Plenty of opportunities still left in international junior E&Ps: Amin Haque

Amin Haque: Geographically, Albania is close to the southern European oil markets. Even though the volume of the country’s oil and gas production is not very significant—about 20,000 barrels per day—it is finding a ready market. Albania has some large oil and gas prospects that have not been explored in the last five decades. Because of the country’s long history as a strict Stalinist regime and because of the subsequent upheaval during transition to a democracy, there was not much infusion of capital and technology. However, independent international oil companies are going back to Albania that have the ability to spend large amounts of capital and bring new technology on-line. We expect production to grow significantly during the next few years—and would not be surprised if there are some major discoveries. This prospect makes Albania quite an attractive country for those who invest in junior energy companies.

TER: Are foreign companies partnering with the Albanian government?

AH: The arrangement is typically a production sharing contract (PSC). The Albanian government works as an inactive partner. It actively encourages foreign oil and gas companies to invest capital in the Albanian oil and gas sector.

TER: What are the obstacles to oil and gas field development in Albania?

AH: First, a large part of the country’s geology is complex and not very well understood. Albania has the largest discovered onshore oil field in all of Europe, which was discovered over 80 years ago. Exploration beyond the known fields has been sporadic at best, so there is not much in terms of analogues. Second, there is not much in the way of oilfield services infrastructure and skilled local staff available in Albania. Most of the equipment has to be brought in country, which increases the cost of exploration.

TER: Are these companies using hydraulic fracking techniques?

AH: No. Permeability in the known fields is such that fracturing is not necessary. However, these fields produce heavy oil, where the application of enhanced recovery techniques is more relevant. Horizontal drilling is already being used with great success, while waterflood and polymer-flood projects have only recently been initiated. Besides, these companies are not pursuing shale or tight natural gas, which is fracking intensive.

TER: How does the cost of production of Albanian oil compare to North America?

AH: Albanian crude is heavy and sells at a discount to Brent, for about $80/bbl ($80/bbl). The two producing companies in our coverage list realize between $35–45/bbl in operating netback. Bankers Petroleum Ltd. (BNK:TSX), with the largest and most stable production profile in Albania, realizes about $40/bbl in cash netback whereas the median intermediate Canadian producers reported a cash netback of $20.37/bbl in Q2/13. It is not only the high netback but also the low finding and development cost that make Albania so compelling. Good cost-benefit results are emerging from short lateral horizontal wells.

TER: What firms do you like in the Albanian space?

AH: I have initiated coverage on three names: Bankers Petroleum, Petromanas Energy Inc. (PMI:TSX.V) and Stream Oil and Gas Ltd. (SKO:TSX.V). I have a Buy rating on Bankers and a Speculative Buy on Petromanas. Stream has some large resources, but it has had quite a few operational and financial challenges during the last three years. Management needs to demonstrate that they can grow production by resolving these hurdles. If management can do so successfully, Stream will become an interesting company.

TER: Tell us more about Bankers Petroleum.

AH: Bankers Petroleum has successfully grown its production by 25% annually for the last five years. Bankers has a strong management team. The original management team that took up the play operated a successful heavy oil company in Egypt, which increased production by six-fold in four years and was sold to a local company. Management applied this experience to Bankers’ operations in Albania. The main producing field in Albania, Patos-Marinza, is the largest discovered onshore oil field in all of Europe. Between the two fields held by Bankers—Patos-Marinza and Kuçova—there is 5.4 billion barrels (5.4 Bbbl) of oil in place, which is a huge number.

The challenge for Bankers is to improve its recovery rate, which has been historically quite low. Bankers Petroleum has been making incremental improvements in recovery rate as is evidenced by its production growth. The company is successfully trying new technologies that include horizontal drilling.

Bankers Petroleum is projecting a 15% annual production growth, which seems to be achievable. With close to 250 million barrels in proven reserves, as well as such large quantity of original oil in place to tap, Bankers has the potential to dramatically grow its production.

TER: How has its stock been performing?

AH: Banker’s stock has been doing quite well in the last six months—up by 50%! But, there is still room to do better. There have been some changes in the Albanian political scene that favor a more transparent business climate, which is one of the reasons that investors are being drawn toward Bankers.

TER: What about Petromanas?

AH: Petromanas is purely an exploration company. It has four blocks in Albania. Of these, the company is conducting an active exploration program on blocks two and three. One well on these blocks just completed drilling and testing and showed very positive test results. The company is drilling another well on these blocks. Between the two wells, Petromanas is expected to identify and partially delineate the large carbonate structure it is pursuing. The company is partnered with Royal Dutch Shell Plc (RDS.A:NYSE; RDS.B:NYSE) in these blocks under favorable terms.

TER: How is the Petromanas share price performing?

AH: After the release of the drill results, the share price rose 18%. The first well took much longer to drill than had been anticipated and overran budget by almost 100%. Consequently, the share prices slid continuously during the past year. I believe that Petromanas has now turned a corner with the successful drilling of the first well. With further success from their other wells—this will be a portfolio stock.

TER: Is the market for Albanian oil partly domestic and regional or does it reach beyond?

AH: Foreign oil companies in Albania are allowed to export 100% of their produced oil. The government usually sends its royalty oil to the local refineries. The rest of the oil is exported to refineries in the Adriatic and the Mediterranean area, including Spain, France and Italy. As Bankers grows its production capacity, it is improving the infrastructure around the export facility, which will eventually widen the market reach for Albanian oil.

