This week has seen a new entrant to the AIM oil & gas sector of the market – Orcadian Energy (ORCA). It offers a very unusual investment case for a newly listed AIM oiler. It has 2P, and lots of it, some 78.8 million barrels in the Pilot Main and Pilot South fields. The oil is drill-bit discovered and well understood, with a total of seven wells drilled on the structure. The admission document includes a full CPR which describes the field development plan. The company does not yet have the means to produce the oil, so the oil in the ground cannot of course be valued at a flowing 2P $6 to $12 valuation. The CPR also describes a further 77.9 million barrels of 2C and 44 million barrels of risked 2U oil. The kicker is the market cap on listing – its £25.5 million, or $35 million. The company has a small debt due to Shell from earlier funding but with that comes an offtake agreement.
I would put the value on the 2C, at this point in time at an option value only – say 20 cents per barrel as the focus over the near and medium terms is developing the Pilot 2P oil. I would not put all value currently on the 2U, but it’s a nice to have! Even so that 2C has a value to me of around $11 million. Many would argue I am being very pessimistic on this assessment, and a figure of double or even triple this is more realistic. I would note the CPR states a risked post tax NPV10 of $273 million for the 2C, which would lend weight to such a view. That leaves me with an equity value on the 2P of $24 million – or 30 cents per barrel. That is extraordinarily low for certified reserves. The CPR states a post-tax NPV10 of the 2P at $425 million, or around $5.40 per barrel. On a normal valuation basis this is bonkers, at the very least this 2P should be being valued at well in excess of a $1 per barrel, and I can readily conceive $2 as being more like fair value as at today. I would only put the full NPV10 valuation to the barrels following successfully oil flowing at the expected rate. Any investment case is about more than just the asset. I look at the political risk, which is why I am never very keen on Former Soviet Union oilers for example. Orcadian is a UK company with North Sea assets, so in that respect most political risk disappears even if I do not think Bonkers Boris’s pushing the green woke agenda is in anyway helpful.
I look at the management. Orcadain’s CEO (Steve Brown) is someone I have spoken to many times. A former BP (BP.) senior manager, he has a wealth of oil patch knowledge built-up over many years. His background includes leading the BP Harding development team for example. I then look at Joe Darby (former CEO of Lasmo) as Non-Exec Chairman and can rightly claim decades of listed oil company board experience and supported by Greg Harding and Alan Hume who each have decades of oil company experience. This senior management team ticks all my “management credibility” boxes, and I like the dominance of oil sector experience. I then look at the technical aspects of the asset. Here it gets interesting. The principal asset is the heavy oil Pilot field. The original development concept was steam / hot water injection to make the oil more mobile within the reservoir and hence flow. The current plan is to inject polymer modified water into the reservoir to displace the oil towards the production well bore. The oil business is a very conservative investment environment, as it should be given so much of the capex is incurred prior to first oil. Polymer injection is a relatively new recovery technique, with the main North Sea example being its use by Chevron on the Captain field which commenced some 10 years ago. Use of this recovery technique is becoming further established on other North Sea fields. The surface facilities to handle polymer injection does not worry me at all. There is nothing I can see that is complex. Chemical injection is a normal routine process for any oil production facility and this is nothing more than a variant. Likewise the water handling capability of the proposed FPSO is not abnormal. What happens below the surface is not an area I have any degree of expertise on and I have to rely on the CPR audit to confirm this has been well considered.
I think it is inevitable I have to make comment on the comparison to Hurricane Energy (HUR) with the Lancaster field. The surface development concepts are much the same - use an FPSO with shuttle tanker offload, there is however one difference - Orcadian will be looking to hook-up to renewable imported power rather than burn gas. The reason I note this is simple – it puts out a positive low CO2 message to the ESG woke brigade of tree huggers, even if I cannot get excited about it. The near death, and in my view impending death, of Hurricane’s Lancaster adventure has all been caused by reservoir models being proven to be wrong. I do not see any material risk of the same happening with Orcadian’s Pilot reservoir – it is normal traditional sandstone. What is unusual is the means by which the heavy oil is made mobile. It is a technical risk, but one I am content with given that decade of North Sea use. The placing has raised some £3 million gross. That is sufficient we are told to progress the FPSO project definition stage and move towards Field Development Plan approval. The time estimate for this is stated at 9 months. Without question further funding will be required to bring the project to FID. The question is if this can be achieved via farm-out or will further equity need to be raised? I suspect raising further equity in the fullness of time will be required in order to maximise the net value of the asset, but this is looking well into the future and I see the oil sector remaining very buoyant as we move into next year and beyond. One cannot ignore near 80 million barrels of confirmed 2P which would be very attractive to existing indebted operators, of which I can think of several. For personal reasons I was unable to take part in the placing, but I will be looking to buy in the secondary market. With 66% of the share being subject to director lock-in for the next 12 months, and then a further 12 month orderly market undertaking, the free float is rather small, and that will not help me, but a BUY. I will be.
Filed under: Orcadian Energy, Wildcat Petroleum, IQE, Burberry, St James House, Jaywing
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