Eco Atlantic (ECO) has provided an update on the Jethro and Joe oil discoveries in Guyana advising both discoveries are heavy sour crude. The market has reacted savagely with the shares more than halving as I type. Despite some positives, I do not see the current share price as attractive. Don't bottom fish! Here's why...
When I commented on Eco in September I noted the high valuation on the discovered resource, concluding it was around the $7 per barrel mark, but could see some justification for that given the potential for further discoveries on the Orinduik block. But that was on the assumption the oil was similar in characteristics to the ExxonMobil Liza discovery which is declared at 32 API with a sulphur content of 0.5%. That’s heavier than Brent or WTI, but similar to many of the Arab grades, but with far lower sulphur content. We are not told here the API or sulfur % of the discoveries, but to state the oil is heavy and has a high sulphur content, these facts must be known. This is not good and makes me wonder just how heavy and how sour the oil is. Both impact the sales value of any produced crude. Insufficient information has been provided to even estimate the discount to Brent or WTI benchmarks. It is the sour element that really hits likely sales value. New regulations for marine heavy fuel oil limit sulphur content from the current 3.5% to 0.5% from 1st January 2020, which is already widening the discount for sour oil. The key issue is the H2S in the crude. This will necessitate more expensive corrosion resistant processing plant and flowlines. Operations on any FPSO will need to be reflective of the danger any gas leak would pose to the staff – exposure to sour gas is fatal even at low concentrations. This adds to Opex costs.
We are told the Jethro reservoir is over-pressured to a significant degree. Being over-pressure, combined with the reservoir being warm will help early recovery flow rates without pressure support or the need for steam / hot water injection so reducing pre-first oil capex. I would not write off the chance of it being developed, but I cannot see the economics being great. It has some value in my view, but measured closer to cents per barrel rather than dollars until further and better clarity is provided on commerciality. Joe always looked on the small side as a stand-alone potential development. With no over-pressure and heavy sour oil, I would discount any potential for development in the foreseeable future, and hence I would attribute no value to this discovery currently. The company has the cash to fund further drilling, but there must be a question mark on the Partners appetite to drill prior to fully understanding the risks and how to minimise them. Clearly further discoveries of sour oil would not be great news. The operator, Tullow Oil (TLW), also has an interest in the adjacent block, which is currently being tested with the Carapa well. I can see the clear possibility that a discovery of sweet oil on that block would see the drilling efforts focusing there in the near future.
I now see the Eco investment case as a funded oil explorer with some discovered oil of limited value on its books at the current time. It does have a likely asset in part of the ExxonMobil Hammerhead discovery which appears to extend into Eco’s block. So far as I know this is not sour oil. The share price has settled as I type around the 65p mark, valuing the company at £120 million. Tom Winnifrith commented at length yesterday in the ShareProphets Radio Podcast, about how buying shares in oil and gas explorers is all too often closer to gambling than investing and this is a clear example supporting that view! Despite the 50% drop, I am not tempted to buy - I see the true value as far lower. SELL.
Filed under: Eco Atlantic, Scotgold Resources, PureCircle, Portmeirion, Wellesley Finance, Bath Spa
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