Running Away - Cove Energy (COV)
17/5/2010
(119264)
Running Away
Commendably detailed comments from Cove Energy (COV) with the 2009 results, offering a decent perspective on all of the prospects in the portfolio. Nothing to remark about the declared loss of $1.64m, but all to play for in the fully-funded 8.5% stake in the offshore Rovuma drilling programme by operator Anadarko.
That involves six deepwater wells, with two already drilled and the third Ironclad in progress after spudding on May 4. We should hear more about that late in June, brokers suggest, but others think it cold be earlier. After that, the Belford Dolphin rig goes on to the Barquentine prospect, where the surface casing has already been set.
This immediate programme confirms that the news flow from Cove should be strong this summer. No guarantees, but there is a highly optimistic tone to the comments from chairman Michael Blaha and his board, led by highly rated oil entrepreneur John Craven. They got lucky first time with the Windjammer well. But the implications are far broader. Anadarko has suggested that this provided evidence the Rovuma basin could be a major new oil area, and that Windjammer substantially de-risked a substantial portion of about 50 leads and prospects across a 2.5m acre position.
Do read the full Cove announcement. It sets out prospects in exciting style but you aint seen nothing yet until you get to a new report from broker Panmure Gordon. It has already been clear that Windjammer could have located some 5 trillion cubic feet (TCF) of gas, sufficient to warrant the construction of a liquefied natural gas plant. As reported previously, there are partners enough from India and Japan eager to get this under way and translate it into cash.
The Panmure report, however, suggests that Windjammer could actually have potential reserves of 10 TCF of gas. The broker suggests Anadarko has proved up a potentially massive source rock, with many potential leads that it can drill to form a major gas province. Gas discoveries off East Africa have been neglected because there has been no ready market, nor sufficient gas to justify a LNG plant. Windjammer changes that.
Collier was the second Rovuma well, suspended by Anadarko when it hit high pressures before entering the reservoir. Intriguingly, this decision was taken at almost the same time as BP suffered the desperate blow-out in the Gulf of Mexico, where Anadarko has a 25% stake. The Rovuma basin is reckoned to have a similar geological structure to the Gulf of Mexico, so the suspension looks doubly prudent.
Happily, Anadarko expects to be able to return to Collier once suitable equipment is available. It is reckoned that it could contain up to 2TCF of gas or up to 250mmbarrels of oil in a shallower source rock.
Ironclad, the current well, looks even more interesting. It appears to be slightly larger than Collier with potential reserves of up to 3TCF gas. Since it also has a shallower source rock, the broker speculates that it could contain up to 500mmbbl of oil. If there is oil at Ironclad, that would make the chance of oil at Collier appear stronger. And because it can be handled via a floating platform, oil would be cheaper to extract and more profitable than gas.
The Barquentine well will follow. That could prove to be an extension of Windjammer, the great gas find.
This leads to startling back of the envelope figures from broker Panmure. If Ironclad finds gas, it could mean an asset value of 126p a share. Should the lower prospects contain oil, that could rise to 281p a share and this is without all of the extra prospects in the basin. Startling stuff.
Joint broker Cenkos has also produced a report recommending Cove shares as a buy. It mentions that Ironclad is shooting for possible reserve of 730mm (in effect, the same target as Panmure when gas and oil are taken together). Since this was not factored in to previous Cenkos asset predictions, bringing it in (with a 25% chance of success and $1.50 barrel for hydrocarbon equivalents) raises the Cenkos target price to 72p. Obviously success at Ironclad would boost assets beyond that.
Cenkos takes a stab at resources from Barquentine, opting for potential resources of 1.5TCF. This one should be drilled in July, with results towards the end of August.
Cenkos suggests successful drilling results would generate significant upside, with still further potential in the onshore assets in Mozambique and Tanzania.
Several brokers are following Cove now, with one talking about a price target of 100p. Any exploration company must rank as speculative since oil exploration and production is subject to so many uncertainties. It is clear, though, that Cove offers an outstanding opportunity, and still warrants buying at 52.5p.
I have a holding in Cove Energy.
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