TER: Amin, you also follow E&P firms in Nigeria. In past interviews with The Energy Report you were bullish on Mart Resources Inc. (MMT:TSX.V). Would successful construction of a new pipeline revive the stock price?

AH: Mart’s new pipeline was proposed quite a while ago. The company’s initial guidance said the pipeline should be in commission by late 2013, which has not happened. In its latest press releases, Mart indicates that the pipeline could be delayed until H1/14. It has, however, made progress in building the pipeline, and remains optimistic. Mart should be able to complete it next year, but it still has challenges to address, which will take time.

TER: What are the challenges?

AH: One challenge concerns the right of way for the pipeline. The local communities want to receive financial benefits by allowing the pipeline to proceed, which is not unjustified. However, it all comes down to how much the participating companies are willing to yield to the communities. The second challenge is more of a procedural delay in receiving government approval for twinning a part of an existing pipeline. That is a matter of completing negotiations with the government and the NPDC, Nigerian Petroleum Development Company.

Time is of the essence, because losses in the oil pipeline that Mart is currently using are rising incrementally. In 2011, the losses were about 8% of produced oil. That loss now stands at over 22%. Mart is losing almost 1 barrel of oil of every four or five barrels produced. Bringing an alternative pipeline online will seriously decrease these losses. Another challenge is that Mart is producing at less than its capacity. An alternative pipeline will allow it to produce more, to generate more cash, and at the end of the day, increase its dividend.

TER: Is Royal Dutch Shell helping Mart with the pipeline?

AH: Shell used to own the oil mining license that the pipeline is going to cross. But Shell sold it to an indigenous company and is not in the picture anymore. Consequently, the control of that field has reverted to Nigerian Petroleum Development Company (NPDC). There are other producers in the same region who are partnering with Mart to construct the pipeline, including a small producer named Energia. Energia’s partner is Oando Energy Resources Inc. (OER:TSX). Mart also has two other indigenous partners in its Umusadege oil field.

TER: You cover Oanda Energy Resources as a Speculative Buy. Are there new developments in the historically troubled oil fields of Nigeria that make this company particularly worthwhile?

AH: Oanda is trying to purchase the entire Nigerian oil and gas portfolio of ConocoPhillips (COP:NYSE) for about $1.8 billion. A month ago, Oanda secured $815 million ($815M) in debt financing for the transaction, which is scheduled to complete on November 30th. Oanda has already put down $450M in deposit. Arranging the debt financing was a big hurdle, which the company has cleared. Oanda must come up with another several hundred million dollars in equity financing—a tremendous achievement in this market, if it happens.

TER: Are the post-2005 changes of political climate in Nigeria holding up as favorable for outside companies contemplating the once-troubled oil fields?

AH: The headline troubles in the Niger Delta have subsided, but there are many challenges. After years of marginalization, the local communities want their share of oil benefits. So they hold out when they can and that holds back the full development of the region’s resources. There has been a concerted effort within the government, including the defense forces to join hands and reduce bunkering.

One thing that has definitely changed is that there is more participation by Nigerian indigenous companies, both on the producing side as well as in providing services and logistics. Engaging the local population helps stabilize the troubled environment in the Niger Delta. In the proposed Petroleum Industry Bill (PIB), there are new provisions intended to benefit the local population.

TER: Tell us the latest developments with the Nigerian operations of Heritage Oil Corp. (HOC:TSX; HOIL:LSE).

AH: Heritage has acquired a major Nigerian asset, OML 30, which is a large field holding in excess of 1 Bbbl of reserves. This acquisition has transformed Heritage from an explorer to a developer. Leading up to the acquisition, Heritage sold two of its exploration assets in Uganda and Tunisia for very large sums. Heritage came to Nigeria with a large war chest.

TER: Are there any interesting E&P companies in North Africa?

AH: I like Longreach Oil & Gas Ltd. (LOI:TSX.V), located onshore in Morocco. It will shortly commence drilling one of two wells in the general area that has produced in excess of 31 billion cubic feet of natural gas. Longreach is looking into a slightly deeper formation that has not been explored before due to technological limitations at that time. Given the high local energy demand, especially in the phosphate industry, a successful exploration will be good for both the company and for Morocco.

The other North African name that I like is DualEx Energy International Inc. (DXE:TSX.V). There has been movement in its stock price in anticipation of results for the company’s BHN-1 well in Tunisia—another North African country that is underexplored, but carries a lot of upside potential. A third company I have been following with a great deal of interest is Serinus Energy (SEN:TSX), formerly Kulczyk Oil Ventures. After establishing a successful gas production operation in Ukraine, the company is pursuing larger upsides in Tunisia. Interestingly, it is also the only oil and gas company operating onshore Brunei.

TER: Thanks for being with us today, Amin.

AH: Thank you, Peter.

Amin Haque provides MGI Securities with research coverage of international explorers, producers and oilfield service companies. Haque brings 14 years of financial market experience, seven of which have been devoted to equity research analysis. He worked as an analyst both on the buy and the sell sides focusing on energy and other resource sectors. Prior to joining MGI, Haque provided independent valuation services to oilfield services, logistics and related companies to Stonecap. Before making his career as an analyst in the energy and the resources sector, he worked in risk management for a New York-based global credit card company. He also worked as a management consultant providing consulting services to a variety of U.S. and international financial organizations including Ginnie Mae and the World Bank. Haque is an electrical engineer by training, and holds a Master of Business Administration degree from Georgetown University in Washington, D.C. He is a CFA charter holder.

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