Thursday, 21 November 2013

#PMG What's Pharos worth to Parkmead?

There was a fair bit of excitement on Tuesday as Parkmead announced that the Statoil operated “Pharos” drill, targeting up to 500 bcf of gas originally in place, has been successful and that a discovery has been made in the Rotliegendes sands. It was suggested by some that the share price could jump to the mid 20’s on confirmation of a discovery (from 13.75p prior). Not sure about you but I can’t remember the last time a share jumped 100% on a discovery of oil, let alone gas!? Nevertheless I am slightly surprised to see no reaction at all. After an initial half pence rise the shares have remained pretty much unchanged since Tuesday and now sit back at under 14p.

In October I had a good look at Parkmead as I am a previous Lochard holder and wanted to know whether to hold or sell at breakeven. My overview of findings is here. I decided on balance to hold, but was nervous about the upcoming Pharos drill because I felt success would see little price impact, but failure would no doubt result in a savage drop down (in this lovely market) to around 10p and nothing much to bring it back up again until 2014’s Perth drill.

But the market hasn’t reacted at all to the Pharos success. Despite volume of over 7 million on Tuesday, the SP remained static. Just shows how many PI’s were waiting to get out on a successful drill result. Aim Oil and Gas is basically heads you lose, tails you lose at the moment. But leaving that aside, how important is the Pharos result and what does it mean to Parkmead’s value in the medium term?

A multiple-prospect development opportunity:

Pharos is one of 4 assets geographically close which Parkmead has interests in:
  1. Platypus (15% interest) - commercial discovery. A 2012 horizontal appraisal well flowed 27 million cubic feet of gas per day (4,600 boepd) and Parkmead’s best estimate of gas initially in place for Platypus is now 147bcf. 
  2. Pharos (20% interest) - new discovery awaiting confirmation of commerciality, estimated 80% chance of success
  3. Possum (15% interest) - same reservoir and trap type as Platypus but not drilled yet, estimated 50% geological chance of success, 80% commercial chance of success
  4. Blackadder (20% interest) - 14kms away from Pharos - estimated 24% geological chance of success, 80% commercial chance of success
Pharos has potential for up to 500 bcf of gas-in-place. This is equivalent to 86m barrels of oil equivalent (and therefore c.17mboe net to Parkmead). Crucially, the structure is just 14km away from the Platypus gas field. Parkmead’s current best estimate for gas in place is 305 bcf, of which 60% should be recoverable (182 bcf). There are potentially significant synergies possible in the development and production from both Platypus (which is already financially viable) and Pharos (if it proves commercial). Dana have not yet confirmed if Pharos is commercial, but this should be relatively low risk as there have been a large number of successful wells drilled in the area around Pharos and it would be produced by horizontal wells so the bar for commerciality should be relatively low.

So if the discovery at Pharos is confirmed as commercial it will be very valuable to Parkmead as it would then be possible to develop it jointly with the Platypus field (which is already viable). Data from Pharos will also give insight about other prospects in the area. For example, Parkmead have the Blackadder gas prospect to the south of Pharos which is currently given no value by brokers as it is reliant on a discovery at Pharos to proceed (tick!) Parkmead’s upside estimate is that Blackadder may contain up to 430 bcf of gas originally in place. Their best estimate of gas originally in place is 311bcf, of which 60% is again expected to be recoverable (186 bcf). If Pharos is developed, it is also possible that another discovery, the 47/10-8, southeast of Blackadder, would be developed which is estimated to contain 86 bcf of gas in place

Development plans

Charles Stanley suggests that the Platypus and Possum fields could be developed from the same platform and that the Pharos and Blackadder fields would be developed together, but from separate platforms. One option could be to tie them into the West Sole or Babbage facility which is 40% owned by Dana. Mr Cross “knows his onions” in this area and this gives me confidence that he is developing interests in areas he is familiar with. The recent success at Pharos (assuming commerciality) should help to unlock the development value for Blackadder. So whilst the relative value of Pharos is not significant on a stand-alone basis, what is hopefully coming together is a combined development and cost saving opportunity to exploit multiple gas prospects through shared production facilities and a single supply pipeline (West Sole Easington which has excess capacity).

Valuation of Pharos and Blackadder

Charles Stanley estimate that if successful the net value of Pharos will amount to 2.3p per share and that drilling the Blackadder prospect will then be game on (and valued at 2.2p per share assuming success). That gives at least 4.5p upside to the current shareprice. I don’t expect we’ll see it in the short term but how nice to think that our core NAV is increasing all the time.

So what do I think about this weeks news?

I’m positive about Parkmead’s long term prospects and more so now that Pharos has been a successful discovery. Whilst the share price hasn’t moved this week, Parkmead’s last 3 years have seen strong developments and growth. Without doubt Mr Cross is a great CEO and deal maker, and the acquisitions to date have been canny and value enhancing. Importantly they have all been production and cash flow positive - none of this San Leon “let’s-buy-some-more-acreage-and-develop-it-at-some-point-in-the-future-whilst-we-pay-ourselves-several-million-pounds-per-year” type nonsense. I’m sure we’ll also see some more deals in the not too distant future. 

There are far fewer PI’s who buy and hold in the current market. Most have seen big losses since 2010 and are wary of buying any more dud E&P oilies. Many PI’s are left with no choice but to hold their loss making shares and hope for a sentiment change in the O&G market. Meanwhile the market is dominated by traders and ii’s, both of whom manipulate prices in the short term for their own gains. My strategy has changed to find companies with reputable boards, who are on growth trajectories for the next 3 years, and where possible for this to be underpinned by production, or at least debt underpinned by proven assets. I believe Parkmead meets these criteria, and whilst the share price is not currently cheap relative to current proven reserves, I am happy that with the board we have, the prospects which are shaping up nicely, and the likelihood of a few more canny deals along the way. The future will reward patient investors in Parkmead I’m sure. One day sentiment will turn and that’s when the real gains will be made.

Couple of useful links:

BBC news of recent discovery : here
Charles Stanley detailed company note : here
My previous comments on Parkmead : here

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