14 April 2014
(PCL AU, last price A$0.032/sh, market cap $35m)
SUBJECT: Pancontinental announced that the Sunbird discovery in Block L10A offshore Kenya is non‐commercial at this stage and further analysis is ongoing to evaluate the recovered liquid samples. We held A$0.02/sh in our valuation for Sunbird. We think that Pancontinental must either complete a farm‐out of the offshore portion of Block L6 or access external financing in order to fund further drilling offshore Kenya alongside BG.
OUR VIEW: Sunbird was the first of two wells to be drilled alongside BG offshore Kenya. We estimate that Pancontinental's US$32m cash reported at the end of 2013 could decrease to around
$10‐15m following this well. As a result, the recovery of some back costs from a farm out of the
offshore part of Block L6 becomes more important to see Pancontinental through the drilling of a second well with BG on either Block 10A or 10B. Without this, recourse to the capital markets may be required. In terms of timing of the second offshore Kenya well, BG plans to relocate the Deepsea Metro drillship back to Kenya after Ophir's final 2014 well on the East Pande block in Tanzania, scheduled to spud Q3. We await further news on how BG's plans firm up. Beyond Kenya, Tullow is due to make a drilling decision on Pancontinental's Namibia acreage around end‐Q3 this year, following the processing of new 3D seismic.
Uncertain whether liquids are naturally occurring. The Sunbird‐1 well encountered 43.6m of gross hydrocarbon bearing zone with a net pay of 27.8m. Both gas and liquid samples have been recovered, but the nature of the liquid samples and whether or not these contain naturally occurring liquids (oil or condensate) remains to be determined by further analysis. Invasion of drilling fluid into the highly porous and permeable formation has prevented reliable evaluation.
Rock properties better than expected. Although the discovery is considered unlikely to be commercial, porosity, permeability and seal for the prospect were better than Pancon's expectations. This has positive implications for follow‐on potential in the play.
Sunbird is a shallow, Miocene reef. The well is expected to have cost $80m gross (Pancontinental's 18.75% share is $15m). We carry A$0.02/sh of risked value for the prospect in our NAV. Pancontinental has around 20 other buried reefs and reef‐like features over its blocks in Kenya.
No clarity on timing of follow‐on exploration well. The joint venture is considering follow‐up exploration activities in Block L10A. BG and Pancontinental had previously guided for a second well on the L10A or L10B block around mid‐late 2014.
Joint venture partners. Block 10A: BG (operator and 50% interest), PTTEP (31.25%) and Pancontinental (18.75%). Block 10B: BG (operator and 45% interest), Premier (25%), PTTEP (15%) and Pancontinental (15%).
Cash: Pancontinental had A$34.5m (or US$31.5m) of cash and no debt at end December 2013.
We expect this cash to come down to around A$15m by the end of March.
Farm‐out of L6 offshore Kenya could provide financial support. FAR (60%) and Pancontinental (40%) are carrying out a farm‐out process for the offshore portion of the L6 block, Kenya. Should this happen successfully Pancon may be able to recover back costs. L6 block is estimated to hold
c3.9bnboe of gross resources. A farm‐out on L6 could pave the way for drilling at the Kifaru prospect.
Tao Ly | Head of Oil & Gas Research (Europe)
Direct: +44 20 7647 2819 | Mobile: +44 77 1406 1170 | E&P@gmpeurope.com
Melanie Savage, CFA | Oil & Gas Equity Research (Europe)
Direct: +44 20 7647 2822 | Mobile: +44 77 1406 1062 | E&P@gmpeurope.com
Ritesh Gaggar | Oil & Gas Equity Research (Europe)
Direct: +44 20 7016 1902 | Mobile: +44 77 1406 1059 | E&P@gmpeurope.com
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