The key issues are that:-

1) Yemen is an early stage exploration target with underexplored basins and huge volumes of source rock

2) The MENA staff at Petsec spent over 10 years drilling wells here with Oil Search so they know the people, the local situation and the geological potential.

The stock is A$0.15 and my target of A$1.46 is only notional and only uses the Low Case of 5,000bopd in Yemen.

A perfectly rational high case could be >A$10/share.

The PER for 2018 calendar Year is <1x and operating costs are <US$15/bbl and these would fall to about US$10/bbl once output is linked to a pipeline, probably in 2019.

Looking at it dispassionately , it is clear that once production begins at An Nagyah, Petsec will be generating a lot of cash from low cost operations and should become something of a super stock.  Next to no capex is required and the two Blocks have accessible reserves ready for production and have very substantial upside.

The oilfields and basins in Yemen are only in the early stages of exploration when large structures are being tested and, given the undoubted high quality of the Arabian Peninsula source rocks, it will certainly mean large oilfields are to be found.   The Hunt Jannah Block (to the west) and the Masila fields (to the east) are each over 2bn bbls.

The existing fields are significant and in the experience of most operators in this basin it seems that they simply become much larger than initially thought.

The Petsec MENA team led by Maki Petkovski have actually been the operators here in Yemen for many years through Oil Search so they know the geology, drilled many of the wells and most importantly, know the bureaucrats, local businessmen and politicians who make things happen in Yemen.

The Yemen assets are almost beyond comparison with petroleum exploration prospects in Australia or in the very mature shallow Gulf of Mexico basins so the opportunities brought into Petsec are practically without peer for any ASX-listed company.

Risk is in the eye of the beholder and whilst the entire Middle East is unstable and hostilities continue in the north west of Yemen the operations of Petsec should be able to work within a supportive community and government umbrella to resume output and apply risk capital, probably through farmins, to drill some of the indisputably attractive exploration/development targets.

Petsec has acquired these magnificent assets and should production resume at An Nagyah as planned and Al Meashar deliver even modest reserves the upside is very high.

Oil prices are currently softer on oversupply concerns but underlying demand has been rising faster than most forecasts so the medium term outlook incorporating increasing imports to China and India should not be negative for oil prices.

MPS Research Report Low Case Earnings Forecasts for PSA at A$0.15.

The link to the Research Report is here:-

http://www.mpsecurities.com.au/petsec-energy-research-report-13-june-2017-final/

The author and Martin Place Securities hold shares in Petsec Energy at the time of this report.

Barry Dawes 
BSc FAusIMM (CP) MFASAA
19 June 2017

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